Contracts
CONTRACT FORMATION (NON UCC)
Offer
1) General rule: a clear and definite expression of an intent to confer power on a specific person/group to immediately create a contractual relationship without any other action.
2) Intent to K = objectively reasonable person standard (objective listener)
a) Look to outward manifestation (not actual intention) to determine K formation
¤ Lucy v Zehmer losing the family farm 120
– Although Zehmer was joking, Lucy actually believed and was warranted in believing the K represented a serious business transaction
b) Consider the language, surrounding circumstances and prior practice/relationship of the parties.
c) Exception: accepting party knows (or should know) the offer is a joke ( acceptance does not create a K
¤ BUT a challenge or calling someone’s bluff is a valid offer
d) Offer must be definite and certain to the extent that the K is capable of being enforced.
3) Vagueness in the offer is ok, the K can clarify it
4) Offers are generally not:
a) Negotiations, price quotes, ads, jokes, medical opinions, soliciting bids, etc.
¤ Ads are usually a “invitations to make an offer” BUT ads containing specific words of commitment (i.e. a particular # of units) may be an offer*
¤ Items up for auction are usually “solicitation for offers” BUT if the sale is “without reserve,” item cannot be w/drawn from the sale.
5) Examples:
a) Owen v. Tunison 130
¤ “Will you sell me property for $6k?”
¤ “Impossible to sell unless I received $16k.”
( Not an offer – open for negotiations
b) Harvey v. Facey 133
¤ “Will you sell us Greenacre? Telegraph lowest price.”
¤ “Lowest price is £900”
( Not an offer, only a statement of the lowest price – first question not answered.
c) Lefkowitz v. Great Minneapolis Surplus Store* 138
¤ Ad: “1 black lapin stole for $1…first come first served.”
← Valid offer – although ads are not generally offers, this is clear, definite and explicit w/nothing open for negotiation.
Terminating an offer prior to acceptance
6) Lapse of time: Natural life span of the offer or a set time limit for acceptance
¤ Offeror can specify when the offer will lapse or longest it will stay open
– Not a guarantee that it will stay open the entire time (unless an option K)
¤ Every offer will expire eventually, so if time is not specified = reasonable time
7) Death/incapacity [RS §48]
¤ Power to accept terminates if either offeror or offeree dies or loses the legal capacity to enter into K.
– Irrelevant if offeree does not learn of the offeror’s death or incapacity until after dispatch of acceptance
¤ Exception: Option K
8) Revocation
¤ Offer can be revoked any time prior to acceptance, effective upon receipt.
¤ Effective upon receipt by the offeree [RS §42]
¤ Conduct [RS §43]: power to accept is terminated when offeror takes definite action inconsistent w/intention to enter into K AND offeree acquires reliable information (even if indirectly)
– Offer is considered revoked if the offeree has good reason to know it was revoked, even if offeror did not communicate directly with offeree.
– Dickinson v Dodds chasing down at the railway station 176
a) Rejection
¤ Offeree does not accept the offer, effective upon receipt.
¤ Power to accept is terminated by offeree’s counter-offer [RS §39]
– Mirror image rule: trying to accept on terms different than the original offer is a counter-offer, not an acceptance.
– Last shot rule: last form before performance prevails
Irrevocable offers: (Option K)
¤ An option K is created when the offeror invites acceptance by performance only and the offeree begins actual performance [RS §45]
– Offer remains irrevocable until offeree has finished performance. Offeree is not bound.
– Preparing to perform does not qualify as performance enough to form the K.
¤ An option K is created when the offeror reasonably expects to induce substantial action/forbearance on the part of the offeree before acceptance. Enforceable to the extent necessary to avoid injustice. [RS §87(2)]
– Irrevocability lasts only as long as is absolutely necessary.
– Result= subcontractor bids are irrevocable (Those offers invite acceptance by performance and induce reliance on the offer.)
– If the sub breaches, expectation recovery is allowed for the general to recoop costs of having to use a more expensive sub
¤ Examples:
¤ Drennan v. Star Paving; where general relied on the sub’s bid and won the job, sub tried to modify the amount before the general accepted because it made a mistake in figuring its bid. Sub was bound to do the job. General recovered the cost of having to hire the next cheapest sub.
