PRECONTRACTUAL LIABILITY
Can a negotiation before a contract is officially formed be legally binding?
Question: when do they consider a contract to be legally formed?
James Baird: subcontractor incorrectly quotes a price upon which a GC relies in
submitting his bid, Learned Hand here says that it was an offer, not a promise, and
could not be binding because D got no return promise from P; Hand said that
promissory estoppel could not apply (despite detrimental reliance) because it was a
doctrine intended to bind donative promises where there is no opportunity to have
a formal bargained for exchange (not where there was an opportunity but it was
passed over)
Bid = offer; without acceptance there is no contract
Drennan: different rule that is now the default. Subcontractor is bound by his
mistake and owed the GC expectation damages for the difference between his quote
and the cost of hiring someone else. Traynor says that the individual who made the
mistake should be the only liable for it and that it’s reasonable practice that a
general contractor will rely on a bid, which effectively makes these options
contracts (he disagrees with treating bids as revocable offers in part because they
will have the effect of raising the contract prices for general contractors who will be
forced to factor in premiums to cover the risks), using promissory estoppel logic to
get to options contract, Traynor argues that this is beneficial to both parties who
will not be able to shop around for greater deals (RST conforms to Traynor’s
opinion)
Bid = option contract
Question: where else have we seen options contracts and how are they constituted?
ELEMENTS OF A CONTRACT
OFFER AND ACCEPTANCE
Offeror is the master of the offer- He can stipulate mode of acceptance
What counts as valid offer?
Patterson, Dickinson: when another accepts, offer is revoked
Morrison: mailbox rule (values the offeree over offeror)
Martin: volunteering information and asking for payment after the fact does not
constitute the formation of a valid contract
Can there be implied acceptance?
Rationale: We want sophisticated buyers to push for contract terms that will benefit
even mass buyers without special knowledge, we don’t want the transaction costs of
each individual entering into fully dickered exchanges, we want there to be an
implied warranty of merchantability
ProCD: buyer did not reject after having read the terms of the contract online and
failing to reject, so by implication, he accepts (Hill same outcome)
Failing to accept goods when expressly given an opportunity = acceptance
Kloeck: Disagrees with ProCd and says that under CL notions the vendor is not the
offeror but the buyer is the offeror
Hobbs: (Holmes) two parties in the habit of having acceptance via implication where
one party sends an eel skin and the other sends back money, keeping the goods is
the equivalent of acceptance, so offeree is bound by performance to pay
In light of ongoing relationship, silence = acceptance
Is there any deviation from this model?
Unilateral contracts
Options contracts
Carlill: buying machine in compliance with the ad constitutes acceptance via
performance
Cobaugh: same
Brackenbury: mother invites the husband to take care of the mom, daughter and
husband move in to take care of
Beginning of performance of a contract binds the offer and the offeree must have
enough time to perform
Unilateral/bilateral
Similar to an options contract vis a vis the option not to bind the performance, there
is no damage payment for breach, if you partially tender
- full/partial performance
- binding offer much like an options contract
- if you start performance on a unilateral contract, it becomes an options
contract
CONSIDERATION
Why do courts want to see consideration?
-
Consideration indicates contract formality: Fuller’s three functions
-
Even if the promises are unequal (like in Batsakis), courts will allow them to
stand if it shows mutual consideration; except if so disproportional that it
indicates manipulation of form (like in Fischer and Schnell)
Keep gifts out of contract law
What can constitute consideration?
Learned Hand (in James Baird): sacrificing some sort of legal right as a return
promise showing there is a mutual exchange and bargain
-
Detriment to promisee
Can include an act (doing/giving something), forebearance, or abandonment of
a legal right (Hamer; cf. Restatement Second §71(3) (Hamer: consideration
because nephew had legal right to smoke, swear, &c. = the abandonment of a
legal right need not be bad for the promisor) (Allegheny College: duty to name a
fund after a donor is enough)
Benefit to promisor
Under the bargained-for exchange test, simply that the promisor got
what he bargained for
An addition to the classic rule: the bargained-for exchange
Early formulation: Holmes
"[I]t is the essence of a consideration, that by the terms of the
agreement, it is given and accepted as the motive or inducement for
furnishing the consideration."
