Contracts I, Mike Selmi, Fall 2003 — Outline

THE PERSPECTIVE OF CONTRACT THEORY Formalism (Langdell, Williston) — objective

o Set of universal rules distilled from decided cases; no need to explain/justify.o Mechanical application of rules; no moral/political values.

Legal Realism (Pound, Llewellyn, Corbin) — subjectiveo Rules of law evaluated on the basis of social interests they served.o Decisionmaking includes personalities, points of view, interest, and goals of decisionmakers.o All lawmaking is policymaking; should consider all relevant knowledge of human affairs, including that

furnished by other disciplines.o Critical of black-letter law approach of Restatements. (Llewellyn later became principal drafter of UCC,

the purpose of which was to reflect actual transactions.) Law & Economics (Chicago school, Posner) — efficiency (subjective)

o Legal rules should tend toward efficient results. Lower transaction costs. Resources allocated to most valued uses.

o Unfairness does not make an agreement unenforceable; only fraud and duress. Critical Legal Studies (CLS) — postmodern legal realism (deconstruction) (subjective)

o Inspired by Legal Realism, view justifications of existing legal rules as political ideology aimed at preserving power and wealth distributions in society; goal is utopian society based on altruistic and communitarian values.

TOOL-KIT Things to look for: Consideration, Reliance, Restitution, Fraud/Duress, Parol Evidence, Ambiguous Terms,

Offer/Acceptance, Boilerplate, Signature, Merchants/Goods. Line-drawing / Slippery-slope

o Once the door is open, it opens wide.o We can distinguish facts1 from facts2 in that . . . -OR- We can draw the line with X because . . .

It’s the Legislature’s jobo Judges should not legislate from the bench.o Judges should rule as they think is most just, and if legislature doesn’t agree they can change law. Most

contract law is common law. Legislature moves slowly. Flood of Litigation

o Courts do not want to open the door to more litigation in an already overburdened system.o Courts should not deny a party relief/justice because they are too busy; we can appoint more judges.

Individual Autonomy vs. Government Protectiono Court protectionism is paternalistic, individuals have a right to enter into any agreement they want.o Individuals need to be protected from being duped by corporations with unequal bargaining power.

Policy / Future Effects of Decisiono Broad or narrow holding.

Social Norms vs. Rules of Contract Lawo Most people think writing (or oral promise, etc.) is binding, even if not signed.o The rules are the rules, it does not matter what most people think.

Market vs. Adhesiono You get a cheaper price because of the arbitration clause (or limitation of damages, etc.).o This is an adhesion K, there is no room to negotiate these terms.

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ENFORCING PROMISES: BASES OF LEGAL OBLIGATION

Intention to Be Bound: The Objective Theory of Contract Social Policy Advantages of Objective Theory of Contract

o Administrative ease: intent is difficult to prove; easier/quicker to rule.o Certainty/predictability of rule-based approach (certainty is worth $$ to businesses).o Rules can constrain courts and remove bias.o Disadvantages: inflexible, rules more important than justice.

Ray v. William G. Eurice & Bros., Inc. o Facts: K to build a house, Ray made changes to K, Eurice pretended to have never seen the changes,

Ray had to pay more for another builder and sued for the difference, court found for Ray. — Unilateral mistake. — Importance of credibility of parties and telling a story.

o Absent fraud, duress, mutual mistake, or lack of capacity to understand agreement, a party who signs a written K with or without reading it, is bound by his signature in law.

o “The test of a true interpretation of an offer or acceptance is not what the party thought it meant or intended to mean, but what a reasonable person in the position of the parties would have thought it meant.” (Williston)

o “If it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake.” (Learned Hand)

Park 100 Investors, Inc. v. Kartes o Facts: company VP took care of office space lease, then sneaky office park representative had

owners/Kartes’ sign a personal guarantee disguised as lease K, owners moved out and office park sued for unpaid rent of sublessee, court found for Kartes. — Unilateral mistake. — Fraud & duress. — Importance of credibility of parties and telling a story.

o Elements of fraud: “(1) A material misrepresentation of past or existing fact by the party to be charged, which (2) was false, (3) was made with knowledge or in reckless ignorance of the falsity, (4) was relied upon by the complaining party, and (5) proximately caused the complaining party injury.”

o “While a person relying on another’s representations must use ordinary care and diligence to guard against fraud, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practiced on the unwary.”

Enforcing Exchange Transactions: The Doctrine of Consideration Restatement 2d § 71. Requirement of Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is 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.(3) The performance may consist of

(a) an act other than a promise, or(b) a forbearance, or(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

Restatement 2d § 73. Performance of Legal Duty Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

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Restatement 2d § 77. Illusory and Alternative Promises A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless

(a) each of the alternative performances would have been consideration if it alone had been bargained for; or(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

Restatement 2d § 79. Adequacy of Consideration; Mutuality of Obligation If the requirement of consideration is met, there is no additionally requirement of

(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or(b) equivalence in the values exchanged; or(c) “mutuality of obligation.”

Peppercorn Theory of Consideration : even a single peppercorn can be valid consideration provided the parties both view it as consideration. — Court does not consider the value of consideration. o “Nothing is consideration that is not regarded as such by both parties.”

Hamer v. Sidway o Facts: Decedent uncle promised to pay nephew $5K for refraining from bad (but legal) conduct until

21, at 21 decedent wrote letter promising money later, then died, estate doesn’t want to pay, court found for nephew.

o Consideration as “Bargained for Exchange” (nephew’s waiver in exchange for uncle’s benefit in the preservation of the good family name).

o “In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise.”

o “Consideration in the sense of the law may consist in wither some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”

o “Courts will not ask whether the thing which forms the consideration does in fact benefit the promise or a third party, or is of any substantial value to anyone.”

Dougherty v. Salt o Facts: Aunt had given nephew a note for $3K payable on her death for “value received” because he was

a good boy, estate didn’t want to pay, court held that it was unenforceable for lack of consideration.o Court held that the note was just a donative promise (or executory gift); no bargained for exchange or

forbearance. “Value received” language was not sufficient consideration. — Joy in conferring gift is not consideration. — “Nothing is consideration that is not regarded as such by both parties.”

o Policy: Court does not want to inhibit gift giving through fear of litigation. (Until the time the gift changes hands, the promise can be revoked.)