Acceptance
9) Definition: manifestation/voluntary act to exercise power conferred by offeror to create a K
a) Offer can generally only be accepted by person the offeror has invited to furnish the consideration.
b) Acceptance valid only if offeree knows of the offer at the time of acceptance
¤ Broadmax v. Ledbetter reward for escaped prisoner 64
– a person who acts w/o knowing about the reward cannot claim it
A) Method of acceptance ( offeror is the “master of the offer” and sets the terms of acceptance
a) Mirror image rule: if the response is not the mirror image of the offer, the acceptance is a rejection and an counter-offer
1) Acceptance by return PROMISE – bilateral K (2 promises) [RS §56]
¤ Notice of acceptance is required if return promise sought
– Offeree must exercise reasonable diligence to notify offeror of acceptance or that offeror receives acceptance seasonably
2) Acceptance by PERFORMANCE – unilateral K [RS §54]
¤ Notice not required unless requested/specified or offeree has reason to know that offeror has no adequate means of learning about the performance
¤ Manifestation of acceptance must be communicated w/in a reasonable time (White v. Corlies 156)
a) If the offer invited either promise or performance → offeror is bound when performance begins and offeree is bound to complete performance. (His performance infers a promise to complete performance.) [RS § 62].
○ Note: §62 does not apply where the only means of acceptance is performance.
b) If the offer only invited performance, → offeror is bound when performance begins, offeree is not bound and can stop performing within a reasonable time. [RS §45].
3) Method not specified = choice [RS §32]
¤ When in doubt, either promise or performance ( acceptance
– If acceptance by performance is chosen, beginning performance is acceptance and a promise to complete performance [RS §62]
¤ If the offer suggests a method, either is allowed (Allied Steel v. Ford Motors)
– i.e. “Acceptance should be executed…”
4) Acceptance by silence or inaction [RS §69]
¤ Failure to reply is not acceptance UNLESS:
– Offeree took benefit of service or goods
– Offer states silence is acceptance
– Previous course of dealings make it reasonable for offeree’s silence to be construed as consent
B) Mailbox Rule (CL): when acceptance becomes effective. This rule usually does not apply to acceptance by performance unless expressed (i.e. making a payment by putting the check in the mail)
a) acceptance effective upon the offeree mailing it (K formed)
¤ Offeror cannot revoke while offer is en route
¤ Offeror bears the risk of mistake in transmission
¤ Exceptions:
– option K = acceptance upon receipt before offer expires
– offer provides otherwise
b) Revocation effective upon receipt by the offeree
c) Rejection effective upon receipt by the offeror
|Sent first |Acceptance |Rejection ( acceptance |Rejection ( acceptance |
|Recvd first |N/A |Acceptance |Rejection |
|K formed? |Yes |Yes |No |
Consideration: Is there mutual obligation?
C) Test: A promise has consideration and is therefore enforceable when the bargained-for return promise or performance causes reciprocal inducements.
1) Identify the promise to be enforced
¤ Must not be illusory, gratuitous, or a sham
– Illusory = promise that is entirely optional with the promisor (does not really commit the promisor to do anything)
○ Strong v. Sheffield endorse the ck for her husband to her uncle 69
– Gratuitous = a gift
○ Kirksey v. Kirksey brother-in-law give a place to raise the family 50
▪ “If you will come see me, I will give you a place to raise your family.”
○ A promise to make a gift is unenforceable
– Sham = attempt to make a gift promise into an enforceable promise by making it a “sham promise.” Consideration is so small that it’s nominal.
