1 CONTRACTS OUTLINE (Fall 1997) PART ONE THE PROMISE & CONSIDERATION I. Contracts on law of Promise A.

The law of contracts concerns agreements under traditional analysis - the presence of an agreement implies a bargain. 1. However, most agreements constituting contracts are composed of promises. Thus, while most individuals use the term "contracts in the law of bargain" it is really the law of promise.

B.

A promise is an engagement that leads to an understanding that gives the promise a right to criticize the promisor if the promised outcome or result does not occur. (This is breach of contract.) 1. 1-106 UCC. Remedies shall put the parties in the economic position which would have resulted if the DF had performed his contractual duties. a. Note that Article II of the UCC applies to the sale of goods. "Goods are anything moveable at the time of sale."

C.

Brief summary of damages on breach. 1. Compensatory or Expectancy damages - we try to put the PL in the position he would have occupied if the contract had ben performed as agreed (UCC above 1-106). "Expectation Interest" - a general approach of measuring damages under the UCC. It generally provides the largest damages. If the PL can find a substitute, we award "cost to cover." This measure protects the expectation of the PL. (Expectation interest is generally the least compelling for state intervention but often used.) 2. Reliance Damages - Restore the PL to his pre-contract state (restoring the status quo). Compensate him for out of pocket expenses used for the contract and for detriments he suffered in reliance in the agreement. Sometimes we use this rather than expectation interest because it means a lower settlement and allows for the "suspect theory." (The reliance interest provides a more compelling justification for state intervention.) 3. Restitution Damages - Unjust Enrichment. Returns the benefit conferred by the PL on the DF to the PL. Any advances or payments under contract are returned to the PL. (Restitution interest is the most compelling justification for state intervention.) The Role of contracts is to support transactions in the marketplace. 1. Our economic system requires bargaining. Our system requires people to exchange promises and engage in commercial transactions. This is why we

D.

2 do not give punitive damages in contract cases. Punitive damages would only deter people from entering into contracts. Also, we do not usually award for pain and suffering because it was unanticipated by the contract. Of course this is the usual/traditional reasoning and there are exceptions. E. MCDONNELL'S TIP FOR LOOKING AT CONTRACTS 1. "Was there any doubt the promise was made?" 2. "Was the promise voluntary and without coercion?"

II.

First Theory of Obligation: CONSIDERATION: An exchange, quid pro quo. Insures that the promise is no accident A. A promise to pay or to deliver goods is the most common from of consideration. Promise for a promise equals a bargain. 1. The Restatement 2nd has adopted the bargain theory of consideration first espoused by Oliver Wendell Homes and then picked up by Williston in the 1st Restatement. (Georgia law has adopted the bargain theory). 2. Consideration does not have a precise meaning; it would be a mistake to think one concept of the law dictates a "right" answer. Sufficiency of consideration - if a promise is voluntarily entered into, it is generally binding. We do not look into values of consideration or fairness awarding to the traditional attitude of contract law. 1. A good example is Hardesty v. Smith where both parties made a mistake. For the purpose of the exchange, the improvement in the lamp had value. The parties treated it as something of value - it just turned out to be worthless. If the courts allowed a "worthless" defense they would question the fairness of inventor contracts. When a party gets all the consideration he honestly contracted for, he cannot say it is "worthless" because parties would not be free to contract. (Note: Dr. Pemberton sold the formula for Coca Cola for $5.00) 2. STARTING POINT - We do not inquire into the value of consideration a. the question is whether there was a bargain. Consideration as bargain seals the agreement as binding b. Unconconscioncionability Rule: (2nd Restatement) If the sum agreed to is so trivial or nominal that it is obvious to both parties that it doesnt not constitute consideration for a promise, then there is no consideration 3. A promise is supported by sufficient consideration if the services were not intended to be gratuitous and they were beneficial "Naked Promise" - Promise not supported by consideration. Generally, it may only be enforced if there was a reasonable reliance on the promise or if justice demands it. At one time, naked promises were not enforced at all. 1. Consideration gives us a mechanism to distinguish gifts from contracts. If one wants to make a gift, then just do it. Do not simply promise - we

B.

C.

3 require delivery of the subject matter. "A gift is a contract without consideration, and, to be valid, must be executed." Unexecuted gifts are not generally enforced (b/c: no reliance on gift, no unjust enrichment, enforcement violates autonomy, no market reason to enforce) Gift enforcement is not socially justified. Gift promises are not important to our economy as bargained for promises. Gifts are not in our own economic self-interest in a commercial setting as to a human setting where is may occur as a breakdown in a relationship. There is no reliance or unjust enrichment in undelivered promises and they fulfill none of the 3 functions of consideration (receiver is no worse off than before).

2. 3.

4.

D.

Functions of Consideration 1. 2. 3. Evidentiary Function - Consideration provides proof of the transaction and rules out suspicious cases. ask: is the promise evidence? Cautionary Function - Perhaps we should not enforce a promise made on emotion or impulse. Ill-conceived promises are spur-of-the-moment promises will not be enforced. ask: was it deliberate? Channeling Function - Bargained promises are the most important to enforce because parties must show intent through actual wording and courts can channel energies into arena of market transactions (an important concept). ask: was it relied on?

E.

What constitutes consideration? According to the 1. Williston's Rule of Thumb - Look for an economic benefit to the promisor as an indication of a contract. Conditions do not equal consideration. Therefore, "if you walk around the corner ... I will...", is not consideration (Tramp Hypo). But a chance to win a lottery in exchange for coming to an auction is consideration, Maughs. Forbearance (refraining from something you have the legal right to do) Hamer v. Sidway - Uncle will pay $5,000 if nephew will refrain from drinking, et al. for 6 years. Williston's rule of thumb does not show consideration; however, according to the old arguments, consideration was "detriment" to the promisee and/or "benefit" to the promisor. Uncle has received some non-economic benefit (maybe satisfaction) and the nephew has restricted his freedom of action. (Restatement 2nd 81 - bargain if the promisor sought the promise. Gilmore feels that Hamer "rejects the bargain theory." Note that under normal analysis, a consideration under pretense is not valid consideration. If you agree to purchase the IBM Tower for $2.70 it is not a bargain under the 2nd Restatement 81 even though it may be okay under 1st Restatement. (Under Options, this deal may be allowed). Forbearance to sue can also be consideration. However, the cause of

2.

3.

4.