Baehr v. Penn-O-Tex Oil Corp. o Facts: Pl leased gas stations to Kemp who was broke and assigned profits to D, when Kemp didn’t pay

rent, Pl went after D who had been running the gas stations, court held that D’s promises to pay rent were without consideration.

o Pl asserted that his refraining from suing was forbearance which amounts to consideration, but court found that it was not forbearance but just his own convenience. (Forbearance can be consideration under Restatement §71.)

o Consideration, as bargained for exchange, requires that promise be the product of a bargain. It doesn’t matter if the things are of value but there must be assumption of an obligation by one party on the condition of an act or forbearance of the other. This insured that the K is not accidental, casual, or gratuitous, but intentional and the result of deliberation.

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Plowman v. Indian Refining Co. o Facts: When Pls were laid off they were told they would continue to receive checks for life if they came

and picked them up, this happened for a while then stopped, court found for D due to lack of consideration.

o Past consideration is not valid (they were already paid for work done in the past). Moral consideration (employer should keep its promise) is not valid. The requirement that they pick up checks is not consideration, merely a condition of the gift (like Williston’s tramp who has to walk around the corner to get a free coat). Also, D’s VP was not authorized to enter into such a K (agency).

The Power of Agents to Bind Their Principals o Agency if: express authority, implied authority (one is authorized to carry out a project and agency is

required to do so), principal does something to lead agent to believe he is authorized, if agent acts without authority then principal learns of action and approves.

Protection of Promisee Reliance: The Doctrine of Promissory Estoppel Restatement 2d § 90. Promise Reasonably Inducing Action or Forbearance

(1) A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance, is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

PROMISES WITHIN THE FAMILY

Greiner [f] v. Greiner [m] o Facts: Pl/mom promised to give son land because he was disinherited, he moved a long distance and

did repairs on the place, then mom changed her mind and tried to evict him, court found for son.o Promissory estoppel: (1) promise, (2) reasonable reliance, (3) detrimental reliance, (4) injustice.

Wright [D] v. Newman [Pl] o Facts: Boyfriend (not biological father) assumed parental role and promised to take care of Pl’s son, did

so for ten years (facts are disputed here), then he tried to split. Court found for Pl.o Promissory estoppel: Pl’s reliance was that she didn’t seek out biological father. This case shows how

much telling a convincing story can go to injustice element of promissory estoppel (dissent tells the facts very differently).

CHARITABLE SUBSCRIPTIONS

Allegheny College v. National Chautauqua County Bank o Facts: Donor promised a donation to college upon her death to set up a memorial scholarship in her

name, paid part, then changed her mind, after death college brought suit, court found for college.o Court talks about promissory estoppel in dicta (college began setting up & advertising scholarship fund),

but Cardozo says that this is a straight consideration case (donation for memorial in her name).PROMISES IN A COMMERCIAL CONTEXT

Katz v. Danny Dare, Inc. o Facts: Pl had been employed for 25 years, became injured and work suffered, boss didn’t want to fire

him but instead persuaded him to retire in exchange for pension, paid pension for a while then cut it in half, court found for Pl based on promissory estoppel (detrimental reliance in that he quit job in reliance on pension). — This would be a better case for consideration (quitting job in exchange for pension) but judge tried it as reliance.

o Contrast with Plowman: Here Pl had choice to retire and did so in exchange for pension, in Plowman there was no choice, they had to retire.

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Shoemaker v. Commonwealth Bank o Facts: Pl’s mortgage required that they have insurance, D provided it for a time then stopped, house

burned down, court overturns summary judgment for D saying that jury needs to look at facts to see if Pl’s reliance was reasonable & thus if there was injustice.

o Reasonableness of Pl’s reliance: letter did not specify duration but Pl was promise as conditional (D will get insurance if Pl does not). — More info needed: why didn’t Pl get insurance; didn’t qualify?

Liability for Benefits Received: The Principle of Restitution Restatement 2d § 86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.(2) A promise is not binding under Subsection (1).

(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or(b) to the extent that its value is disproportionate to the benefit.

Restatement of Restitution § 116 A person who has supplied things or services to another, although acting without the other’s knowledge or consent, is entitled to restitution therefore from the other if

(a) he acted unofficiously* and with intent to charge therefore, and(b) the things or services were necessary to prevent the other from suffering serious bodily harm or pain, and(c) the person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent; and(d) it was impossible for the other to give consent, because if extreme youth or mental impairment, the other’s consent would have been immaterial.

* Officiousness means interference in the affairs of others not justified by the circumstances under which the interference takes place. (Restatement of Restitution § 2 comment a)

Definitions o Contract Implied in Fact: K can be implied based on the facts (request for services/benefit).o Contract Implied in Law: court implies K based on restitution.

Implied in Fact Contract Implied in Law Contract (Quasi-Contract)

No Written or oral contract No written or oral contract

Based on the conduct of the parties No conduct – imposed by court to prevent injustice

Generally are acknowledged by the parties NOT acknowledged by the parties

Usually is an agreement No Agreement

Is Consideration No Consideration

Expectation Damages are imposed Restitution Damages for Unjust Enrichment

RESTITUTION IN THE ABSENCE OF A PROMISE

Credit Bureau Enterprises, Inc. v. Pelo o Facts: Bipolar guy committed, didn’t want to pay hospital bill, court said he needs to pay under

restitution.o Restitution cannot be applied where one does not request or knowingly accept benefit or where one

refuses benefit, except in cases of mental impairment. Posner on Restitution

o Reasonable Person Standard: Would a reasonable person have assented if capable of doing so?o Transaction Costs: How difficult would it have been to get actual assent?

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Commerce Partnership 8098 Limited Partnership [D] v. Equity Contracting Co., Inc. [Pl] o Subcontractor was never paid by contractor for work done, is suing owner of building where services

were performed, D claims to have paid full contracted price, court reversed judgment for Pl and remanded for new trial to find additional facts about D’s payments to determine if they had indeed already fulfilled their K.

o A subcontractor can maintain a restitution action against an owner by proving two elements of unjust enrichment, (1) subcontractor had exhausted all remedies against contractor and was still unpaid, and (2) owner had not already paid someone else for the subcontractor’s work.

