The Bargaining Process Part I

1. The Bargaining ProcessPart I Does the law of contracts need a ritual?

2. Problem You are responsible for ordering office supplies. The boss says he needs 1000 sheets of stationery with his name on it. You go online to place an order with the usual supplier, and after selecting and designing the stationery you type “1000” in the “quantity” box, not noticing that the box is for quantity “in thousands.” You press the enter key just as you notice the price—not $100 as you expected, but $100,000. You immediately pick up the phone to call the supplier, and as you are dialing you receive an email from the supplier stating: Thank you for your order. Your order has been accepted and will be processed in the order received. Please expect at least 2 business days for preparation of your order, and 3 business days for delivery. The supplier answers the phone, but when you try to cancel, he responds that you have a contract, and that the order is binding. Is he right?

3. Solving the Problem Of the Inconspicuous Zeroes • Consideration by each side? • Is lack of reliance important? • An exchange of the sort not expected to be binding? • To what terms did you intend to be bound? Using what we already know: Careful!

4. Some Possible GoalsOf Rules of Contract Formation • A party should be bound only if he intended. • A party should know whenhe is bound and when the other party is bound. • It should be possible to know the terms to which you will be bound. • Would a ritual minimize disputes about intent? Is a handshake a signal of intent to be bound?

5. Alternative PerspectivesFor Resolving Issues of Intent • Subjective view: What was each party thinking when he appeared to make a contract? • Objective view: How would disinterested observer interpret what he saw (the “fly on the wall”)? Should we test a party’s honesty? Or should we just ask the fly?

6. Restatement Section 20(1):If People Intend Differently Question: What if parties claim different meanings (e.g., “we are bound” v. “we are not yet bound”)? 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 (equally innocent); or (b) each party knows or each party has reason to know the meaning attached by the other (equally at fault).

7. Examples • Buyer denies it made contract. At trial, Buyer’s lawyer asks Mr. Goofus, the clerk who placed the order, “Did you intend to order 1,000,000 sheets?” Seller’s lawyer exclaims “Objection! Relevance!” • Buyer’s’s lawyer asks Boss, “What were your instructions to Mr. Goofus?” Seller’s lawyer exclaims “Objection! Relevance!” • After each side has presented its case, the Seller says to judge: “Let the jury go home. There is no ‘issue of fact’ to decide because it is undisputed that the order was for 1 million.” Buyer responds: “I think we should let the jury decide what I really intended!”

8. Lucy v. Zehmer Abbot & Costello Meet Lucy & Zehmer

9. Did Zehmer Intend to Make A Contract with Lucy? • We hereby agree to sell to Lucy the Ferguson Farm complete for $50,000, title satisfactory to buyer. • Breach: Zehmers renege: It was a “jest”, a “joke”, a “dare”, or a “bluff.” • Result under objective theory? Subjective theory? “Who’s on first?”

10. Facts Showing the Zehmers’ Lack Of Subjective Intent • Zehmer’s testimony. • “High as a Georgia Pine.” • Setting (tavern). • Mr. Z whispered to Mrs. Z, “it’s a joke.” • Lucy didn’t have enough money to buy land. • Nature of writing they signed (receipt). Should we let a jury decide what he was thinking?

11. Facts Showing Zehmers’ Objective Intent • Lucy’s testimony. • Zehmer offered to drive Lucy home. • They discussed contract for 40 min. • Lucy insisted both Zehmers sign, and they did. • Writing contains essential terms. • It was a second draft. • Lucy took possession of the writing. • Lucy offered $5 to make the contract binding. • Zehmer didn’t object until a few days later. Is this what a real estate contract looks like?

12. Problems • Price for the farm was $50, not $50,000? • The Leonard v. Pepsico case, p. 124. • Before Zehmers signed, Lucy whispered to a friend, “they think I’m bluffing.” • Surgeon promised Patient, “Everything will turn out fine.” See also Hawkins v. McGee, p. 127, and reconsider Sullivan v. O’Connor. • Promise of a “date,” or to love someone “to the end of time.”

13. “Gentlemen’s Agreements:”Politically Incorrect Contracts? • Can parties intend agreement not enforceable by judicial process? What’s the point? • Firm-commitment underwriting: with proviso: “no liability or obligation of any nature whatsoever is intended….” • Promise of discretionary bonus. Gentlemen only?

14. Nonbinding Agreements?Other Possible Examples • Agreement not to raise prices or wages. • An agreement to beginemployment at will. • Agreement to exclusivedating relationship. • Neighbors’ agreement to use matching Christmas decorations. The Godfather makes a “gentlemen’s agreement.”