Modern formulation: Restatement Second §.71 (p. 200)
(1) "To constitute consideration, a performance or a return promise
must be bargained for."
(2) 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."
But, this is independent of inducement: Restatement Second §.81
(p. 200):
"Just because the performance isn't the thing that induced a
promise doesn't mean it doesn’t constitute consideration, and
vice versa." A random web site.
Ex.: DeLeo: the $25,000 was not given in exchange for the plaque
above the library; that was promised after the fact
However, Allegheny College presents only the slightest
variation in timing, and that counted
In Allegheny College, the condition came with the donation,
whereas in DeLeo, the donation seemed to come free of
requirement that the library be named for the donor
Ex.: Pitts: McGraw-Edison was giving the 1% commission, but not
in exchange for the customer lists, so no consideration = no
contract
(3) Performance may consist of "an act," "a forbearance," or "the
creation, modification, or destruction of a legal relation."
(4) Parties to the contract need not themselves be the ones to deliver
the performance or the recipients of its benefits
-obligation and promise to perform in good faith, as in Lucy Lady Duff
Gordon is a valid consideration
INTERPRETING THE PROMISE
When can misunderstanding invalidate a promise?
Raffles: When the misunderstanding is central to the purpose of the promise, a
material ambiguity can invalidate the contract according to a reasonable standard,
today there is an objective standard
Mutual (and material) ambiguity invalidates when both parties are equally to
blame for the misunderstanding (but the RST approach says that if it appears that
the parties are using it to manipulate one another, then it will interpreted against
the one seeming to be exploiting)
Flower City: As a new entrant, subcontractor is not bound by industry norms since
he didn’t know them yet
You can be excused from industry norms if your misunderstanding derives
from your newness to the industry
Embry 1907: A boss’s subjective understanding of his intention does not constitute
a legally bound interpretation
Words said in response to a direct question can be reasonably interpreted as
an answer to that question, regardless of subjective intention
Frigaliment 1960: The subjective intention of the P is not enforceable given that
there is a business lexicon reasonably understood by the community; P did not meet
his burden of proof that his more narrow understanding of the word “chicken” was
based on any objective standard beyond his personal belief
The current approach is to resolve the ambiguity rather than dissolve the
agreement
How does a court resolve an ambiguity in the terms of written contract?
ADOPTING WRITING
Evidentiary function
Mitchell: when a K is ambiguous on its face, parol evidence is ok otherwise no (plain
meaning rule)
Hattley: parol evidence may be ok if it adds to the context and does not contradict
express terms
WWW Assoc.: a contract that includes a reciprocal cancellation clause after a certain
point in time is admissible given that the contract is clear on its face (critique is that
it gives written words a magic totemic quality)
Plain meaning rule = if the K is clear on its face, then there is no way to allow
in extrinsic evidence
PG &E: (Traynor) an ambiguity surrounding whether an indemnification clause
allows protection of 3rd party, it is ok to allow in extrinsic evidence to resolve this
When the words of a contract are not plain on their face, it is admissible to
have extrinsic evidence to clarify the intentions
Columbia Nitrogen Corp.: 2 parties have a longstanding relationship of buying and
selling and make a one-time deal, which P refuses, the court allows in extrinsic
evidence that will enhance the understanding of the context (industry norm of
renegotiating price as it changes in the market up until completion of performance)
If extrinsic evidence can clarify a term on the contract, it is admissible, so long
as it does not contradict expressly
When does a court find that performance of a validly formed contract is
excusable?
Mutual Mistake – Sherwood
Impossibility – Taylor
Limited promises
Lucy Lady Duff Gordon: implication for good faith efforts in a promise
Feld: must look to norms of merchant community when deciding what good faith
means
Corenswet: As long as there is reasonable notice, the breach is in good faith
Sun Printing: contract is incomplete because key terms were missing
POLICING THE BARGAIN
When will a court say that a contract is not valid because the manner in which
it was formed was improper?