Watts [f] v. Watts [m] o Facts: Unmarried partners living together as married, wife gave up career to support husband & raise

kids, she also worked long hours at his business, now splitsville and hubby wants to keep everything, court held that there was sufficient evidence to go to trial on three claims, breach of implied in fact K to share assets, D’s holding all assets amounts to unjust enrichment, Pl is entitled to partition of goods under partition statutes (for disputes of commonly held property).

o On breach of implied in fact K, court saw possible consideration in wife dropping career and helping with business. Court noted that sexual relations alone are not valid consideration (illicit).

o On unjust enrichment claim, there is sufficient evidence to satisfy 3 elements of unjust enrichment under Wisconsin statute: (1) benefit conferred, (2) D knew of or appreciated the benefit, and (3) D accepted the benefit under circumstances that make it inequitable for D to retain benefit.

PROMISSORY RESTITUTION

Mills v. Wyman o Facts: Pl takes care of D’s dying adult son, D promises in writing to reimburse for expenses, then

changes mind, court dismissed for failure to state a claim.o Moral obligation not valid consideration. Past consideration not valid consideration. Unjust enrichment

does not apply to 3rd parties (benefit must be directly conferred). Webb v. McGowan

o Facts: Pl saved D from death or serious harm crippling himself in the process, D agreed to pay Pl $15 every two weeks for the rest of Pl’s life, D died first and estate doesn’t want to pay, court reversed dismissal and remanded for trial because there is sufficient evidence for a restitution claim.

o Past/moral consideration & restitution: “A moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability resting on the promisor.”

Restatement 2d § 82. Promise to Pay Indebtedness; Effect on Statute of Limitations (1) A promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the statute of limitations.(2) The following facts operate as such a promise unless other facts indicate a different intention:

(a) A voluntary acknowledgment to the obligee, admitting the present existence of the antecedent indebtedness; or(b) A voluntary transfer of money, a negotiable instrument, or other thing by the obligor to the obligee, made as interest on or part payment of or collateral security for the antecedent indebtedness; or(c) A statement to the obligee that the statute of limitations will not be pleaded as a defense.

Restatement 2d § 83. Promise to Pay Indebtedness Discharged in Bankruptcy An express promise to pay all or part of an indebtedness of the promisor, discharged or dischargeable in bankruptcy proceedings begun before the promise is made, is binding.

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REACHING AGREEMENT: THE PROCESS OF CONTRACT FORMATION

Offer and Acceptance: Bilateral Contracts Restatement 2d § 24. Offer Defined

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

Restatement 2d § 25. Option Contracts An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.

Restatement 2d § 26. Preliminary Negotiations A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

Restatement 2d § 33. Certainty (1) 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.(2) 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.(3) 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.

Restatement 2d § 36. Methods of Termination of the Power of Acceptance (1) An offeree’s power of acceptance may be terminated by

(a) rejection or counter-offer by the offeree, or(b) lapse of time, or(c) revocation by the offeror, or(d) death or incapacity of the offeror or offeree.

(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.

Restatement 2d § 39. Counter-offers (1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.(2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

Restatement 2d § 43. Indirect Communication of Revocation An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.

Restatement 2d § 50. Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.(2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.(3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise.

Restatement 2d § 59. Purported Acceptance Which Adds Qualifications A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

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Restatement 2d § 63. Time When Acceptance Takes Effect Unless the offer provides otherwise,

(a) an acceptance made in a manner and my a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but(b) an acceptance under an option contract is not operative until received by the offeror.

Restatement 2d § 69. Acceptance by Silence of Exercise of Dominion (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:

(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.(b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.

(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.

Lonergan v. Scolnick o Facts: Pl trying to buy D’s land, Pl took preliminary negotiations as offer and was trying to raise funds

while D sold land to someone else, court found for D.o Advertisement as invitation to offer (not offer). o Reasonable Person: would a reasonable person see an offer being made?o Mailbox Rule: acceptance is binding at the time it is sent (not at the time it is received). Revocation

needs to be communicated directly. If offeror calls to revoke after offeree put acceptance in the mail, the acceptance is binding.

Izadi v. Machado (Gus) Ford, Inc. o Facts: Pl filed suit when he didn’t get the deal implied in the ad because of confusing language in ad,

court held that there was sufficient evidence to go to trial on the breach of contract and misleading advertising claims.

o Advertisement taken as offer because a reasonable person would see it as such. If Pl was not deceived by unclear language, but rather was taking advantage of it, there would have been no claim.

o Advertisement/offer viewed as a whole.o In cases of “bait and switch” advertiser can be held to deceptive advertising.

Normile v. Miller o Facts: D’s counter-offer submitted on same form as offer which contained acceptance deadline, Pl was

silent and D sold to another, then before deadline expired, Pl tried to accept, court found for D.o No additional consideration for option K, therefore it is revocable at any time.o Notification of revocation can come in the form of inconsistent behavior (§ 43), when D sold to another.o Offeror is master of the offer, with power to revoke, but revocation requires some sort of notice.

Offer and Acceptance: Unilateral Contracts Definition

o Unilateral Contract: exchange of promise for performance; complete performance is acceptance; offeror can revoke any time before acceptance.

o Part Performance: can constitute an option K (§ 45); substantial part performance can also constitute full performance (barring revocation but contingent on completion) under reliance (§ 90).

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Restatement 2d § 45. Option Contract Created by Part Performance or Tender (1) 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.(2) 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.

Petterson v. Pattberg o Facts: D offered Pl a discount on her bond repayment if she pays by a certain time, Pl came to tender

payment within the time limit and was told that property had been sold and the deal was off, court found for D because offer was revoked before it was accepted.

o Court saw this as unilateral K, early tender of payment in exchange for discount. Since the offer was revoked before payment was handed over, the performance/acceptance didn’t happen before the revocation.

Cook v. Coldwell Banker / Frank Liaben Realty Co. o Facts: D promised Pl cash bonus based on performance to be paid at end of year, then after Pl had

accomplished part performance, D changed terms to be payable in March contingent on D remaining an employee until then, court found for Pl.

o Court found substantial performance which prevents D from changing terms. (It could have come out differently if the agreement was framed differently—lots of little Ks or one 1-year K.)

Limiting the Offeror’s Power to Revoke: The Effect of Pre-acceptance Reliance Restatement 2d § 87. Option Contract

(1) An offer is binding as an option contract if it(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

James Baird Co. v. Gimbel Bros., Inc. o Facts: D subcontractor sent a bid to contractor based on underestimate, Pl contractor made a bit using

D’s numbers then later received revocation from D, contractor’s bid was accepted, Pl tried to get D to supply linoleum at bid price but D claimed it was revoked, Pl contractor suing for breach, court finds for D finding that offer was revoked before acceptance.

o Court states that offer was revoked before it was accepted. Pl’s reliance claim and claim that offer was an option K were both dismissed as without merit.