○ i.e. X promises to pay a “peppercorn,” Y promises to mow the law
2) Identify potential consideration for the promise (mutual obligation)
¤ Return promise or performance
– RS §71: performance = action or forbearance
– Implied return promise can be sufficient
○ Wood v. Lucy Lady Duff Gordon
▪ Wood impliedly promised to use reasonable efforts to market the designs
¤ Consideration must be of some value
3) Determine if there is bargained-for exchange: “quid pro quo”
¤ Reciprocal inducements
– Promise must induce consideration, consideration must induce the promise
¤ Fairness/adequacy are irrelevant
– Valid as long as promisee suffered some detriment – no matter how small
– Sufficient consideration if honest subjective reasonable belief that return promise is valid (majority rule)
○ i.e. Promise not to sue when s/l has run
¤ Multiple motives are irrelevant
– Exception: relevant only if both parties know the consideration is a sham
¤ Past consideration/service ( consideration
– Feinberg v. Pfeiffer lifetime payments at retirement 39
¤ Pre-existing duty rule
– If promisor/promisee is already legally obligated to act/forebear, he has not suffered any detriment ( no consideration
○ §89 can be used to overcome this rule: modification would be fair and equitable in light of the unanticipated circumstances or justice requires based on reliance.
4) Examples of consideration:
a) Forbearing to engage in legal activities (Hamer v. Sidway)
b) Forbearing to assert a valid claim (Fiege v. Boehm, where woman forbeared to assert bastardy charges which she thought were valid in exchange for money. When man found out he was not the father he tried to say she gave no consideration for the money. Court found for woman.)
Consideration substitutes: promises binding w/o consideration
5) Promissory estoppel [RS §90]: A promise which expectedly induces reliance on the part of the promisee can be enforced if enforcement is the only way to prevent injustice (promisor’s unjust enrichment)
¤ Promissory estoppel does not apply to irrevocable offers – if you have an irrevocable offer, consider reliance/option K (below).
¤ Elements:
– A promise was made
– Expected reliance
○ Should this promise be expected to induce someone to act or not act?
○ How reasonable would be reliance under the circumstances?
– Actual reliance
○ Did this promise induce action or forbearance?
○ What was done? How substantial?
– Injustice can be avoided only by enforcing this promise
○ What was the setting/context under which the promise was made?
▪ Formal? Commercial context?
○ Will someone be unjustly enriched if the promise is not enforced?
¤ Recovery – reliance damages (as if the promise was never made)
¤ Examples:
– Sub-contractors bids are temporarily irrevocable b/c PE
– Promise for at-will employment b/c employee may have quit his other job
Definite Terms
D) Terms of the K must be reasonably certain for K formation, even if the parties manifest an intention to be bound. If terms are left indefinite and uncertain, this may be proof that there was no intent to be bound.
1) [RS §33] Terms are reasonably certain if they
a) provide a basis for determining when the K is breached
b) and the appropriate remedy.
2) The courts find definiteness from external sources
a) trade usage
b) prior dealings between the parties
c) course of performance
¤ Part performance can resolve an unspecified element of the agreement
3) If the court believes the parties truly intended to be bound, it will supply a reasonable value for the missing term.
a) “Agreement to agree” (intentionally leaving a term to be agreed upon later) was an unenforceable K under CL. Now the courts may supply the reasonable value.
E) A party who has performed under an agreement that is unenforceable because of definiteness is entitled to restitution recovery.
Alternatives: even if no K exists, there may be a method of recovery
1) Promissory estoppel applies to all “promises”, not just “offers.”
a) Even if no K is formed, a promise can be enforceable if it reasonably and expectedly induced the other party to rely to his detriment and injustice can only be avoided if the promise is enforced.
b) Ex: (Hoffman v. Red Owl Stores p235 where the guy was trying to buy a franchise and the grocery store strung him along asking for more money and eventually he didn’t get a franchise. Court reimbursed his losses on reliance that a K was going to be formed.)
2) Restitution recovery allowed for
a) “Implied in fact K” – a K that was never articulated into words but was implied by conduct.
¤ implying a deal/assertion from the facts and circumstances
– Example: Walk into a salon and allow a hairdresser to cut your hair
b) “Quasi-K” – implied at law b/c of part performance. Not an actual K but a remedy to prevent unjust enrichment and recovery value of benefits conferred.
¤ Might not be an actual K b/c an oral agreement that falls w/in S/F
– i.e. Oral lease agreement for two years. T moves out after 2 months. L can still recovery for the two months.