4 action or claim must be somewhat valid. If we allowed spurious claims it would promote blackmail. Need a colorable claim. a. Example - Springstead - others had not even a doubtful claim to property thus any promise in return for forbearance to sue was without consideration. i. the subjective belief of the potential person to sue is whats important (subjectively, the claimant has to have an honest belief in his claim)b/c of fear of extortion and we want compromise 5. MCDONNELL TIPS ON WHAT IS NOT CONSIDERATION a. A gift promise b. Promising to do what you are already obligated to do. Pre-existing Duty Rule. c. A promise not to revoke an offer, standing alone, is not binding. d. Unconscionability Rule Two types of contracts 1. Bilateral Contract - a promise is exchanged for a promise. These are important and allow people to cooperate in a complex organization like a distribution claim. (acceptance through a return promise) a. need mutuality of obligation for a bilateral K, b/c an exchange of promises is the only basis for liability. Often, courts must infer a bargain to enforce these b/c no unjust enrichment or reliance exists Unilateral Contract - a promise in exchange for an act. If there is a sufficient act, a unilateral contract does not require mutuality of obligation. Illusory promises and mutuality of obligation/pre-existing duty. (acceptance by performance) See Weiner. Ad for a lost dogIm looking for an act. a. UCC and Restatement limitations - Unilateral contract require (1) an offeror to clearly indicate that performance is the only manner of acceptance. OR (2) an Offer to the public: a Finder's reward. It clearly indicates that performance is requested rather than a promise.

F.

2.

G.

Mutuality of Obligation: There must be a promise on each side of the agreement for a contract to result (bilateral Ks). If you reserve the right to change your mind then it is an Illusory Promise. Promise: An undertaking that something will happen in the future. 1. 2. If a promise is not binding and real, the courts say there is no mutuality of obligation. EX: I will marry you if I choose to. (Illusory) Lack of mutuality is usually raised as a kind of technical exception and the courts do not always honor it in the cases where a party has made a promise that contends that he doe not have to keep it. When there is

5 mutuality, it is often tough for a promisor to invoke lack of mutuality in order to get out of his promise (Wood v. Lucy, Mattei) These arguments are not as compelling as when made by the promisee. Lack of Mutuality can be satisfied by an implied promise. The court may imply a promise if there was an exclusive agreement between the PL and DF (such as Wood - fashion designer PL implicitly promised to put forth efforts for DF and work for her. "A promise may be lacking, and yet the whole writing may be instinct with an obligation imperfectly expressed" This saved deal from lack of mutuality). *Court may also imply a promise if consideration other than the promise has been given EX: If you work for someone in reliance on their promise.

3.

4.

H.

Courts have also held contracts valid despite the presence of a satisfaction chance. (EX: " I will find satisfactory leases", Mattei v. Hopper.). The breaching party must have a genuine grievance. The contract cannot be breached because lack of mutuality is raised as a technical exception. The leases extended must be examined in "good faith." (Commercial goods standard - Reasonable Person. Items of taste standard - Good Faith. a. courts go out of their way to enforce bilateral Ks Pre-existing Duty Rule 1. A promise to do something which you are already bound to do is not consideration. (EX: If a seller asks for more money before he delivers goods). Extra money or further consideration cannot be coerced from a buyer. The courts would not allow the seller to keep the money. If I enter a K to sell a condo for $60k, but its worth $90, there is no way outthe bargain seals the deal a. Exception - If buyer received too good a deal in the first place, then refuses to pay additional costs, courts may not apply the preexisting duty rule. b. 2nd Restatement: Cant be for a nominal amount ($1 for condo more likely to be a gift)

PART TWO Other Theories of Obligation - Non-contractual III. Promissory Estoppel - Justified Reliance. The Basis for enforcing things that are too indefinite to be enforced as a bargain. Sometimes Courts use justified reliance as a "substitute" for contracts. A. Characteristics: Restatement 2d 90 (1) <ALSO ADOPTED IN GEORGIA> 1. Must have a promise. 2. The promise must be reasonably expected to induce action or forbearance by promisee or 3rd person.

6 3. 4. B. The promise does induce action or forbearance resulting in detrimental reliance. The promise is enforceable if injustice can only be avoided by its enforcement. Remedy is usually limited to reliance interest.

4 Changes in 1981: 1. Reliance by a 3rd party counts 2. reliance doesnt have to be definite 3. Remedy may be limited 4. Charity and Marriage dont need reliance Cases before 90 Restatement 2d (which formally defined PE). 1. Seavey v. Drake - Courts saw a dramatic reliance of building a house, paying taxes and making improvements. (Land)work equaled consideration a. Reliance has 2 purposes: part performance (no S of Frauds defense; equity in consideration) 2. Ricketts - Grandfather promises to provide $2000 induced girl to quit job. 3. Ryers Case - Charitable subscription relied on by building church. Gift. 4. MCDONNELL THOUGHT - All of the above cases back up Gilmore's argument that Holmes simply invented the bargain theory because all of these cases were enforced promises without a bargain theory being present. 5. Siegel v. Spear - DF promised to insure furniture as a gratuitous bailee and violated a trust relationship. 6. In these cases the promises wee enforced without bargained for consideration. 90 emerged to explain cases like above which promises in absence of bargain consideration. 90 really changed the way we thought about consideration as a necessary item in a contract. The courts sidestepped adherence of valid consideration when the promise should be enforced. Courts enforced the promises because of what they considered to be redeeming social value. Kirksey is an exception - "white trash." Wheeler v. White - after 90 (1965). Promise was made to obtain financing so the PL demolished the building. D induced this action. 1. 2. 3. 4. There was an attempted bargain but it was not validtoo indefinite to be a bargain. Reliance was compelling and dramatic (PE), and the court measured damages by reliance factor. "Tangible Reliance" with "Pictorial Persuasion." The detriment suffered provides damage - value of buildings. No expectation damages because promisee partly responsible for ambiguity of the contract he relies on. PL must bind the promisor to a legally sufficient contract to get any expectation damages. Reliance=amnt. building a. reliance damages in PE (if this had been a bargain supported by

B.

C.

7 consideration it would have been expectation damages) D. Hoffman v. Red Owl Stores - Bargained contract never reached when details not finalized. Follows the logic 90. The parties were working toward an agreement and action was taken based on DF's promises. 1. 2. It was foreseeable that Hoffman would rely due to business relationship. No damages were awarded for expectation interest. Hoffman relied but he didn't have a contract. The court covers his losses but not his future profits on sold store. P must have a breech of a bargain contract for expectation damages. Exposes D Company to damages due to a promise made during negotiations; however, reliance must be reasonable and in accordance with contract terms. Franklin - unsigned letters do not rule out promissory estoppel element in verbal promises by D. Justified Relaince: she knew P was relying on her promise. Local 130 - Workers claim they relied on U.S. Steel's promise not to shut down if profitable by working. There was no dramatic reliance because the reliance was simply continued working. They didnt fulfill the condition of profitability anyway.

3. 4.

E.

Ways cos can protect selves while negotiating: 1. Stipulate no liability until K formed 2.

IV.