Drennan v. Star Paving Co. o Facts: D subcontractor sent a bid to contractor based on an underestimate, Pl contractor made bid using

D’s numbers, contractor’s bid was accepted, when contractor went to meet D he was told that the offer was revoked, court found for Pl on grounds of promissory estoppel.

o Contrast with Baird: Facts are basically the same; discrepancy in timing not material. Two different approaches to contractor-subcontractor disputes. Under Baird, neither party is bound (contractor can price shop and subcontractor can change price). Under Drennan, only subcontractor is bound (contractor can still price shop). But Drennan is more commonly used for policy reasons. To address this, subcontractors need only put a clause in bid saying that it is binding on both parties. Also business practices mean that both parties will play buy the rules to foster good relationships.

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Berryman v. Kmoch o Facts: D real estate broker was trying to buy Pl’s land, he made an offer with an option K which

specified $10 consideration, but he never paid the consideration, Pl sold to another and D tried to exercise his option, Pl brought suit to have option declared void, court found for Pl (no option).

o Court states that since D was a realtor, he should have known the rules of contract. Option was without consideration. D’s efforts to gather investors is not consideration (no benefit to Pl) or reliance (not reasonable).

Pop’s Cones, Inc. v. Resorts International Hotel, Inc. o Facts: Pl negotiated extensively to move shop to D’s storefront, Pl was assured that they just needed to

get it approved which would not be a problem, D told Pl to move out of old shop, Pl did so and spent a bunch of money getting ready to move, then D changed its mind, court found that there was sufficient evidence to go to trial on a promissory estoppel claim.

o Partly because Pl was only seeking remedy in reliance interests and not expectation damages, court found that reliance was reasonable. This seems to go against the NJ promissory estoppel statute which demands a “clear & definite promise,” but court equates this language with reasonableness of reliance which it found sufficient evidence to support.

Irrevocability by Statute: The “Firm Offer” UCC § 2-205. Firm Offers

An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.o Addresses the Baird-Drennan problem.

Qualified Acceptance: The “Battle of Forms” UCC § 2-207. Additional Terms in Acceptance or Confirmation

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;(b) they materially alter it; or(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such a case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any provision of this Act.* UCC only applies if K is for a sale of goods. (Merchant rules only apply to merchants; all additional terms need to be assented to by individuals.)

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Common Law Rules o Mirror Image Rule: Acceptance must be precise mirror image of offer. If acceptance includes

different/additional terms, it is a rejection and counteroffer.o Last Shot Rule: Last form that precedes manifestation of completion is what dictates the terms. (If

performance, the party who sends the last written form before performance gets last word.) Example: buyer sends form offer to seller, seller sends form acceptance that is different from offer

(this means it is counteroffer), seller ships goods, buyer accepts — terms of deal would be what was in seller’s counteroffer.

Strategy o Goods?

How to decide? If K is primarily for goods as understood by 3 factors: (1) language of K, (2) nature of the business of supplier, and (3) intrinsic worth of materials.

Yes — UCC \/ Merchants? Yes — \/ ; No — all terms need express assent if not merchants

No — Common Law (acceptance with additional terms becomes rejection and counter-offer which needs to be accepted).

o Find offer and acceptance. Does acceptance have “expressly conditional” language (express language saying that acceptance is conditional on acceptance of additional terms)? Yes — treat as common law (acceptance is actually rejection and counter-offer) No — conditional acceptance with additional terms \/

o Are additional terms contradictory? Knockout Rule: two terms cancel each other out and default UCC gap-filler provisions are used.

o Are additional terms material? What is material?

price, quantity, time frame, warranties, choice of law & forum selection clauses; sometimes arbitration, interest on past due amounts, and attorney fees (these vary by jurisdiction)

surprise OR hardship test (from Dale Horning) Yes — need to be assented to or they do not become part of K No — automatically become part of K if not expressly rejected in a reasonable amount of time

Princess Cruises, Inc. v. General Electric Co. o Facts: D was contracted for repair services on Pl’s boat, battle of forms ensued, Ds final price quotation

included boilerplate T&C limiting liability to the amount of the K (no liquidated damages), Pl orally accepted that price quotation, repairs were botched and Pl had to cancel 2 cruises, court found D liable but limited the damages to the amount of the K ($230K as opposed to the 4.5Mil awarded by trial jury).

o UCC or Common Law? Here K was primarily for service, so common law presides. Under common law D’s price quotation was not conditional acceptance, but was rejection of old offer (Pl’s PO) and a whole new offer which included a limitation on liability. Pl accepted this offer so there is a limitation of liability in the K. (last shot rule)

Brown Machine, Inc. v. Hercules, Inc. o Facts: D bought machine from Pl, battle of forms during purchase, Pl proposal (saying that D sill

indemnify for injuries) then D PO (no indemnification—Pl liable) then Pl order acknowledgment (with indemnification clause) then D confirmation (correcting part of order details but not commenting on indemnification boilerplate), machine shipped & paid for, later D’s employee is injured, sues Pl & settles, then Pl tries to recover from D based on indemnification clause, court finds for D, holding that there was no indemnification clause releasing Pl from liability in the K, so there is no recovery.

o Court saw PO as offer and order acknowledgment as acceptance with additional terms. Court found that D’s letter correcting part of the order details (which specified that “all other specifications are correct”) referred only to the bargained-for terms of the order and was not an assent to the boilerplate indemnification clause. Therefore the indemnification clause, as an additional term, was never assented to and did not become part of the K.

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Dale R. Horning Co. v. Falconer Glass Industries, Inc. o Facts: Pl contracted D to supply glass for construction project, preliminary negotiations where Pl told D

of time constraints, then Pl sent D confirming order form with no language about warranties or damages and shipment on as-needed basis (offer), then D sent order confirmation with boilerplate T&C with warranty and limited damages (no consequential) terms (acceptance), glass was defective, Pl fell behind on job and had to pay, D didn’t object when told they would have to pay, Pl invoiced D but D refused to pay, court found for Pl granting consequential damages.

o Court found D’s T&C to be a conditional acceptance, the terms were material but were never assented to, therefore they are not part of K. Consequential damages are a UCC gap-filler provision.

o To determine materiality of additional terms, court uses surprise or hardship test: Surprise: terms that limit consequential damages are common in the industry; buyers should expect

sellers to try to include such a term, therefore no surprise. Hardship: based on preliminary negotiations D knew or should have known that limiting

consequential damages would be a hardship to Pl. Therefore terms are material.