¤ Duty: in an actual K, the agreement defines the duty but in a quasi-K, duty defines the K
– i.e. Medical professions who provide emergency services to those who are unconscious are entitled to restitution recovery (Cotnam v. Wisdom)
– Note: a lay person performing as a Good Samaritan is considered a gratuitous volunteer
¤ requires a direct relationship or a mistake on the part of the party conferring the benefit
c) No recovery for the “Officious intermeddler” or “volunteer”
¤ EX: While X is away, Y repaints his house increasing the value. X is not required to pay since the benefits were forced upon him.
ENFORCEABILITY
F) Statute of Frauds (S/F)
1) Does the K fall w/in the scope of s/f and if so is the writing requirement satisfied?
a) Applies to contracts for sale of land or an interest in land
b) Applies to any type of agreements not to be performed w/in 1 year: If any promise of either party cannot be performed w/in 1 yr of when K is formed, whole K is subject to s/f writing requirements.
¤ [RS 131] The writing must:
– Identify parties
– nature and subject matter of deal
– essential terms of the promises to be performed (dependent on the nature of the K).
– Signed by the party being sued
¤ Writing can be done before or after K formation
– Multiple writings – Court might consider these other writings along w/the core signed writing if they are sufficiently connected (i.e. stapled together or incorporated by express references)
c) Applies to contracts for the sale of goods over $500 [§2-201]
2) Circumstances when agreement should be enforced when there is no writing
a) Full performance = reliable evidence that agreement is real (what was promised)
¤ Agreements not to be performed w/in 1 yr: Full performance on one side
b) Restitution
¤ Oral K where X conferred some benefit to Y and Y would be unjustly enriched if K not enforced.
c) Estoppel (reliance)
¤ Equitable estoppel (rare): Y represented/told X he will put the agreement in writing (or would never assert s/f against him), Y repudiates and uses s/f defense. X relied on Y = Y is estopped from asserting s/f.
¤ Promissory estoppel [RS §139]: Y makes no representation about writing or s/f but nevertheless X expectedly relied on the oral promises in a way that has been detrimental (unconscionable injury – more substantial than just reliance) (Manarco v. Lo Greco 291 – Christie gets screwed by his step-dad).
– Test: is there a compelling basis for relief or do the circumstances satisfy the evidentiary purpose?
○ Is there a promise
○ Offeror should reasonably expect to induce offeree’s action/forebearance?
○ Offer does in fact act/forebear
○ Enforcing the promise is the only way to avoid injustice considering:
▪ Other possible remedies like cancellation and restitiution
▪ Definite and substantial reliance
▪ Extent to which the reliance or other evidence corroborates the promise
▪ Reasonable for offeree to rely?
▪ Extent to which offeror should have forseen the offeree’s action/forbearance.
¤ Using estoppel to get around a lack of writing should be harder than using it to get around lack of consideration.
G) Unconscionability – tool to undue a clause or K (usually adhesion K)
1) Applicability
a) Matter of law (not a jury question)
¤ Policy driven, no set definition of unconscionability. Rarely applied to merchantsB
b) Flexible doctrine
¤ Court will look at this K in this time and place (not a binding public policy decision for all time)
c) Considered at the time of K formation
2) Procedural Unconscionability – unfairness in bargaining process
¤ Element of surprise
– Fine print boilerplate
– Technical language an average person cannot understand
○ High pressure sales
¤ Element of oppression (unequal bargaining power)
– All providers have the same clause on Ks (no options)
– Necessity v discretionary purchase
– Lack of meaningful choice
○ Williams v Walker-Thomas Furniture Co welfare mother purchasing a stereo repo
▪ Absence of a meaningful choice for one party and K terms that unreasonably favor the other party (procedural unconscionability)
▪ To determine a meaningful choice, look to manner in which the K was entered and all the circumstances surrounding the transaction
▪ Meaningful choice often negated by gross inequality of bargaining power
▪ Lack of reasonable opportunity to understand the terms or “hidden terms”
▪ Terms are to be considered in light of the general commercial background and commercial needs of the trade
3) Substantive unconscionability – unfairness in content of agreement or in the K itself (outcome/terms)
¤ exculpatory clauses
¤ limiting remedies
¤ excessive high prices
– Jones v Star Credit door-to-door freezer salesman
○ Disparity in value motivates the court to find substantive unconscionability
○ Crt reforms the K so that amount paid meets amount owed
¤ Overly harsh or one-sided results
– Armendariz v Foundation Health sexual harassment/discrimination termination
○ Arbitration clauses can be substantively unconscionable when a stronger party, through a K of adhesion, imposes the arbitration forum on a weaker party w/o accepting that forum for itself.