Restitution - Unjust Enrichment - Quasi Contract (Separate from Contract & Promissory Estoppel. A. When the D has been unjustly enriched at the expense of the P, he is required to make restitution. McDonnell Hypo - You pay the electricity bill twice. You can get the second payment back because it's unjust enrichment even though they have never promised to do that. "Benefit Conferred by Mistake." (painter hypos).if doesnt know, then no U.E.; if knew and acknowledged hes painting, its a K implied in fact. 1. Parties try to make a contract but fail to produce an enforceable contract: The P can fall back and make a recovery to the extent D was enriched. Agreement to take care of elderly in return for house. (Unenforceable contract, Quasi Contract & DF breaches). Example - Gay v. Monney, where the contract was not enforceable as a bargain contract under the Statute of Frauds or Kearns v. Andree, where it was too indefinite to be enforced as a bargain contract. Agreement to by house if an act is done. a. Restitution may be: a theory of recovery; measure of damages; both

8 b. the 2. There is no liability in U.E. if the P didnt expect compensation at time the services were rendered (no compensation for volunteers) dont want people to intermeddle in our affairs

Parties do make a contract. The P confers a benefits in accordance with the contract (payment) but the D breaches. P can recover the befit conferred. (EX - increases in value of home). a. Doctor saves my life while Im unconscious on the street. Dr is a volunteer, but I have been unjustly enriched (?) Parties make a valid contract but the P breaches. Should we award the value to the P if the Ps partial performance? (NOTE: Under a contract, the breaching P certainly cannot recover.) a. Courts are reluctant to do this because it may cause partial performances to increase. But, it has been done in cases where wages are due a breaching P. Quasi-Contract. b. QUASI CONTRACT - Not a contract at all, but a duty thrust by the courts under certain conditions upon 1 party to repay another in order to avoid the former's unjust enrichment. EX - Britton v. Turner - where the employee left after 9.5 months instead of 1-year. P get pro rata share less damages to D. c. If breach was not willful the P may recover under "quantum mertuit." (as much as he deserves). Quantum Meruit measures recovery under implied contract to pay compensation as reasonable value of services rendered. EX - Kelley v. Hance, where court would not enforce because contractor did perpetrate "willful abandonment & repudiation. He did not substantially perform on contract & willfully quit without a promise to pay by the D or a voluntary acceptance of P's work. UCC 2-720 (2) Breaching Buyer. Restitution is made only when buyer has prepaid.

3.

B.

MCDONNELL HYPO - You're desperate for a plumber because your sink is clogged. You call the plumber to come and no price is mentioned. It's implicitly understood that you will pay but indefinite; thus, you implicitly promised to pay at fair market value. This is a real bargain contract. It's implied based on situation Implied-In-Fact Contract - a true contract, containing all necessary elements of a binding agreement; it differs from other contract only in that it has not been committed to writing or orally stated in express terms, but rather is inferred from the conduct of the parties in the milieu in which they dealt. You can examine this as a bargain contract or restitution. 1. if I see painter, but he doesnt see me, and I say nothing, theres no K implied in fact, but there is restitution b/c I never said anything 2. The party seeking damages should typically show that services were carried out under circumstances to give the recipient reason to believe that: a. They were performing them for him and no one else b. They were not rendered gratuitously (Sparks v. Guftason: services

9 werent gratuitous, even though they were voluntary and for a friend, b/c D knew they were going on) c. services were beneficial to the recipient 3. Requirements of Quasi K: a. D unjustly enriched at Ps expense b. Circumstances are such that D should make restitution in good conscience C. MCDONNELL HYPO - Julian live at #41 and Anglin lives at #42. Anglin enters into a bargain contract with Sarah to have his house painted for $1000. The numbers are confusing and Sarah paints Julian's house by mistake. 1. If Julian wasn't there to refuse the service, he is not liable because it was done gratuitously and to make him pay would be intruding in his affairs. The notion is that Sarah assumed the risk - she should have made sure she was painting the right house. We don not want to impose on Julian's freedom. If Julian realizes Sarah's mistake and goes to hide in the basement, he is liable because he had the opportunity to refuse and did not. This imposes an affirmative duty on Julian. EX - Edson v. Poppe and the drilling of the well. If Sarah sees Julian's house in horribly run down condition & knows Julian is down on his luck, so she does a good deed and paints house for charity. If she finds out the next day he is worth $4 million, it's too bad for Sarah because she did the work of charity and never made it known she expected restitution at the time she painted the house. We do not protect volunteers and gift givers.

2.

3.

D.

THREE RULES FOR RESTITUTION INTERESTS 1. 2. 3. Theory of Recovery A new way to alternatively measure damages. Both

V.

Promise for Benefit Received. "Material Benefit." A. Restatement 2d 86. 1. A promise made in recognition of a benefit received previously by the promisor is binding to the extent necessary to prevent injustice. EX Webb v. McGowin, where the court said there was consideration because D received a material benefit. There was a moral obligation to pay which was upheld because of a pre-existing agreement. No restitution b/c P was a volunteer, but, in a sense, the kid was unconscious, so P had to be one. This could also be like a Dr. with and the emergency rule where we compensate under restitution.

10 a. Not binding if: (1) Promisor conferred benefit as a gift. (2) The value of the promise is disproportionate to the benefit received. You can only recover value of benefit. (3) Promisor has not been unjustly enriched

2.

b. Moral Obligation is important Common Law also allowed enforcement - past consideration element. a. Bankruptcy - debts discharged through bankruptcy can be voluntarily reassumed and enforced (usually in writing). b. Contracts of infants - although invalid, these can be re-affirmed at majority age. c. Statute of Limitations - expired obligations can be reaffirmed.

B.

These cases arise where person makes a bargain promise; a legal obstacle to pay arises; and the person promises to pay anew, creating an enforceable moral obligation.

VI.

Obligation Arising Solely from Form. A. B. C. The old writ of covenant enforce "sealed" writings. 1. Formal kind of commitment. 2. No consideration necessary. Not done today. The seal is not decisive. Today, this is an independent factor. Modern Application 1. One impact of the seal in some states is on statute of limitations. a. In Georgia, on a simple contract in writing, the statute of limitations is 6 years, but if it's sealed writing, the statute of limitations is 20 years. (20 years is long in contract law) (1) In corporate law, the use of the seal can have an impact because it gives an advantage to the creditor. 2. Another situation where the form (Not Seal) of a writing is important is the option contract (promise not to revoke an offer) where a nominal sum is o.k. 3. guaranty Ksin writing; singed, recites consideration; its binding This is the least prominent theory of obligation in Contract Law. PART THREE Warranties

D.

VII.

Warranties in General A. Introduction 1. Warranties involve the quality of goods.

11 2. 3. 4. B. Most litigation arising under Article II of the UCC results from a warranty. The UCC is the principle source of warranty law. Also, the Magnuson-Moss Act (Consumer Products), State law, and courts interpretation of the UCC. Warranty Law shares similarities and differences with warranty theory such as strict liability in tort. (This is discussed in the next section concerning the relationship between contract and tort.)