Electronic Contracting Hill v. Gateway 2000, Inc.

o Facts: Pl bought computer by phone/mail, computer came with T&C which contained arbitration clause and which said that terms will govern the sale if Pl keeps computer for more than 30 days, after 30 days Pl complained about computer and brought action (class action for racketeering), court held that arbitration clause is binding.

o Accept-or-return offer in T&C. UCC applies because goods, but 2-207 (battle of forms) does not apply because there is only one form.

o Court held that a K need not be read to be binding, as long as there was time to read the terms and an opportunity to not accept, the terms are binding. Just having the terms available on the web is enough.

o ProCD v. Zeidenberg : cited in Hill: Shrinkwrap licenses are binding (buyer can return product before installing software). Software is considered goods (so UCC applies).

Klocek v. Gateway, Inc. o Facts: same basic facts as Hill, now T&C only gives 5 days to return (not 30), but this is not material,

here court finds arbitration clause NOT binding based on UCC.o Court sees order as offer and shipping as acceptance with additional terms, which were not expressly

conditional and which were never assented to. — According to this reading, the warranty would not be part of the K either.

o Contrast with Hill: Depends on how you view the transaction (where offer and acceptance lie). Hill was vastly criticized but is the most commonly used interpretation.

Postponed Bargaining: The “Agreement to Agree” Restatement 2d § 27. Existence of Contract Where Written Memorial Is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.

UCC § 2-204. Formation in General (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.(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.

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UCC § 2-305. Open Price Term (1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if

(a) nothing is said as to price; or(b) the price is left to be agreed by the parties and they fail to agree; or(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third

person or agency and it is not so set or recorded.(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at the party’s option treat the contract as canceled or himself fix a reasonable price.(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable to do so must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

Quake Construction, Inc. v. American Airlines, Inc. o Facts: Pl contractor was awarded construction contract, D asks for subcontractor license numbers but Pl

wants a signed K first, D sends letter of intent with specific details which says that work is to begin in one week, this letter has cancellation clause, Pl & D verbally work out all terms and handwrite them but D never types up formal K, D cancels agreement after Pl had spent money on preparations, court found that there is sufficient evidence to go to trial because letter (& cancellation clause) are ambiguous.

o Court held that a letter of intent, although usually not binding, may be binding if the parties intended it to be (§ 27). Court lists 9 factors to determine whether parties wanted to put agreement in writing: (1) whether it’s the type of agreement that’s usually written, (2) many or few details, (3) large or small amount of money, (4) K requires writing for full expression, (5) negotiations indicated a written document, (6) when the writing was abandoned, (7) reasons writing was abandoned, (8) extent of the assurances previously given, and (9) the other party’s reliance.

o Court also notes ambiguity of cancellation clause in letter of intent: on face it’s a cancellation clause, but the fact that a cancellation clause was put in a non-binding letter of intent indicates that D intended agreement to be binding.

COMMON PRACTICES Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (1991).

o Coase Theorem: when transaction costs are zero it doesn’t matter where liability lies because the party most interested in results will make sure result is achieved (if you want to keep your neighbor’s animals out, you will build a fence) — market forces internalize all costs regardless of the rule of liability.

o Long-term Relationships: if you have a continuing relationship that you want to preserve, litigation is the worst way to resolve a dispute — social norms supplant legal rules.

o Bargaining in the Shadow of the Law: informal rules: self-help (gossip/reputation, moving animals to inconvenient location), complaint to authority, claims w/out lawyer, claims w/lawyer.

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THE STATUTE OF FRAUDS

General Principles: Scope and Application Restatement 2d § 110. Classes of Contracts Covered

(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception:

(a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision);(b) a contract to answer for the duty of another (the suretyship provision);(c) a contract made upon consideration of marriage (the marriage provision);(d) a contract for the sale of an interest in land (the land contract provision);(e) a contract that is not to be performed within one year form the making thereof (the one-year provision).

(2) The following classes of contracts, which were traditionally subject to the Statute of Frauds, are now governed by Statute of Frauds provisions of the Uniform Commercial Code:

(a) a contract for the sale of goods for the price of $500 or more (UCC § 2-201); . . . Restatement 2d § 131. General Requisites of a Memorandum

Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged, which

(a) reasonably identifies the subject matter of the contract;(b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and(c) states with reasonable certainty the essential terms of the unperformed promises in the contract.

Restatement 2d § 132. Several Writings The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction.

Restatement 2d § 133. Memorandum Not Made as Such Except in the case of a writing evidencing a contract upon consideration of marriage, the Statute may be satisfied by a signed writing not made as a memorandum of a contract.

Restatement 2d § 139. Enforcement by Virtue of Action in Reliance (1) 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 the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant:

(a) the availability and adequacy of other remedies, particularly cancellation and restitution; (b) the definite and substantial character of the action or forbearance in relation to the remedy sought;(c) the extent 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;(d) the reasonableness of the action or forbearance; (e) the extent to which the action or forbearance was foreseeable by the promisor.

Policy Rationales, etc. o Avoid fraud & perjuryo Cautionary function: make people think before entering Kso Evidentiary function: in case parties forget what was agreed too Not intended to let people get out of legitimate agreementso Signature has to be from party against which K is being enforced

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Crabtree v. Elizabeth Arden Sales Corp. o Facts: Pl was hired by D for 2-years employment with raises after 6 and 12 months, written memo to

this effect but not signed, two payroll cards reflecting raises were initialed and signed, second raise never happened, Pl sued for breach, court found for Pl under statute of frauds.

o K for over 1 year, therefore statute of frauds applies (§ 110). Signed payroll cards (§ 133) and memo are all part of several writings (§ 132) therefore they are signed by party against which enforcement is sought.