15. Agreement Subject To Memorialization Are they bound, if they’re waiting on the secretary to type the agreement?

16. Formal Writing Contemplated: Restatement Section 27 • “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.” • “Circumstances may show that the agreements are preliminary negotiations.”

17. Formal Contract ContemplatedAgreeing Before We’ve Agreed? • Complex contract requiring lengthy, costly negotiation. • The need for sense of commitment before invest-ment in negotiation. • Agreement in stages? Essential terms, then details? • The “letter of intent.” “Have your attorney call my attorney.”

18. Agreements to Agree:Are They Binding? • The engagement analogy. • Evidence parties intendedto be bound? • What if parties fail to agree about the details? • The Getty, Pennzoil and Texaco story. A “letter of intent?”

19. The Offer Is he talking to you?

20. The Offer: Will We Know It When We See It? • Offer: “A 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.” Section 24. • Preliminary Negotiations: “A manifestation of willin-gness 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.” Section 26 Whose perspective matters most?

21. Owen v. Tunison Courting? Or Contracting? p. 130

22. Offer to Be Bound? Or Preliminary Negotiation? • Owen: “Will you sell me your store ... For the sum of $6,000?” • Tunison: “[I]t would not be possible for me to sell it unless I was to receive $16,000.00 cash.” • Owen: “Accept your offer for ... sixteen thousand cash send deed ... [to my agent].” Whose perspective matters?

23. Owen v. Tunison: Reasons for Caution • Is lack of reliance important? • A simple “yes” test. • Seller not actively marketing. • Willingness to discuss not commitment to sell. • Liability imposed too readily inhibits discussions. • Price not the only term. • Possible concurrent dealings? Not ready to commit?

24. Problem p. 132 Letter to 4 possible buyers: “Selling [described ranch] at the assessed value of …. $324,419. Terms available--- 29% down---balance over 5 years at 8% interest. Negotiate sale date for December 1, 1976 or January 1, 1977….” Offer? Or invitation to negotiate?

25. Southworth v. Oliver587 P.2d 994 (Or. 1978) • Letter was not “out of the blue.” It was invited by buyer, who wanted to know the price at which seller would sell. • Lists essential terms. • Although seller sent letter to others, it would have appeared to buyer that the letter was specifically addressed to him. • Seller’s subjective intent relevant, not controlling.

26. Harvey v. FaceyThe Fight for Bumper Hall Pen • Harvey: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price—answer paid.” • Facey: “Lowest price for Bumper Hall Pen £900.” • Harvey: “We agree….” Offer? Or invitation to negotiate?

27. Problem p. 134 “I am willing to release you from the non-competition agreement in return for a cash buy-out. I have … decided that a reasonable figure would be $40,000…. “If you are willing to approach the problem in the way I suggest, please let me know and I will have the appropriate paperwork taken care of.” Offer? Or invitation to negotiate?

28. Fairmont Glass Works v. Crunden-Martin Buyer: Please advise us the lowest price … on our order for ten car loads of Mason green jars…. State terms and cash discount. Seller: [W]e quote you Mason fruit jars, complete, in one-dozen boxes, delivered in East St. Louis, Ill.: Pints, $4.50, quarts, $5.00, half gallons, $6.50 per gross, for immediate acceptance …; sixty days acceptance or 2 off, cash in ten days…. We make all quotations and contracts subject to the contingencies of agencies or transportation … beyond our control. Buyer: Enter our order for ten car loads as per your quotation. p. 134

29. Offers v. AdvertisementsLimited Quantity, Unlimited Audience • Presumption: Advertisement is invitation to “treat” or bargain. • Rationale: Limited supply, unlimited audience. • Why not first come first served? • Risk of bait and switch? Our operators are standing by to accept your offer!

30. Offers and Rewards:Dead or Alive? • City offers $2,000 for information leading to arrest of notorious outlaw. Will Hunter realizes that fugitive livesin apartment across the hall. He calls police, and they arrest fugitive. Has Will accepted an offer of reward ? • The Lefkowitz case: “Saturday 9 a.m., 1 Black Lapin Stole …Beautiful! Worth $139.50, yours for $1.00, first come, first served.”

31. PROBLEM, p. 141Mesaros v. United States U.S. Mint to produce and sell a limited run of 500,000 gold five dollar commemorative coins: “If the Mint receives your reservation by December 31, 1985, you will enjoy a favorable Pre-Issue Discount saving you up to 16% on your coins.” TO PLACE YOUR ORDER TODAY!