VIII.

EXPRESS Warranties (UCC 2-313) A. Express Warranties are created by seller representation. The Key is if the seller's express representation becomes part of the basis of the bargain. NOTE: This phrase was chosen because it has almost no meaning at all. It is so opaque to give a mechanism for giving the courts some flexibility. 1. 2. However, there is no requirement of an intentional misrepresentation for a warranty claim. Under UCC 2-313 (1) Express Warranties are created by: a. Affirmation of fact or promise made by seller that is a part of the basis of the bargain. b. Description of goods which is part of the basis if the bargain (express warranty is that goods shall conform to the description). See Keith v. Buchanan where literature for advertising purposes said the boat was "very seaworthy" and this was found to be express warranty. If buyer had known it wasnt seaworthy, then it wouldnt be legit. c. Sample or Model which is part of the basis of the bargain transaction (creates warranty that whole of goods shall conform to the sample or model). NOTE: Under UCC 2-313 (2) an express warranty can be created by the above even if the seller does not use formal words such as "warranty" or guarantee." BUT Also in 2-313 (2), puffing or sellers talk does not create an express warranty. An affirmation by the seller of the value of the goods (EX: "this boat is worth the price"), or a statement of the seller's opinion (EX: "these computers will improve your profitability"), does not create an express warranty. (unless there is a radical breakdown immediately after purchase). Presumption of Warranty - The seller's statements are presumed to create a warranty unless the seller can introduce evidence that they were not part of the bargain (EX: "the buyer might not have seen an advertisement which stated boat was seaworthy"). The D Seller can show facts that the information was not part of the bargain transaction - a lack of reliance. The burden of showing reliance is not on the buyer. Seller must show. a. buyer does not have to demonstrate reliance on statements. Only necessary to show that the statement was a component of the bargain. All language is part of the bargain whether intended to or

3.

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12 not unless the seller has specifically rejected statements in the brouchure, they are part of the bargain. ii. 2-316: once you have spoken and made the express warranty, you cant take it back with a disclaimer 5. If the warrant expresses a specific limitation under which the product must be operated and the buyer doesn't follow the limitation, he is probably out of luck. EX: "Don't use above 80 degrees" and buyer uses above 80 degrees. 6. When the breakdown occurs right after the sale, the jury is more likely to hold it as a warranty (If car seller says this is a damn good car, then I buy it and it immediately breaks. In such cases, very general statements is enough for a valid express warranty). There has to be a serious break down immediately after the sale. 7. If I buy a copier and it says it will bring high profits, this is not an express warranty b/c many things affect the profitability of a corp. B. Nature of Statement considered in context: look at key facts 1. The courts have found express warranties from very vague statements due to the facts of each case: (These are not, on their face, promises. They are representations of fact; this is different than with contracts.) a. "This car is in A1 mechanical condition." b. "This motorcycle is in excellent condition." c. "This boat is seaworthy" Keith v. Buchanan d. "Copier maintenance cost is no more than 1 cent/copy." BUT NOT "Copier will increase profits". The courts view two factors as important: a. Causal connection between a problem with goods and statement of seller (is the problem what the statement addressed). - was the buyer's loss covered by defect in problem. b. Amount of time from sale of goods to problem origination. (1) If the quotes above the goods broke down immediately after sale in a dramatic way. (2) Note that the court decides when the party gets a warranty (also above statements are not fraud). Scientifically developed products - we have high expectation about technical products. We expect them to work, sometimes we demand them to work. If they don't work we sue ... Thus, hybrid cord seed ad which states "excellent stalk standability" was held as an express warranty when stalks destroyed by storm. a. Remedies: repair; replacement; or purchase price Informal Express Warranty - characteristics summary a. There is no drafted warranty document given by the seller. b. They arise from advertising, statements by sales reps., and displays and models. i.

2.

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13 c. C. Claim arises when statements are not fulfilled in total. No negligence is needed.

Disclaimers of Express Warranties UCC 2-316 (1) 1. You can't count on a general disclaimer to negate an earlier express warranty. The phrase "No warranties express or implied" is not effective to the extent it is unreasonable. a. The above rule protects a buyer from unbargained for disclaimer by rendering them inoperative when they are inconsistent with express warranties. (Disclaimer presented in contract & not "dickered term"). 2. You cannot reconcile two different statements ("boat is seaworthy" and "Now warranties...") the disclaimer is ineffective. If the buyer signs the disclaimer of warranty after looking at advertising literature, etc., the disclaimer doesn't count because of earlier statements. 3. If an ad or brochure contains only technical specifications, a disclaimer will be effective. 4. If you have a merger or integration clause which invokes the parole evidence rule (writing contract) this will avoid the earlier express warranty: (EX: "This instrument is the complete contract"). 5. Note that an express warranty can be used as a substitute for the implied warranties of merchantability and fitness. Thus, a narrow express warranty (EX: can use phrase like "There are no warranties which extend beyond the description on the face hereof.")

IX.

IMPLIED Warranties UCC 2-314 & 2-315 (NOTE: you can express a warranty for services, but you cant imply one. Implied warranties apply only to goods. A. General - Arise under the UCC. You do not need a statement of warranty or representation for these. 1. Two types a. Implied Warranty of Merchantability - UCC 2-314 (1) Most important warranty - It provides that goods must be fit for the ordinary purposes for which such goods are used. (2) Attached automatically; doesn't have to be expressed if you're a merchant selling goods of that kind. (3) Strict Liability because it doesn't require a demonstration of fault or negligence or who is negligent. (4) The UCC doesn't give firm and clear guidelines for what merchantability is, so the court or jury defines it. This is problematical to the seller of complex technical goods. They will try to disclaim as will sellers in general. (5) Food Items - Court uses reasonable expectation test. b. Implied Warranty of Fitness for a particular purpose - UCC 2-315 (dont have to be a merchant seller; as opposed to implied

14 warranty of merchantability) (1) Where the seller knows or has reason to know of a particular purpose that the goods are to be used for and the buyer relies on seller to select or furnish the goods; the goods must be fit for the particular purpose. (2) Buyer must prove three things and goods must be unfit: (a) Seller had reason to know of buyer's purpose (b) Seller knew the buyer was relying or had reason to know. (c) That the buyer relied on the seller's knowledge. (3) Under this warranty goods may be fit for "ordinary purposes" but not for the "particular purpose" envisioned by the parties. (like sail boat for ocean-going voyage) Warranties in the Market Place (1) Soft Goods (food, clothes): sellers of soft goods are content to rely on the UCC for implied (2)

c. generally warranty do market place will 4. B.