Winternitz v. Summit Hills Joint Venture o Facts: Pl was almost at end of 6-year lease of store, he negotiated a sublet and a new lease with D but

lease was never signed, then D changed his mind about lease and Pl lost a bunch of money, court found for D saying that lease was unenforceable under statute of frauds.

o Lease of property, therefore statute of frauds applies (§ 110). Partial performance exception to statute of frauds (§ 139) does not apply (based on Pl’s paying one month of higher rent) because it was not substantial performance. Court held that lease was unenforceable because it was not signed (§ 110), but awarded breach damages for Pl’s malicious interference tort claim (for interfering with sublet agreement) because court thought D acted with malice; court justified this by saying that even though the K was not binding it can have effect with regard to third parties.

Alaska Democratic Party [D] v. Rice [Pl] o Facts: Pl had worked for D in the past but was fired, Pl was in Maryland when D offered a 2-year job

(nothing in writing), Pl quit Maryland job and moved to Alaska, once there D changed mind, court found for Pl based on promissory estoppel.

o K for over 1 year, therefore statute of frauds applies (§ 110). No signed writing therefore K is not binding. But here there is reliance in Pl’s quitting job and moving across country. Reliance can overcome statute of frauds if injustice can be shown by clear and convincing evidence (heightened standard of proof) (§ 139). — Statute of frauds cannot be used to avoid a legitimate obligation.

o At-will employment does not apply to the statute of frauds (not considered more than 1 year).o 5 factors to determine injustice under § 139: other remedies, character of reliance, clear and convincing

evidence of terms, reasonableness, foreseeability.

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The Sale of Goods Statute of Frauds: UCC §2-201 UCC § 2-201. Formal Requirements; Statute of Frauds

(1) Except as otherwise provided in this section a contract for sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against which enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received.(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s 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; or(b) if the party against which enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or(c) with respect to goods for which payment has been made and accepted or which have been received and accepted.

Buffaloe v. Hart o Facts: Pl was renting barns then negotiated to buy them from D in annual payments, Pl found buyers to

sell barns for twice as much, he made first annual payment to D, then D returned the check four days later and claimed there was no K, D then sold barns to Pl’s buyer, court found for Pl.

o K for goods over $500 (sale for barns not land) so UCC applies (§ 2-201). No signed writing, so sale K is not binding. Court finds injustice to Pl here, so judgment is entered for Pl on the grounds of part performance because D accepted first payment (even though it was returned four days later) (§ 2-201(3)(c)).

Bazak International Corp. v. Mast Industries, Inc. o Facts: Parties negotiated oral agreement for $100K in goods, D told Pl that written invoice would be

mailed, never received, Pl went to D office and Pl wrote out & faxed 5 POs (signed by Pl) to other D office, D never objected to POs but never sent goods, court found for Pl reversing summary judgment.

o Goods over $500 so UCC statute of frauds applies. Signed writing only signed by Pl (not party against which enforcement is sought), but since both parties are merchants, merchant exception applies (§ 2-201(2)). This means since written confirmation was sent to D and not objected to with 10 days, the K is binding under statute of frauds.

o Court is trying to balance danger of unilateral unsolicited confirmations becoming binding and injustice to Pl based on prior oral agreement (Pl’s POs did not have express confirmation language and they looked like orders not confirmations so their status as confirmations was problematic). — Court focuses on underlying purpose, not letter, of statute of frauds.

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THE MEANING OF THE AGREEMENT: PRINCIPLES OF INTERPRETATION AND THE PAROL EVIDENCE RULE

Principles of Interpretation Restatement 2d § 201. Whose Meaning Prevails

(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof; it is interpreted in accordance with that meaning.(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew of the meaning attached by the first party; or(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a future of mutual assent.

Restatement 2d § 202. Rules in Aid of Interpretation (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.(3) Unless a different intention is manifested,

(a) where language has a generally prevailing meaning, it is interpreted in accordance with its meaning;(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

(4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.(5) Wherever reasonable, the manifestations of intention of the parties to a promise of agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, usage or trade.

Restatement 2d § 203. Standards of Preference in Interpretation In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:

(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;(b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;(c) specific terms and exact terms are given greater weight than general language;(d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

Restatement 2d § 204. Supplying an Omitted Term When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances will be supplied by the court.

Rules of Interpretation 17

o Noscitur a sociis. The meaning of a word in a series is affected by others in the same series; or, a word may be affected by its immediate context.

o Ejusdem generic. A general term joined with a specific one will be deemed to include only things that are like (of the same genus as) the specific one.

o Expressio unius exclusio alterius. If one or more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded.

o Ut magis valeat quam pereat. An interpretation that makes the contract valid is preferred to one that makes it invalid.

o Omnia praesumuntur contra proferentem. If a written contract contains a word or phrase which is capable of two reasonable meanings, one of which favors one party and the other of which favors the other, that interpretation will be preferred which is less favorable to the one by whom the contract was drafted.

o Interpret contract as a whole. A writing or writings that form part of the same transaction should be interpreted together as a whole, that is, every term should be interpreted as a part of the whole and not as if isolated from it.

o “Purpose of the parties.” The principal apparent purpose of the parties is given great weight in determining the meaning to be given to manifestations of intention or any part thereof.

o Specific provision is exception to general one. If two provisions of a contract are inconsistent with each other and if one is general enough to include the specific situation to which the other is confined, the specific provision will be deemed to qualify the more general one, that is, to state an exception to it.

o Handwritten or typed provisions control printed provisions. Where a written contract contains both printed provisions and handwritten or typed provisions, and the two are inconsistent, the handwritten or typed provisions are preferred.

o Public interest preferred. If a public interest is affected by a contract, that interpretation or construction is preferred which favors the public interest.

Joyner v. Adams o Facts: Pl had K with 3rd party to develop land, 3rd party bankrupt D steps in, K revised such that

annual rent increases are suspended in exchange for D having all land developed by a certain date, parties disagree on meaning of “developed” (D thinks it means subdivided and begun construction, Pl thinks it means all construction would be done), Pl brought suit for breach when construction wasn’t don’t by the specified date, App Ct reversed judgment for Pl, remanding for fact finding.

o D’s interpretation based on trade usage. There is evidence that the parties may have known of one another’s interpretation. If this is the case, if one side knew of the meaning of the other, that meaning is binding (§ 201(2)). If not, there is no K and D wins (§ 201(2)). So jury needs to rule on if Pl knew of D’s interpretation.

o 2nd trial Ct should not have resolved ambiguity against the drafter because this rule is reserved for cases of unequal bargaining power and also because there is evidence that Pl helped draft provision.