▪ Unilateral arbitration clauses can be enforceable – when justification grounded in something other than employer’s desire to maximize advantage based on perceived superiority of judicial forum
▪ Generally, states have strong public policy of favoring arbitration as a method of dispute resolution
○ Does not permit full recovery of damages for employees but no restrictions on employers
○ Lacks mutuality
a) NOTE: Both categories must be present but not to the same degree
¤ Analyze it on a sliding scale
– the more substantively oppressive a term is, less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable and vice versa
– Note: the lower the procedural unconscionability, the less likely the court will find the clause/K unconscionable since more likely there was equal bargaining power.
4) Court remedies
a) Invalidate K as a whole (if entire K permiated)
b) Invalidate only only the particular clause(s), but enforce the rest of the K
c) Limit (w/o striking) the application of the unconscionable clause(s)
H) Undue Influence: unfair persuasion of a victim under the domination of another or by virtue of the relationship the victim is justified in believing that person will not act in their best interest [RS §177]
a) K is voidable at the option of he V
¤ Odorizzi v Bloomingfield School District gay teacher 349
– Not a duress case b/c school board had a legal right/duty to fire the gay teacher
– Undue influence cannot be used as a pretext to avoid bad bargains or escape from bargains which refuse to come up to expectations.
b) Usually a confidential/fiduciary relationship (although not required):
¤ atty/client
¤ Dr/patient
¤ trustee/beneficiary
c) Markers:
¤ discussion at an unusual/inappropriate time/place
¤ insistent demand to finish business at once
¤ extreme emphasis on untoward consequences of delay
¤ multiple persuaders by the dominant side
¤ absence of third-party advisers
¤ statements that no time to consult advisers or attys
I) Adhesion Ks – K dictated by one party to a large # of parties (non-bargained clauses)
1) Characteristic and triggering factors:
a) One dominant party
b) Weaker party must take it or leave it (unequal bargaining power)
c) Often form contracts (boiler plate) but not limited to
d) Fine point
e) Important points on reverse side or deep in lengthy K
f) Average reasonable person would not be expect such a document to be a K
¤ i.e. Ticket
2) Issue: Can the party who signed a standardized K reasonably be held to have seen, understood, and assented to its unfavorable terms, and accordingly be bound by them?
a) Can the court find a reasonable exception to the Duty to Read Rule?
3) Court use strict construction when considering adhesion Ks
a) crt will interpret clause narrowly
b) Ambiguity (if any) will be interpreted against the drafter
c) Example: Galligan p367, where the “lawn” was not read into an exculpatory clause that indemnified landowner from accidents on the “sidewalk, hallway or stairway.” Court read ambiguity in favor of the party with less bargaining power.
4) Public policy considerations
a) Offensive? Why?
b) Impact limitable? Countervailing public policy?
J) Accord and Satisfaction: compromise and consideration
a) Arises when parties dispute who owes what to whom
b) Each party gives up a claim to a higher/less amount when they had 2 different honest beliefs
c) Example: X honestly believes he owes Y $50 (some goods were defective). Y honestly believes X owes him $100.
¤ Accord = X will pay $75, Y will recv $75 (agreement)
¤ Satisfaction = X pays Y $75 and Y accepts $75 (performance)
( K is enforceable (Y cannot later sue for $25).
– Consideration on each side: X gave up claim for less amount and Y gave up claim for higher amount.
K) Incapacity: certain people are incapable of entering into Ks
1) Infants – The K of a minor, other than for necessaries, is voidable at his option. (Kiefer v. Fred Howe Motors 301 – lemon car)
a) Disaffirmance: A minor can disaffirm a K made while he is still a minor or a “reasonable” time after reaching the age of majority
¤ Affirmation/gratification is only possible after infant becomes an adult
b) Restitution if voided: Obligation is wiped out.