Hard Goods (furniture, cars): there is an unwillingness to business on the implied warranty business; the force someone to make a warranty Magnusson-Moss Warranty Act: cant disclaim an implied warranty; can only limit the duration of an express warranty

Disclaimers and other defenses of sellers 1. UCC 2-316 - Disclaimer a. Implied warranty of merchantability - The disclaimer must: (1) mention merchantability (2-316(2)) (2) be conspicuous if in writing (2-316(2)) b. Implied warranties of fitness for purpose, disclaimer must: (1) must be in writing and conspicuous. (2-316(2)). The following apply to both merchantability and fitness: c. "Magic Words" - all implied warranties can be disclaimed by such words as "with all faults" or "as is," they call fact that there is no warranty to buyer's attention. (2-316 (3) (a)). d. Buyer must examine goods for reasonable defect, if he refuses to examine, there is no implied warranty. Also, if he fully examined sample or model there is no implied warranty -> express warranty instead. (2-316 (3) (b)). {no warranty if examination should reveal defect.} e. Implied can also be excluded or modified by prior course of dealing, course of performance or usage of trade. (2-316 (3) (c)). NOTE: It appears as though a seller can get out of a warranty with a few "magic words" - however, the courts have leeway in finding what is "conspicuous" , and can revert to UCC 2-302, which is "unconscionable

15 disclaimer" provision. You must look at whether disclaimer is one-sided; surprise or in actual contract; or leaves parties without a remedy. f. 2-316 (2) & (3) seen in sections a-e above, make it seem like an easy formula to follow to disclaim, BUT if you go to the court decisions, it is not necessarily the case. It depends on the circumstances as to how the court decides. g. When the disclaimer was introduced is important. If it's in a warranty booklet not opened until after the goods are bought, it doesn't count. h. There is also a problem for the seller because if something is disclaimed too much, it's hard to sell. 2. UCC 2-607 (3)(a) - Notice of breach required (I AM NOT SURE WE COVERED THIS) a. After a buyer discovers a problem (breach of warranty) he must notify the seller within a reasonable period of time or be barred from remedy. (1) If you have a perishable product (like tomatoes) this is especially important. Privity of Contract a. Definition - two people are in privity when they have contracted with each other. b. Two types: (1) Vertical Privity - When a consumer who purchased product fro m retailer sues the manufacturer. (Vertical lawsuit up distribution chain) (2) Horizontal Privity - When a non-purchaser sues. You do not have a contract but are injured by breach of warranty. c. The law is not entirely uniform on privity as a defense. In Georgia you must still be in privity unless manufacturer expressly warrants to remote party. d. The UCC 2-318 gives three alternative versions of privity which operate as exceptions to privity defenses: (1) Most strict - protection of warranty extends to members of buyer's family or household or guests who would reasonably use or consume goods. (2) Middle - warranty covers all people who are reasonably expected to use goods. Covers personal injury if people. (3) Broadest - warranty covers personal injury and economic harm to all expected reasonably to use goods. Note: "Disclaimer" above refers to a statement like "family members are not covered by this warranty." 4. Statute of Limitations - under UCC this begins to run as soon as the goods

3.

16 are sold. 5. MCDONNELL EXAMPLE: You cannot sell a new car in the U.S. without a warranty. a. b. The manufacturer gives a very limited, defined warranty on the car. The dealer disclaims everything and says the buy must look to the manufacturer. (1) (2) Dealer's disclaimer would be effective but for the federal intervention in the Magnuson-Moss Act (UCC book, p. 1620 &1633) The Magnuson-Moss Act relates to the disclosure of warranties. If the dealer makes a service contract then he can't disclaim under implied warranty during that time period. The dealer can only limit the duration of the warranty. But the dealer could do a specific limited warrant of repair or replacement (SEE BELOW), trying to make it much more limited and circumscribed - in this case, dealer's disclaimer is probably effective.

(3)

X.

Express Warranty for Repair and Replacement - An industry standard for certain hard goods...(UCC 2-719) A. The "Trigger" - Warranted to be free from defects in material and workmanship which arise during normal use and service, the "trigger" = 1. 2. 3. 4. 5. B. Limits the range of the promise of warranty. Try of manufacturer to rule out design defects relating to the effectiveness of the product. The warrantor does not want to assume responsibility that the car (or other hard goods with complex parts) will perform as required. "Materials" as used in this phrase means that the part is as the part is required to be (pistons are made of good steel, for example). "Normal use and service" - avoids the problems due to buyers misuse, and external factors of pollution and acid rain. See handout on warranty

"We will repair or replace the defective product." 1. 2. Exclusive phrase - ,This provision serves to limit the buyer's remedy to replacement of defective goods or parts. It really says "This is our only remedy." This also attempts to disclaim the implied warranties of the UCC and the Magnuson-Moss Act. However, according to the Magnuson-Moss Act, one cannot disclaim the implied warranties of the UCC for consumer

17 3. goods. (such as a car) This phrase also says that no consequential damages will be allowed. No loss of use damages (and no damages for expenses of a hotel or rental car for example). Is not limiting for injury to the person but for commercial loss.

C.

UCC Limitations included in the UCC 2-719. The code does not give the sellers of hard goods an unlimited right to exclude or limit the buyer's remedy as outlined above. There are important limits: 1. Failure of essential purpose - UCC 2-719 (2) - When limited remedy (like that provided above by a repair and replacement warranty) fails in its essential purpose the buyer may have another remedy as provided elsewhere in the UCC. {Manufacturer has opportunity to repair or replace before buyer can sue}. If manufacturer can't repair, buyer may get damages under UCC 2-714 (2).

2. XI.

The Relationship between Contract and Tort (NOTE: determine: (a)is it for goods or services and (b)is it personal injury or economic loss?) A. Prosser & Keeton say the American courts have extended the tort liability for misfeasance (negligently breaking a contract) to virtually every type of contract where defective performance may injure the promisee. The principle has emerged that there will be liability in tort for misperformance of a contract whenever such misperformance involves a foreseeable unreasonable risk of harm to interests of the P. P can get punitive damages and emotional distress damages (need to show wanton and deliberate aim) if he takes the tort route unlike under a contract claim. EX Mauldin v. Sheffer - The engineer intentionally provided defective plans and the P sued under a tort claim rather than a contract claim. Once you enter into a K, you need to use a reasonable degree of care, skill, and abilityif dont do this, can be liable under tort of negligence. If the engineer had tried his best and they still sucked, there would not be an implied warranty. For services, a servicer doesnt warrant his services. 1. However, if D just did nothing & made no attempt to fulfill his side of the bargain, it wouldn't be applicable under torts because he did not take an affirmative action. (nonfeasance vs. misfeasance) a. to get punitive damages, need to show the D was intentionally negligent b. Nonfeasance: failure to perform (no tort) c. Misfeasance: negligent performance of K 2. Wallis v. Superior Court - the complaint alleges punitive damages by torts for : 1) intentional infliction of emotional distress; 2) implied breach of covenant of good faith and fair dealing (UCC 1-203).