Frigaliment Importing Co. v. B.N.S. International Sales Corp. o Facts: Pl entered into 2 Ks to buy many chickens from D, big birds and small birds, Pl thought all

would be fryers (younger), D meant the big birds to be stewing (older) and the small birds to be fryers, on K small birds were more expensive per pound, first shipment arrived and Pl was pissed about the fowl stewing chickens but he accepted them and the second shipment too, then Pl brought suit for breach of warranty (NY Personal Property law: goods sold shall correspond to description), court found for D (dismissing complaint).

o A party is bound to the other party’s meaning if the first party knew or had reason to know the second party’s meaning, but the second party did not know or have reason to know the first party’s meaning (§ 201(2)). Here, based on industry standards and the language and pricing of the K, Pl knew or should have known D’s meaning, so D wins.

C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. 18

o Facts: Pl had burglary insurance with D, before buying policy parties talked about visible evidence requirement but the “on the exterior of premises” qualifier was not specifically addressed, poop burgled, evidence of crime on inside doors but not on outside door because outside door is easy to jimmy, Pl sued for breach when insurance refused to pay, court found for Pl.

o Court says that traditional rules of K don’t apply to boilerplate, especially insurance policy boilerplate because they are adhesion Ks. Only terms actually negotiated are really binding. “The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance Ks will be honored even though through painstaking study of the policy provisions would have negated those expectations.” Terms are not binding if the insured would not have signed the policy had he known of those terms before signing. — Doctrine of reasonable expectations only applies to insurance Ks, but you could try to argue it elsewhere with a proviso to this effect.

o Here, it is legitimate for burglary insurance to not cover inside jobs and to require visual evidence of a break-in. But D’s interpretation ignores this purpose behind the language and focuses on the letter of the policy to the detriment of the party whose poop has legitimately been burgled.

o Selmi says that court is making fake arguments to protect consumers in the interest of public policy (this interpretation of the policy is something neither party would have actually agreed to). The issue here is what to do when K language is clear on face but it indicates something that neither party actually intended when negotiating; court seeks out fairness through doctrine of reasonable expectations.

Doctrine of Reasonable Expectations in Insurance Law o Only for Ks of insurance that are true Ks of adhesion;o Ambiguity in policy language will be interpreted in light of the objective reasonable expectations of the

average insured;o Regardless of ambiguity the objective reasonable expectations of the average insured will be applied

there the insured did not receive notice of the provision in question, and (a) the policy provision is unusual or unexpected, or (b) the policy provision effectively emasculates the apparent coverage.

Adhesion Contracts o Standardized printed form;o Unequal bargaining power: form drafted by one party who participates in numerous transactions of the

type and enters into these transactions routinely;o Absence of choice / no opportunity for negotiation — take it or leave it.

Lucy v. Zehmer o Facts: Pl had tried to buy D’s land in the past, in the context of much drinking Pl makes an offer, D

didn’t think that Pl had that much money so he accepted and wrote up a K to call Pl’s bluff, Pl thought these were serious negotiations, they had some preliminary negotiations and drafted 2 versions of the K, a couple days later Pl shows up with the money and D refuses to sell, court finds for Pl (reversing summary judgment).

o Court finds evidence indicating that D was not so drunk as to not be able to form a K so that’s not a defense. Evidence of preliminary negotiations, 2 drafts of the K, the fact that both parties and D’s wife signed, and the price (fair value) all indicates that either D was serious or he gave the outward appearance of being serious. Intent is determined by outward expression (reasonable person standard), not secret inward intent. Pl reasonably relied on K in borrowing money and hiring attorney to look at title.

The Parol Evidence Rule Restatement 2d § 215. Contradiction of Integrated Terms

Except as stated in the preceding section, where there is a binding agreement, either completely or partially integrated, evidence of prior contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.

Restatement 2d § 216. Consistent Additional Terms

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(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is

(a) agreed to for separate consideration, or(b) such a term as in the circumstances might naturally be omitted from the writing.

UCC § 2-202. Final Written Expression: Parol or Extrinsic Evidence Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of dealing or usage of trade or by course of performance; and(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Thompson v. Libby o Facts: Both parties signed sales K for logs, D buyer never paid claiming they were of poor quality, Pl

seller brought suit to recover payment, D claims there was an oral warranty agreement made after the signed sales K, court found for Pl.

o Parol evidence is only allowed if writing is incomplete; we can determine incompleteness by looking at face of K (4 corners rule; classic/Williston approach to parol evidence rule). Here, K is complete on face, so trial Ct should not have admitted D’s parol evidence about oral warranty agreement.

o There is a “collateral agreement” exception to parol evidence rule, wherein parol evidence can be admitted to establish a separate agreement if such agreement does not contradict the original agreement. Collateral agreement must relate to a subject distinct from the subject of the original agreement. (If the subject of the collateral agreement is something that is likely to be included in the original K, even if it is not mentioned—as warranty here—then it is not a collateral agreement.)

Exceptions to the Parol Evidence Rule o Only applies to written agreements — not oral;o Evidence offered to explain the meaning of the agreement;o Agreements made after the execution of the writing;o Evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent

(ex. I’ll buy this house if I get loan approval);o Evidence offered to show that the agreement was invalid for any reason, such as fraud (need to show

intent), duress, undue influence, incapacity, mistake, or illegality;o Evidence that is offered to establish a right to an equitable remedy, such as reformation of the K;o Evidence introduced to establish a collateral agreement between the parties (must be a subject distinct

from that to which the writing relates). Sherrodd, Inc. v. Morrison-Knudsen Co.

o Facts: Pl placed bid on contract to excavate land based on being told by D that excavation was 25,000 cubic yards (actual excavation was significantly greater), D accepted bid and Pl began work, later Pl asked for partial payment for services and D insisted that Pl sign K which specified quantity as “LS” (lump sum), D told Pl that they would try to get more payment for extra work but this never happened, Pl never finished work and D only paid portion of original K price, court granted summary judgment for D due to parol evidence rule.

o Fraud exception to parol evidence rule: only applicable when fraud does not relate to the subject matter of the K (fraud in subject matter is a question of interpretation); fraud exception applies to fraudulent inducement. — Need to show intent to defraud.

Taylor v. State Farm Mutual Automobile Insurance Co.