¤ Goods: Minor gets back payments already made and must return the goods (even if they are in a worse condition).
¤ Services: Minor is not entitled to be put in superior position than if he had never entered into the voidable K (Eden v. Kavovit 304 – child actor).
c) Policy
¤ Pro: protection from being bound in an unintended/unwanted K
¤ Con: discrimination and people mature at different ages
2) Mentally impaired – K is voidable at the option of the mentally impaired person
a) Disaffirmance: Decision to disaffirm can be exercised by the person’s estate or guardian.
b) Full restitution if voided: give the value of what was recvd (this may be different from market price or the price paid)
¤ All/any benefit must be given back (not just what’s left)
¤ If goods have been dissipated, give back $
c) Tests for establishing capacity (use both tests on an exam)
¤ Cognitive Test [RS §15(a)]: He is unable to understand the nature and consequences of the transaction? (Cundick v Broadbent 310 – sheep rancher)
– Very few people will be so impaired that they would not understand the nature and consequences. Weak-mindedness is not a defense.
¤ Volition Test [RS §15(b)]: He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of the condition (Ortelere v. Teachers’ Retirement 305 – retirement)
L) Mistake
1) Mutual mistake [RS §152]: same mistaken belief might permits one of them to escape the commitment
a) General rule is to assign the risk to the person who is in the best position to avoid the mistake, usually the professional if only party is a pro.
b) Requirements for adversely affected party to avoid K:
¤ Both parties made the mistake at K formation
¤ Mistake is a basic assumption on which the K was made
– i.e. Both thought Rose 2d of Aberlone was a sterile cow 798
¤ Mistake has a material effect on the agreed exchange of performances
– i.e. A barren cow is substantially a different creature than a breeding one (owner not required to deliver Rose)
¤ Adversely affected party does not bear the risk
– A party bears the risk when…[RS §154]
○ Risk allocated to him by agreement
○ He was aware he had only limited knowledge but treats his limited knowledge as sufficient (conscious ignorance) when K made
▪ No recovery for the uncut diamond case b/c both parties made a gamble 797
○ (or) risk allocated to him by the court b/c it would be reasonable under the circumstances to do so
▪ in the best position to prevent the mistake (superior knowledge)
c) [RS §89] After a mistake, parties can agree to modify the existing K without new consideration as long as the modification is
¤ fair and equitable in light of new, unanticipated circumstances
¤ necessary to avoid an injustice because of reasonable reliance
d) Recovery = restitution
¤ Renner v Kehl cultivating jojoba in Arizona but no water 789
– When a party rescinds a K on the ground of mutual mistake, he is entitled to restitution for any benefit that he conferred on the other party by was of part performance or reliance.
e) Exceptions:
¤ Mistake in market conditions
– i.e. both parties believe the land is worth $5k but it is really worth $2k
¤ Mistake about minerals
– Seller almost always bears the risk that valuable oil or mineral deposits will be found on the land (even though the price negotiated was on the basic assumption that the land was suitable only for farming).
¤ Building conditions
– A builder that Ks to construct a building will almost always bear the risk of mistake about soil or other unexpected conditions (Stees v Leonard building collapse due to quicksand and water flow 786)
2) Unilateral Mistake [RS §153]
a) K is voidable by the mistaken party if
¤ Mistake is a basic assumption on which he made the K
¤ Mistake has a material effect on the agreed exchange of performances
¤ He does not bear the risk of the mistake (and)
¤ (1) Enforcement would have an unconscionable effect (impact on the mistaken party & placing the other party back to status quo)
¤ Or
¤ (2) the other party had reason to know of the mistake or had caused the mistake.
b) Courts are more reluctant to allow parties to void a K for a unilateral mistake (than mutual)
c) Courts are more sympathetic to clerical errors than judgment errors.
M) Illegality—Ks can not be formed on the premise of acts that are illegal.