B.

18 a. P can claim under tort because: (1) Parties are not in equal bargaining position. (2) emotional protection / peace of mind. (3) ordinary contract considerations do not provide incentive to the DF to fulfill the contract. b. The courts have reacted against situations where the disabled worker is in a very vulnerable position and subject to pressure (Usually from an insurance co.). The courts have reacted against this under tortious breach of the covenant of good faith and fair dealings. (UCC 1-203). 1-205: every K imposes an aspect of good faitha violation of good faith can give rise to tort. **If its a personal injury or it deals with a service, then its a tort. If economic loss or it deals with a good, then its a K (warranty) a. Breach of K: arises from agreement by the parties b. Tort: violation of a duty fixed by law, independent of K See pgs 18-19 for Foley

3. theres 4. C.

Restatement 2d, of Torts 402 A - "Special Liability of Seller of Product for Physical harm to User or Consumer" - Strict Liability. Implied Warranty, UCC 2-314, and Strict Liability, Rest. 2d. of Torts 402 A have a common case. (Both Impose liability in absence of negligence.) (no implied warranty in "services") 1. Impose liability on remote product manufacturers even if they are not negligent or if there is no contract between the purchaser and the seller, if the products they sell are unreasonably dangerous. This section was premised on a manufacturers ability to obtain insurance and spread the cost of injuries through the entire public. No privity is required when injury. a. Similar to UCC 2-314 which requires a product to be fit or ordinary purpose used. (Implied Merchantability or 2-315 "fit for ordinary purposes"). b. to help the Ps of the world. c. If there is no physical harm, there is no claim under Rest. 2d. Torts 402 A because 402A is limited to personal injury or property damage. (1) EX - If its simply a lemon of a car, this would be under purely economic loss terms to recovery and only recoverable under UCC Warranty Theory. Tort applies to Personal Injury cases and can be more attractive to the P as it avoids defenses available under UCC (disclaimer, lack of privity, failure to give notice of breach, statute of limitations which runs as soon as goods are sold.) Has led to a dramatic upsurge in personal injury cases. a. tort is not applicable for economic harm. (1) Consensus emerging that simple economic loss cases involving a product rather than a service, you can't sue under torts for negligence or under 402 A. This would be under the warranty provisions off the UCC.

2.

19 b. Warranty can be better if there is an express warranty that product is safe. P does not have to prove it was dangerous. 402 A is a higher/harder standard for the PL. NOTE: You are allowed to plead both warranty & tort, but only one goes to the jury. Contract for Services 1. UCC Article II is not applicable to services so its warranty provisions do not apply to services. With services, the standard is only negligence. 2. Rest. 2d. Torts 402A is not applicable either because it applies to products. 3. Thus, PL in this type of situation will have to use breach of contract or tort negligence. a. Channeled into a particular area of law. b. If it's a contract for goods and services, the court must decide whether to use goods or services. The courts will often look to see which one predominates. 4. Even though the loss is an economic loss, PL can use a tort claim of negligence. 5. EX - J'Aire Case - which was a construction contract (i.e. for services). The county was to provide heat and AC under contract, but work not done in reasonable tome and PL lost business and sued in tort. a. Foreseeability of harm to PL b. degree of certainty PL suffered injury E. Remedies: 1. Services K: gives rise to duty to provide reasonable carebreach of K or tort of negligence 2. Goods K: breach of Warranty. If seller lies, (Oki) a tort for fraud can exist 3. Employment K: typically breaching duty or good faith/fair dealing cant be a tort NOTE: look at 19-21 of notes to make sure the stuff re warranty and torts is covered D.

PART FOUR STATUTE OF FRAUDS XII. Statute of Frauds: lack of writing bars action (NOTE: Compliance with the SOFs does not itself prove the existence of a K. the P must show all the requirements of an agreement w/ consideration). Also, within the statute means subject to one of the prongs of the legislation. *LOOK AT HANDOUT A. General on the Statute of Frauds

20 1. 2. 3. 4. 5. 6. B. This is a common type of case The original Statute of Frauds was enacted in 1677, so it has become encrusted by case law. Every state has enacted a statute of frauds modeled on the original Parliamentary enactment of 1677. Not all statutes are covered under the statute of frauds; only the ones that fall within specific categories. The courts and academics criticize the Statute of Frauds. (England has repealed theirs') There is "judicial hostility." K for services not covered. This only deals with goods.

Generally provides that the following be in writing: 1. 2. 3. 4. 5. 6. 7. 8. Executor - Administrator - A contract of an executor to answer for a duty of a decedent (i.e. from executor's money) Suretyship - A contract to answer for the debt of another. Marriage - A contract made upon consideration of marriage. Sale of Real Estate - A contract for the sale of an interest in land. One Year - A contract that cannot be performed within one year of making. Must be impossible to perform. EX - if the contract is for life, it doesn't apply because the person could die before one year is up. Real Estate Commission - contract to employ broker for commission to sell land. Will - backs up the statute that requires writing for a will. Any obligation of estate must be in writing. UCC 2-201 - requires a writing for sale of goods of $500 or more. UCC 8-319 - requires writing for sale of securities. UCC 9-203 (1)(a) hypothesisation of interest (property put up as collateral for loan that you do not own) UCC 1-206 - sale of personal property for more than $5,000. (Goods not covered by 2-201.)

C.

Courts have construed the statute very narrowly. The courts do not want to let the statute create fraud (i.e. by letting people get out of their promises because they were not in writing). Judicial reluctance to allow technical requirements to be a hinderance to a good promise. Rest. 2d. 139. Specifically covers situations where there has been reliance on an oral contract that falls within the Statute of Frauds. This is a way around the statute if the reliance is compelling and injustice can be avoided only by enforcing. 1. EX - McIntosh v. Murphy - the HI Supreme Court would not enforce the statute of frauds on a contract for a year and 2 days because of equitable estoppel due to dramatic reliance by the P. The Court specifically cited Rest. 2d. 139. Here the promise reasonably expected to induce action on part of promisee. PE used to get around SOF. SOF is not a bar when

D.

21 there has been part performance (reliance)--Seavey E. F. G. Note that the statute requires the memorandum be in writing and signed by the party to be charged against whom the enforcement is sought. Also, the original rule was that the note must contain all material contract terms. The UCC does not require this. Criticisms of the Statute of Frauds 1. 2. 3. The policy of strict construction has often led to decisions that make little sense, particularly the one year rule. What kind of memo is sufficient to satisfy the written requirement? (Dealt with for some cases in UCC 2-201 (1) - see below.) There can be one-sided enforcement because what if one of the parties signs and one does not, the one who doesn't sign can enforce under the Statute of Frauds, but the one who signed and sent the memo can't enforce if the other guy never replies. (Deal with some cases in UCC 2-201 (2) see below) a. party that signed has to fulfill, while other party (who didnt sign) has no obligation Problem of a technical assertion of the statute at the same time that the contesting party admits that they made an oral agreement. (Dealt with for some cases in UCC 2-201 (3)(b) - see below.) a. Jonesboro: D concedes the facts (that he promised), but the writing on company stationary is insufficientneed all the essential elements Leading Object Rule: w/ suretyship, theres always some personal interest

4.