Coercion
Duress [ (1) threat of withholding needed goods, 2) no other place to procure,
3)adequate K remedy would be inadequate ]
Fraud
Unconscionability
Alaska packers: need valid consideration to form a new contract
Austin Instrument co: subcontractor reneging unless increases price constitutes
duress since there were reputational and economic costs on the line
Unconscionability: Henningsen – warranty without bargaining is unconscionable
(no chance to read the fine print)
William Walker furniture
Marketstreet: Superior knowledge within a contract and not
CONDITIONS AS RELEASE FROM CONTRACT; BREACH AS DUTY REMAINING
The difference between a condition precedent and a promise
If the promissor or the promisee does not comply with the condition precedent it
acts as a shield for the opposite party who is released from the obligation to perform
If the promissory or promisee does not comply with the performance, the other side
has an opportunity to sue for breach
The purpose of contractual conditions is to place the risk on one party or anther in
case a certain event does not occur.
 A condition precedent is something that has to happen before an obligation
comes due (If it’s 70 degrees tomorrow, I will pay you $10 to mow my lawn.)
If the condition does not happen, both sides are released from their
obligations.
 A condition subsequent happens and changes the pre-existing duty. (I will
pay you $10 dollars to mow my lawn tomorrow, but if it rains I will only pay
you $5.) (almost like an addendum stipulating another set of terms)
Condition or promise?
It can be unclear whether a clause is a condition or a promise, and typically this
requires inquiring into the parties’ intentions. If it is found to be a promise, the
party who did not perform the promise will be in breach, but if it is a condition,
there is no breach and parties are released from performance.
How do court evaluate whether there is a condition or a promise?
Nichols: old form of contract was that one side had to perform as a precondition for
the other side
Gray: Buyer wants to get out of his contract to buy whale oil, which would require
the court to interpret the promise as a condition, and if the condition was not met,
then the buyer would not be obligated to purchase the oil at all, or at the higher
price
Condition precedent – If there is the same amount of whale oil as last year, I will pay
you 85 cents. Condition subsequent - I will pay you 85 cents. But if there is more
whale oil, I will pay you 65 cents.
The problem here was that both instances can characterize the agreement here, the
court had to determine if it was a condition subsequent or precedent and what the
default arrangement was.
Buyer wanted to prove that the clause was a condition subsequent that had
been met, and the burden of proof was on him. Party who wants to be
discharged from his pre-existing duty (ie paying 85 cents) has burden of proof.
Price: The arrival of a land deed is not a condition precedent to issuing a loan
In a bilateral contract, the norm is that the first of two time ordered performances
are considered an implied condition precedent to the other, and you can sue for
breach if it is not performed
Howard:
If words are ambiguous as to whether they are a condition or a promise, they
will be interpreted as a condition precedent
Semmes: If there is impossibility, there is a release from a condition and the
contract obligations still stand
Substantial performance doctrine
Plante: if there is substantial performance, P must pay D expectation damages
Jacobs and Young: waste was the predominant reason was not make them change
the foundation (peevyhouse rationale) groves rationale for everything else
De minimus non curat lex – changing the pipes was too trivial to enforce
Substitution is fine in an expectation damages universe where damages =
performance
Printing Center of Texas: A buyer has a right to reject or accept goods that fail to
comply with express or implied terms, so long as the buyer is going so in good faith
(not so here)
CONTRACTUAL RIGHTS OF THIRD PARTIES
Third party beneficiaries
Lawrence v Fox: a third party for whose benefit a contract is made can sue
Seaver: an exception to privity is with family members
Assignment and Delegation
Macke Co: Rights and duties under a bilateral executory contract can be freely
assigned
Tortious interference with contractual relations
Seeing the obligation as property, almost like interfering with a property right, like
stealing or is it a BFP
Lumley: P can be liable for maliciously intervening in a contract
Della Penna: P sues D for intervention with prospective contractual relations - P
must prove it was wrongful
JD Edwards: consultants can be clear of being liable by third parties so that they can
offer good-faith advice to customers without fear of being liable
If a contract is formed and you know it, that’s all you need for malice
If it’s a prospective contract, you need more than interference, you need an
affirmative act of malice