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o Facts: In first case Pl was sued by other parties in auto accident and Pl had to pay $2.5Mil in excess of policy limits, Pl sues D for the excess judgment claiming bad faith in that D failed to settle first case within policy limits, D claims that Pl waived his right to sue for bad faith in signing a release as part of his uninsured motorist settlement, court found for Pl based on parol evidence.

o Corbin/modern approach to parol evidence rule: you have to look at (but not admit to trial) extrinsic evidence to see where ambiguity may lie (to create ambiguity in written K—but you cannot use this preliminary exploration to introduce contradictory terms, i.e. to create ambiguity between written K and oral negotiations), then if ambiguity is found parol evidence is admitted. — You still can’t use parol evidence to contradict written terms. Here, parol evidence was the small amount of the uninsured motorist settlement, which no reasonable person would have accepted in exchange for giving up the bad faith claim worth over $2Mil.

Nanakuli Paving & Rock Co. v. Shell Oil Co. o Facts: Pl had been buying asphalt supplies from D for over a decade, in that time D didn’t raise Pl’s

price over the only two price increases, then price was increased without notification, Pl claims that price protections are a local industry custom, court found for Pl.

o UCC Parol Evidence (§ 2-202): trade usage (“any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question”), course of performance (must be more than one instance, not clear how much more is required), course of dealing. — Under UCC usage and performance can change but not contradict boilerplate/written language (intent of parties more important than letter of writing; K interpreted so as to be consistent with conduct).

SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD FAITH, AND WARRANTIES

The Rationale for Implied Terms Wood v. Lucy, Lady Duff-Gordon

o Facts: D contracted with Pl to help market clothing in exchange for 50% of all profits, D made a side deal & didn’t share profits, Pl sued for breach, D claims K was without consideration, court found for Pl (reversing summary judgment).

o “A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed . . . If that is so, there is a K.”

o Here, claims that there is no consideration for lack of mutuality of obligation (Pl wasn’t contractually obligated to do anything). Court held that other terms of the K imply D’s obligation (exclusive privilege, assumption of duties, no unfairness, compensation, detailed tasks). — Implied term is that D must make reasonable efforts to marked clothing.

Leibel v. Raynor Manufacturing Co. o Facts: Pl & D had oral K in which Pl was exclusive distributor of D’s garage doors, sales eventually

decreased and D terminated relationship without notice, Pl sued for breach alleging that fair notice is an implied term of the agreement, court found for Pl (reversing summary judgment).

o Manufacturer & dealer/distributor/franchisee agreement does consist of sale of goods so UCC applies (a merchant & employee/salesman relationship does not consist of sale of goods). Under UCC, reasonable notification is part of implied term of good faith. Reasonable notification means enough time to give the other party reasonable time to seek a substitute arrangement 9exact length of time is a jury question).

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The Implied Obligation of Good Faith Restatement 2d § 205. Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

Form of bad faith conduct Meaning of good faith

Seller concealing a defect in what he is selling

Fully disclosing material facts

Builder willfully failing to perform in full, though otherwise substantially performing

Substantially performing without knowingly deviating from specifications

Contractor openly abusing bargaining power to coerce an increase in the contract price

Refraining from abuse of bargaining power

Hiring a broker and then deliberately preventing him from consummating the deal

Acting cooperatively

Conscious lack of diligence in mitigating the other party’s damages

Acting diligently

Arbitrarily and capriciously exercising a power to terminate a contract

Acting with some reason

Adopting an overreaching interpretation of contract language

Interpreting contract language fairly

Harassing the other party for repeated assurances of performance

Accepting adequate assurances

Locke v. Warner Bros., Inc. o Facts: After pl broke up with Dirty Harry, she entered into a pay or play K with D which was being

funded by Clint, there is evidence that D never intended to give Pl any work, Pl sued for bad faith, court found for Pl (reversing summary judgment).

o Court cannot rule on issues of creative discretion, but since there is evidence that D didn’t even consider Pl’s ideas, there may be a good faith claim based on dishonesty.

Empire Gas Corp. v. American Bakeries Co. o Facts: Pl entered into requirements K with D agreeing to buy all propane required (K estimated 2000

units), then D changed mind and decided to not convert van fleet to propane, Pl sued for breach, court found for Pl.

o Under UCC an “unreasonably disproportionate” variance to an estimate in a requirements K is bad faith (§ 2-306). A buyer can theoretically reduce requirement to zero but only with good reason (ex. company financial problems), but not merely because party changed its mind.

Donahue v. Federal Express Corp. o Facts: Pl was employed by D for 17 years, made some complaints to supervisor about misconduct, then

was accused of making derogatory remarks, then was fired, Pl sued for wrongful termination, court found for D (dismissing complaint).

o Good faith applies to at-will employment Ks only with respect to the terms (pay rate, etc.) and not to termination. The only exception to this is when termination violates public policy, which was not found here (whistleblowing has to be regarding a violation of law, not just unethical conduct). There can also be additional consideration (substantial benefit conferred or substantial hardship undergone, other than services hired to perform) which could remove employee from at-will status, but that was not found here either.

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Warranties UCC § 2-314. Implied Warranty: Merchantability; Usage of Trade

(1) Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. (2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and . . .(c) are fit for the ordinary purposes for which such goods are used; . . .

UCC § 2-315. Implied Warranty: Fitness for Particular Purpose Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified an implied warranty that the goods shall be fit for such purpose.

Bayliner Marine Corp. [D] v. Crow [Pl] o Facts: Pl was looking to buy boat, sales rep showed him prop matrixes and brochure which were both

general information not specific to the boat Pl purchased, Pl complained about speed not matching information and brought suit, court found for D.

o Court found that prop matrixes are not express warranty because they do not relate to this particular boat, that brochure is not express warranty because it is only opinion/commendation. Court held that boat met implied warranty of merchantability (trade standard and fit for ordinary purpose tests) (§ 2-314) also met implied warranty of fitness for particular purpose (§ 2-315) because D used it for 5 years.

Caceci v. De Canio Construction Corp. o Facts: Pl entered into K with D for sale of land and construction of house, 4 years after closing there

appeared a sink hole under kitchen floor, D repaired it twice but it kept reappearing, Pl hired outside firm who inspected and had to re-pour foundation, Pl brought suit to recover cost of new foundation, court found for Pl.

o Implied warranty of habitability / skillful construction: based on warranty of merchantability and good faith performance; also customer expectation. Policy considerations of importance of housing and unequal bargaining power.

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