5. H.

Under the UCC: (ways it gets around the Statute of Frauds). The drafters were trying to deal with the above criticisms. Remember: Only deals with goods. 1. 2. UCC 2-201 - Contract may omit all terms except for the quantity term. There is no way for the courts to check in this term; the market gives an idea of price. Leading Object Rule - if surety is owed $ by debtor, or has interest in underwriting really not a surety at all. This is another way to get around the statute of frauds. Howard M. Schoor: the promise was not subject to SOF, b/c of this. UCC 2-201 (2) - avoids one-sided signature problem. A merchant who sends a contract is able to defeat the statute if an objection is not received within 10 days of receipt of the other party. But this has hoops: a. Only between merchants - doesn't apply between 2 consumers or a consumer and a merchant. Merchant is defined under UCC 2-104 as "a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction..."

3.

22 (1) Some courts have held that a farmer is not a merchant. b. Need to have a confirmation in writing sent. c. That confirmation must be sent within a reasonable time. d. It must be sufficient to the sender. e. It must be received. f. Imposes a duty on the receiver to respond within ten days. 4. UCC 2-201 (3) - No writing is needed if the goods are especially manufactured for the buyer and not suitable for ordinary sale to others. 5. UCC 2-201 (3) (b) - No writing is required if a party admits an oral contract was made. He is estopped from asserting the statute as a defense (not accepted in California). This is a major change. D generally does not have usual demurrer rights because he can say that an oral contract was made. 6. UCC 2-201 (3) (c) - No writing is required of payment for goods has been made or the goods have been received and accepted. 7. I agree to sell vintage car and I sign on a napkin? No K b/c terms not expressed. BUT, under 2-201, its alloweddont need all essential terms; just need to show its a K for sale of goods. This is to avoid technical loophole. a. If memorandum was binding on the dealer and if received by Buster and he knew of its contents and didnt object in 10 days, then its binding even though he hasnt signed. (pg 27 of notes) However, this just means that SOF is not a defense; doesnt mean its a binding K NOTE: see pgs 27 to 28 of notes for history of UCC (it rocks) PART FIVE REMEDIES XIII. Purposes pursued in Awarding Contract Damages A. Restitution Interest - The P has, in reliance on the promises of the D, conferred some value on the D. The DF fails to perform his promise. The court may force the D to disgorge the value he received from the P. The object is the prevention of gain by the defaulting promisor at the expense of the promisee; the prevention of unjust enrichment. TWO ELEMENTS: 1. 2. B. Reliance by the promisee. (Losses caused.) A resultant gain to the promisor. (Gains prevented.)

Reliance Interest - The P has in reliance on the promise of the D, changed his position. We may award damages to the P for the purpose of undoing harm which his reliance on the D's promise has caused him. Our object is to put him in as good a position as he was before the promise was made.

23

C.

Expectation Interest - (see below) - Without insisting on reliance by the promisee or enrichment of the promisor, we may seek to give the promisee the value of the expectancy which the promise created. The object is to put the PL in as good a position he would have occupied had the DF performed his promise.

NOTE: Specefic Performance: only available on limited occasions. Easier to seize assets than to force action. Used in land or where goods are unique. XIV. Expectancy Damages for Breach of an Agreement with Consideration A. There are two formulas for measuring the expectation interest that usually apply to breach by the contractor. Typically there are many mathematical formulas competing for recognition in a given case & sometimes the formulas need adjustment.) 1.

Difference between property as it is now & property as it would've been upon completion. (DIFFERENCE IN VALUE.) 2. Cost to Complete. a. Courts resist cost to complete when it is higher than formula 1 (except certain cases later) because it seems like a windfall. They fear that the owner would take the $$ & not complete. (EX. Groves v. John Wunder Co. - Formula 1 = $12,160 while Formula 2 = $60,000. The court gives cost to complete because it says this is a bad faith deliberate breach.)also, its in the depression 3. Some things to look to in deciding between these two formulas: a. Did the parties really appreciate going in that they could be liable for this much fixing; did the party realize his exposure going in; could the party have foreseeability realized the extent? (i.e. when Formula 2 is a much higher figure than Formula 1) MCDONNELL LIKES THIS ONE THE BEST. i. CTC is weakened if the D didnt know about an idiosyncratic motivation b. Is it a bad faith / intentional breach? Then CTC c. Do the damages make good sense from an economic point of view? The idea is to avoid economic waste. d. Proportionality: look at the difference b/n DIV and CTC e. What is the Ps motive?--to complete or to get money f. Circumstances (i.e.--depression) g. Environmental considerations h. Look at the critical facts NOTE: look at pgs 29 and on for good hypos. 4. Situations where the court will give the cost to complete: a. Specific clause in the Contract that defines how damages will be

24 measured - a "liquidated damages clause." (this will come later). If a non-economic motive of the owner is apparent at the outset need to go to cost to complete to give the contractor sufficient incentive to perform contract. (1) EX - MCDONNELL's pink flamingo "monument to my folly" hypo. Damages should be the cost to complete even though they're higher b/c the contractor knew going in that the guy wanted something that had no market value & that guy was eccentric to want something like this. It's foreseeable on the contractor's part. Interest in autonomy of the eccentric. (2) EX - Radford - P has more than simple economic reasons; the court is convinced that the P will use the $$ to build the fence so they don't worry about a windfall to P. c. Where the value of the real estate seems to be temporarily depressed. EX - Groves - It was a Depression era case when the land value was low. We do not want to use the difference in value here because the value is so low. d. Public construction contract - owner is a government entity. e. Parties have factored the cost to complete into the consideration for the contract. The owner is accepting less to reflect the higher cost to the contractor to complete. (Contractor would then get a windfall upon breach.) f. The P must have paid everything NOTE: Courts favor a money judgement over specific performance because they don't want to have to supervise the latter. Only when there is irreversible harm to we give specific performance in a contractor case. b. 5. Adjustments to the formulas: We ultimately want to tailor damages to protect the expectation but with no overly inflated damages. a. No new extra work allowed. Thorne v. White - Here it would be in error to give the cost of the new roof because the replacement job he had done was better than the one they had contracted for so there must be an adjustment. i. here, the substitute K called for a better roof; thus, you refer to the refer to the difference b/n the original and the 2nd one Efficient Breach. (Handicapped: better teacher case) - Different b/c only 1 applicant applied. They'd taken reasonable steps to mitigate damages but had no alternative but to hire a more expensive teacher. The extra expense wasnt voluntarily assumed. This was an "efficient breach" May only sue for damages that are a natural and proximate cause of the breach. Do not place aggrieved party in a better position than they would have been. i. criticism of efficient breach: breaches should never be

b.