32. Is Uncle Sam Off the Hook? Key Facts in Mesaros • 500,000 coins, 756,000 orders. • At signature line: “YES, please accept my order…. Verification of my order will be made by the Department of Treasury.” • No provision for selection of offerees by “first come, first served” or any other basis. • Mint favored orders which, by information, means of purchase and credit were absolutely clear.

33. Recall Our Hypothetical Remember your purchase of stationery? You placed the order over the internet after accessing a webpage created by the office supply store. Do the materials on advertisements help your analysis of the problem? Who made the offer? Who made the acceptance? When did the contract form?

34. Elsinore Union Elementary S.D. v. Kastorff When a Contractor Miscalculates p. 143

35. Public Works Bidding And the Source of Error • The risk of bid shopping. • Last minute bid calculating by subcontractors and contractors. • Public authority invites bids;contractor bids are offers. • By operation of public authority’s rule, bids (offers) are irrevocable once opened.

36. Restatement of Contracts:Contract Based on Mistake • Mistake: Belief not in accord w/ existing facts. §151. • Mutual mistake, §152. • Unilateral mistake, §153. • Reason for caution? • When is court most likely to grant avoidance?

37. Unilateral Mistake of FactRestatement of Contracts §153 • Mistake involved basic assumption on which he made the contract. • It has material, adverse effect on the exchange. • He does not bear risk of mistake under §154, and (a) enforcement unconscionable, or (b) other party had reason to know or his fault caused mistake.

38. When Do You Bear Risk Of Your Own Mistake? • The risk is allocated to you by agreement; or • You were aware, when contract was made, that you had limited knowledge of facts about which your mistake relates, but you treated your limited knowledge as sufficient. • Court allocates risk is allocated to you because it is reasonable in the circumstances to do so.

39. Is Kastorff Entitled To Forgiveness For Mistake? • Was there a mistake of fact? • Material, adverse effect? • Enforcement unconscionable? Or did district know of, or bear responsibility for mistake? • Does he bear risk because of agreement, for treating limited knowledge as sufficient; or for other reasons?

40. Variations on Elsinore: Mistake v. Error in Judgment • Kastorff predicted he could find a subcontractor for a certain price. • He believed union would not strike. • He made a rough “guesstimate” without calling subcontractors. • He believed subcontractor would stick to estimate. • He believed he could withdraw bid after opening. I see oil at $40 a barrel by September 2007!

41. Recall Our Hypothetical Remember your error in ordering 1,000,000 sheets of stationery instead of the 1,000 sheets you intended? You tried to cancel by phone, but before you reached the seller, you received the seller’s email message accepting your order. Does the rule for unilateral mistake allow you to void the contract? Your special order is on the way!

42. The Acceptance

43. Restatement of Contracts §30Acceptance:By What Manifestation? (1) An offer may invite or require acceptance … by an affirmative answer in words, or by performing or refraining from performing a specified act…. (2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable under the circumstances. Could a tap dance be an acceptance?

44. Acceptance of OfferForming a Bilateral Contract

45. International Filter Co. v. Conroe Gin, Ice & Light Co. Is it an acceptance, if no one is there to read it?

46. Exchange of Communications In International Filter Co. • Seller’s proposal “becomes a contract when accepted by [buyer] and approved by an executive officer of [seller] at its office in Chicago…. This proposal is submitted for prompt acceptance….” • Buyer writes on the proposal, “Accepted,” sends proposal to Seller’s Chicago office. • Seller’s president writes “OK” on proposal, mails acknowledgement of “order,” request for sample. • Buyer sends written cancellation of order.

47. International Filter v. ConroeAnd Communication Delays • Seller’s form made buyer the offeror, and dictated rules for seller’s acceptance. • Offer made acceptance validlong before buyer knew. • It is irrelevant that seller has not relied and has not yet begun to perform. Contract formation in the fog of communications

48. Implications of Int’l Filter:Acceptance without Notice? • Acceptance can be any objective manifestation of assent consistent with offer’s requirements. • Manifestation might not be by communication. • Even communication could be very be slow. • Risks to the offeror? Can acceptance be a secret?

49. White v. Corlies & Tift Could shopping be a form of acceptance? p. 156

50. What Manner of AcceptanceDid Customer’s Offer Require? • Background: Contractor had “assented” to customer’s new specifications, at same estimated price. Offer? • Customer: “Upon an agreement to finish the fitting up of [our offices] in two weeks from date, you can begin at once. The writer will call again, probably between 5 and 6 this p.m.” Acceptance or new offer? • Contractor buys lumber, begins “work thereon.”