N) Misrepresentation and concealment – used car salesman sells a car with a fixed odometer or lies about previous accidents
a) Misrepresentation makes the K voidable at the option of the victim
b) Elements needed for a misrepresentation claim:
¤ Misrepresentation of fact (opinion ( misrepresentation)
– Exceptions (misrepresentation can be of opinion, not fact):
○ if a party has superior knowledge, a statement that ordinarily would be considered to be an opinion can be treated as fact (Vokes v. Arthur bad dancer 363)
○ fiduciary relationship
○ there has been some artifice/trick employed
○ parties do not deal at “arm’s length”
○ representee does not have equal opportunity to become apprised of truth/falsity.
¤ Material misrepresentation (significant) – goes to the basis of the bargain
¤ Scienter? (knowledge that statement is false or a reckless disregard for the truth)
– Needed for misrepresentation under tort
– Not needed for claim under breach of K – innocent or negligent misrepresentation is sufficient
¤ Victim relies on the misrepresentation
– w/o reliance, no legal consequence
¤ Reliance is justifiable/reasonable under the circumstances
– b/c some degree of diligence is required by the party who relies on another’s statement
¤ Victim proves he suffered damages
– Majority: look at the difference between the value as it was represented/promised and how it is in reality.
c) Doctrine of half-truths: There is no legal obligation to disclose facts or to answer inquiries (caveat emptor), but if the initiative is taken, there is a duty to disclose the whole truth.
¤ A half-truth is a misrepresentation
¤ Kannavos v Annino selling illegal multi-family dwelling house to immigrants
– Annino advertised and sold a multi-family dwelling to Kannanvos w/o telling it was illegal.
– Annino went beyond “bare nondisclosure” and knowingly misrepresented material facts by telling “half-truths.” Kannavos was allowed to rescind although he could have ascertained the whole truth by checking.
d) Dealing at “arms length” – each side negotiating for their own benefit
¤ nondisclosure of latent/hidden defects will not render one party liable to the other
– Swinton v Whitinsville Saving Bank termite house 354
○ Caveat emptor: no legal obligation to disclose facts
○ Although it seems unfair, seller cannot be liable for non-disclosure of a non-apparent defect b/c it would reduce value and law cannot provide special rules for some defects.
○ Saying nothing does not make the seller liable.
¤ Positive or active concealment creates liability
¤ Expert knowledge: generally understood that dealers in certain types of merchandise (antiques and rare coins) trade on their expertise and are not expected to disclose to their customers all the elements that enter into their evaluations.
e) Alternative: look to rescission of K
¤ No scienter required so even innocent misrepresentation allows rescission
¤ Two way street – V must make restitution
– Give back car and get $ back
O) Ambiguity- Terms needed usually include:
a) Identity of the parties
b) Definiteness of the subject matter
¤ real estate=identity of land + price
c) a basis for determining a breach
d) appropriate remedy in the event of a breach
P) Fraud: [RS 162] if the maker intends his assertion to induce a party to accept and the maker
1) Knows the assertion if false
2) Fakes his confidence in his assertion
3) Knows the basis for his assertion does not exist
Q) Duress: assent is induced by a wrongful threat and leaves no alternative than to agree, K is voidable by victim [RS §175(1)] ()
a) Improper threats [RS §176]:
¤ Threatened a crime or a tort
¤ Criminal prosecution
¤ Bad faith threat to sue
¤ Breach of duty of good faith and fair dealing under a K
b) Austin Instruments v. Loral Supplier held its parts hostage in order to get more money and to win 2nd contract. Buyer paid them to get the job done and then sued and won. p 343
¤ Loral was not required to ask the govt for an extension b/c nonperformance by a subcontractor is not an excuse to default
¤ Loral contacted possible vendors on it’s “approved” list. Unreasonable to find that Loral should have gone to other vendors w/whom it was unfamiliar or dissatisfied – it was enough that Loral contacted all vendors whom it believed capable.
c) Remedy: rescind K and get back excess of what was paid over the original price but must pay restitution.
