Contracts I

1. Contracts I Contract Fundamentals

2. Contract Law • Usually consists of a legal framework within which parties may create their own rights and duties by agreement • Yet many contract disputes relate to the nature and extent of the rights and duties the parties have created for themselves. Disputes over “the law of the contract” not over “contract law” See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

3. Contract Law • Knowledgeable counsel will use language which has been tested in previous controversies • Many potential disputes over the law of a contract never arise because the contract is well drafted See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

4. 3 Critical Elements

5. Offer • A manifestation to another of assent to enter into a contract if the other manifests assent in return by some action, often a promise but sometimes a performance. • The offeror confers upon the offeree the power to create a contract. • An offer is nearly always a promise. See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

6. Acceptance • The action (promise or performance) by the offeree that creates a contract (i.e., makes the offeror’s promise enforceable). See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

7. Objective Theory of Acceptance • Judge Learned Hand, “a contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties...[it] is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, 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 on them, he would still be held, unless there were mutual mistake...”

8. Objective Theory of Acceptance • Anderson v. Backland, 199 N.W. 90, 91 (Minn. 1924) • Hawkins v. McGee, 146 A. 641, 643 (N.H. 1929) • Keller v. Holderman, 11 Mich. 248 (1863) • Lucy v. Zehmer, 84 S.E.2d 516 (1954) • Balfour v. Balfour, 2 K.B. 571 (C.A. 1919)

9. A Contract ? • “formal contract contemplated” • “forward a contract” • Letter of intent signed leaving details to be worked out by the lawyers • Intent of each party? • Understanding of the other party’s intent?

10. Factors Used in Case Analysis • In 1984 the Second Circuit set out this list: • (1) party’s explicit statement that it reserves the right to be bound only by signed agreement • (2) one party has partially performed and that performance has been accepted by the party disclaiming the contract • (3) whether there was literally nothing left to negotiate or settle, so that all that remained was the signing of what had already been agreed to

11. Factors Used in Case Analysis(Continued) • (4) whether the agreement concerns those complex and substantial business matters where requirements that contracts be in writing are the norm rather than the exception See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

12. Mutuality of Obligation • Because contracts require a mutuality of obligation, both parties are free to withdraw from negotiations until the moment when both parties are bound. • Thus the offeror is free to revoke the offer at any time before acceptance. See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

13. Consideration • Consideration is a fundamental requirement for the enforcement of a promise (i.e. contract). • 1700 and1800’s - either a benefit to the promisor or a detriment to the promisee. • First Restatement of Contracts, in 1933, defined exclusively in terms of bargain. See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

14. Theoretical v. Practical • Theoretical - Consideration is essential element of any contract • Practical - Maybe

15. Lacking A Bargained For Exchange • Gratuitous promise • Reciprocity • Past consideration • Moral obligation • Unsolicited action • At will employment contracts

16. Bargained For Consideration • Peppercorn theory • One dollar and other good and valuable consideration • Nominal consideration • Imbalance of exchange • Illusory consideration

17. Acceptance By Promise • The offeror obtains the offeree’s commitment to undertake the return performance and to be responsible for its completion and for any deficiencies, and the offeror is not bound until such a commitment has been recieved. • However, the offeror is bound before receiving the return performance. See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

18. Acceptance By Promise ? • Patterson v. Pattberg, 161 N.E. 428, 429 (N.Y. 1928)

19. Acceptance By Performance • The offeror is not bound before receiving the return performance. • The offeror obtains no commitment to undertake the return performance. • Employee Handbooks

20. Traditional Approach • Suppose A says to B, “I will give you $100 if you walk across the Brooklyn Bridge” • B starts to walk across the bridge and has gone about half-way across, when A overtakes him and says, “I withdraw my offer.” • Does B have any rights against A?

21. Restatement of Contracts § 45 • (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.

22. Termination of Power to Accept • Revocation of the offer by the offeror • Death or incapacity of the offeror • Lapse of time, In re Kelly, 39 Conn. 159, 163 (1872) • Rejection of the offer by the offeree, “mirror image,” or modification

23. Contracts by Correspondence • The offeree has dispatched an acceptance that has not yet been received by the offeror. Is it too late for the offeror to revoke his offer? Is it too late for the offeree to reconsider and reject the offer? • Is there a contract even if the acceptance is lost in transit and never received by the offeror?

24. Modern Reality • Most modern business contracts are the results of more than one negotiation session. Usually involve personal meetings, phone calls, faxes, e-mail and different individuals at different stages of the process. • Complex business transactions involve many “rounds” of negotiations.

25. Pre-Contractual Liability • More modern cases have shown a willingness to impose per-contractual liability. • Unjust enrichment resulting from negotiations • A misrepresentation made during negotiations • A specific promise made during negotiations, see Cyberchron v. Calldata Sys. Development, 47 F.3d 39, 45 (2nd Cir. 1995) • An agreement to negotiate in good faith

26. Agreement to Negotiate ? • Itek Corp. v. Chicago Aerial Industries, 248 A.2d 625 (Del. 1968) • Was there an obligation to negotiate in good faith?

27. Statute of Frauds • Provide trustworthy evidence of the fact and terms of the agreement and to avoid reliance on uncertain memory. • Answer for the duty of another • Sale of an interest in land • Not to be performed within a year • Determines whether the parties have entered into an enforceable contract.

28. Definiteness • Restatement Second states that the terms of a contract must “provide a basis for determining the existence of a breach and for giving an appropriate remedy. • The Uniform Commercial Code provides “even though one or more of the 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 reasonable certain basis for giving an appropriate remedy.”

29. Interpretation of Terms • Process which a court ascertains the meaning that it will give to the language used by the parties in determining the legal effect of the contract • Intent of parties - more narrow approach • Construction - process by which a court determines the meaning that will be given to the language of the contract in giving it legal effect See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

30. Interpretation of Terms • Contra proferentem • Prior negotiations, usage and custom • Omitted terms supplied by courts - duty of good faith, duty of best efforts, terms providing for termination of the agreement See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

31. The Parol Evidence Rule • The extent to which litigants may introduce extrinsic evidence when interpreting the meaning of a written contract. • Merger Clause • Course of dealings, usage of trade, course of performance, implied warranties, fraud or mistake

32. Restatement of Contracts § 90 • A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action 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.

33. Abuse of Bargaining Process • The most common are misleading conduct and coercive behavior, both of which may tempt a court to impose its moral judgment on the propriety of the bargaining behavior. See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

34. Performance • Each party enters into a contract because of their expectation that the other party will actually perform their promised conduct • The goal of the court’s approach has been to develop rules to protect that expectation against a possible failure of the other party to perform See Contracts, Third Edition, Farnsworth, Aspen Pub., 1999

35. Failure to Perform ? • Dispute over what performance is required • Non performance does not always amount to a breach. • Full performance may not yet be due • Performance may be discharged because of impracticality of performance or frustration of purpose.