1) Pre-existing duty rule: Modification appears to be coerced b/c there is no consideration since legal duty already owed under the original K. (Alaska v. Packers 327 where hired boatmen tried to go on strike once they were already out to sea unless the captain gave them higher wages. Captain’s agreement was not a K b/c boatmen had pre-existing duty.)
a) Can be used only if promise has not already been performed
¤ i.e. valid defense against paying, but not to get $ back.
b) Pre-existing duty rule is unreliable since ways to get around it:
¤ RS §89 (not accepted by all crts) – modification is binding if…
– it is fair and equitable in view of circumstances not anticipated by both parties
○ Carrig rock in the cellar 333
– provided by statute
– justice requires enforcement b/c reliance on the promise
¤ Renegotiation: parties can cancel a K by mutual agreement and renegotiate
– Schwartzreich v Bauman-Basch K for higher salary 332
c) Exceptions:
¤ Assuming slight additional or different duties might be sufficient consideration
What are the terms of the K?
R) Parol Evidence Rule: K already formed and reduced to writing but one party is trying to establish that prior discussions or writings should be part of the agreement (add to the K).
1) Only applies to documents that are “integrations” (intended as a final expression of the agreement )
a) Partial integration: intended to be final, but not intended to include all details of the agreement
¤ Document can be supplemented (added to) but not contradicted
b) Complete integration: intended to be a final expression and include all details of the agreement
¤ No evidence of prior/contemporaneous agreements/negotiations admitted that would contradict OR add
c) Triggering factors: informal memos, handwritten notes, and causal letters are usually not considered as final expressions
d) Never bars subsequent conversations after the agreement – a K can always be modified
2) Judge (not jury) determines if document is integrated:
a) Modern rule:
¤ Look at all available evidence to determine actual intention
¤ RS §216(2)(b): agreement is not completely integrated if it omits a term that might naturally be agreed upon but excluded in the circumstances
– Inexperienced parties
– Parties didn’t think it was needed (i.e. family members)
– Put terms in a separate deed/agreement
b) Four Corner Rule (Gianni exclusive right to sell soda 557):
¤ Look solely at the document
– Does it look like a formal K and complete on its face?
– Document will prove the parties intent
c) Merger clauses (“constitutes the entire agreement” or “there are no promises, verbal understandings, or agreements of any kind, pertaining to this contract other than specified herein”)
¤ Modern Rule: usually will be honored
¤ Four Corners Rule: conclusive
¤ Adhesion K: will not be honored
3) Parol evidence rule does NOT apply if…
a) The K is voidable or invalid [RS §214(d)] – prior agreements/negotiations are admissible to establish:
¤ Fraud
¤ Duress
¤ Mistake
¤ Lack of consideration
b) Collateral agreements – prior oral agreement is supported by separate consideration
¤ Ex. K for the sale of a car and as part of transaction, oral agreement to keep car in garage for $15/mo. Allowed to prove prior agreement even though integrated K does not include the agreement.
4) Interpretation
a) Most courts allow extrinsic evidence to aid interpretation of K
¤ Unambiguous terms: judge interprets
¤ Ambiguous terms: extrinsic evidence must be allowed and evaluated by a jury
b) Tests to determine ambiguity
¤ Modern (CA): Liberal rule
– Look to all evidence to decide if language of K is reasonably susceptible to more than one interpretation
– If so, extrinsic evidence of that interpretation is admissible
¤ Traditional (NY): Plain-meaning rule (four corners)
– Look to the four corners of the K and if clear and unambiguous on its face, writing should be enforced according to terms
– If writing is unclear and ambiguous, extrinsic evidence admitted and interpretation goes to the jury
○ Court will not hear evidence about the parties’ preliminary negotiations but will hear evidence about the circumstances (context) surrounding the agreement
( ON EXAM, ONLY APPLY TRADITIONAL RULE IF OUTCOME WOULD BE DIFF FROM MODERN RULE
REMEDIES
5) Expectation: “benefit of the bargain”
a) Makes X (promisee) as well off if Y (promisor) had performed.
¤ Loss of what was anticipated/promised/expected
¤ Standard for a breach of K
6) Reliance: “pretend it never happened”
a) Put X back in position if promise was never made.
¤ X may gave detrimentally changed position on reliance of the promise
– Ex. X incurred expenses for preparation or lost other Ks
7) Restitution: “return or restore”
a) Put Y back in position if promise was never made. Prevent Y’s unjust enrichment.
¤ X conferred some benefit to Y.
– Ex. X paid for the performance
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