25 encourageddestabilizing, immoral, dont account for attys fees. Factor in breachor's improvements. Morello - The court gave the cost to complete to the general contractor without subtracting the value of the sub-contractor's work before the breach b/c the value had already been calculated in the price, and the court wanted to protect the contractor's interest. Really good bargain of the general contractor. w/ a prime contractor and a subcontractor breaches, prime is entitled to recover the difference in his costs to complete less any improvements made by subs unfinished work.

c.

B.

Breach on part of the owner rather than the contractor: 1. EX - Warner v. McLay (shirley mclain case) - Different from the above cases in this section because here the owner breached and won't allow the contractor to complete; aggrieved contractor rather than aggrieved owner. The court used the formula below --> b) TWO Formulas to measure damages: a. b. 3. Net contract profits to be obtained + expenses incurred up to the time of the breach (net contract profits figure = contract price anticipated expenses) Unpaid contract price - cost to complete (This is deducted as a kind of savings that results from the breach.)

2.

It is said that these 2 figures should turn out the same, but you have to prove the evidence for the jury to use to figure out the formula with, so the contractor has to come up with a monetary figure. This can lead to the two formulas coming out differently. a. In general, one needs to approach this with fluidity using the specifics of a given case.

C.

Sale of Goods Arena 1. Remedies of the Buyer (where seller fails to deliver goods or repudiates) a. UCC 2-713 (Market Value) - where seller doesn't deliver or seller repudiates. Difference b/w market price at the time buyer learned of the breach and the contact price together with any incidental & consequential damages but less expenses saved in consequence of the seller's breach. (market price at time of breach - K price + Incidentals + Consequential - Savings = Damages) (1) There is a problem because sometimes its hard to say exactly when the breach occurred and this can affect the price because the market fluctuates; thus, we can't be sure

26 that this formula measures the actual economic impact on the buyer. [may not match actual damages] (2) Copper v. Clute - where sellers sold the cotton to another for a higher price but the PL/buyer recovered no damages because there was no difference b/w the contract price and the market price at the time of the breach. UCC 2-712 (Substituted Transaction) - No acceptance by buyer. The buyer may cover by making in good faith and without unreasonable delay and reasonable purchase of or contract to purchase goods in substitution for those due from the seller ("Substituted Transaction"). In this situation, the buyer can recover damages from the seller by: Subtract the K price from the cover price and then add incidental expenses. (Cover price - K price + Incidentals + Consequential - Savings) (1) This way is more accurate because it measures the actual economic impact on the buyer; it actually measures the impact on the expectation interest. Its also most accepted. (2) This way is used & the market value way in --> a. is disregarded unless the buyer hasn't covered - once there's a cover, we measure this way. (However, the buyer is not obligated to cover - but it may affect his consequential damages) i. if there is a cover by the buyer, the cover formula controls. The buyer doesnt have the option of choosing a market based formula that will give him higher damages UCC 2-714 (2) & (3) - Where the buyer has accepted the goods and given notification, we use the difference b/w the value of the goods as warranted & the value of the goods as delivered plus incidentals plus cover. Valuation is by the market price at the time and place of the acceptance of the goods. Its when acceptance is made. 2-718(2) - Restitution UCC 2-716 (1) - specific performance may be decreed where the goods are unique or in other proper circumstances.

b.

c.

d. e 2.

Remedies of the seller: a. UCC 2- 708 (1) - upon non-acceptance or repudiation of the buyer, the damages are measured by: unpaid K price - market price + incidentals - Savings. Valuation is by the market price at the time and place of the breach. b. UCC 2-706 - Resale Formula. Substituted transaction was if the seller resells in good faith and in a commercially reasonable manner : K price - resale + Incidentals - Savings i. Rules for resale are stricter than those for cover: drafters were afraid that sellers were likely to resell low to get higher

27 damages. aa. seller can only buy at a public sale (bidded on) and every step must be done in good faith UCC 2-708 (2) - A new way under a profit based formula: Profit (including overhead) + Incidentals + cost on resale Proceeds. This formula may be used when the other 2 are inadequate or don't apply. This is where P is a volume seller (loss of volume seller theory) i. can add in what you would have profited if he had volume for 2 sales (1) Neri v. Retail Marine Corp. - Neri wants his deposit back for boat. His theory of recovery is 2-718 (2) & (3) restitution/unjust enrichment. There's a penalty of 20 % for breach if no other losses to the seller [or $500 whichever smaller]. Retail Marine, under 2-708(1), would get nothing b/c no difference in contract price & market price (unless incidental damages) - same under 3-706. BUT, 2-708(2) applies to Neri because Retail Marine is a "lost volume seller" (mass producer) - he's out 1 sale in the relevant accounting period. (but he has to prove that he could've gotten the 2nd boat & would've made 2nd sale without the breach.) (2) The court has to struggle to make this formula make sense because if you subtract the proceeds for the sale of the boat, there are 0 damages, so we say the resale would've occurred without the breach; thus, we don't count this as proceeds. This is borrowed from contractor theories. (3) 2-708(2) also applies when seller is building the goods & is partially completed & sells it partially completed as a substituted transaction - repudiation where the seller is manufacturing & decides to scrap the product. look at Sams and Melissas notes for this (25) Does the seller have the option of which one or does mitigation of damages control? There is no comment on this in the UCC unlike the Buyer's side. This is b/c Buyer's cover occurs across the market, so there can't be an artificially low price. But there is a fear that the seller can set it up on his end to get inflated damages, so there are more rules regarding resale. [seller can manipulate price but buyer cannot]. EX - every aspect of the sale must be commercially reasonable.

c.

d.

XV.

CONSEQUENTIAL DAMAGES (Limitations on recovery: There has to be Foreseeability, Certainty, Causation, Mitigation; also, remedy limitation) A. Hadley v. Baxendale - (The most celebrated contract case.)

28 1. The Hadley's are a local manufacturing enterprise while Pickford & Co. (Baxendale is their London managing director) is a national transportation co. The Hadleys want to be compensated for the additional days that their mill was shut down due to no timely delivery. The trial court charged the jury that it could allow compensation to the Hadley's for lost profits. The jury found judgement for 120 for the Hadleys, juries at the time were not democratic but were mainly white male property owners; thus, you end up with a group of local male merchants who are like the Hadleys & are likely to identify with them. a. The appellate court says thee is error because no clear principles were given to the jury. It is error to just give damages to the jury without any guidance. (The general practice at this time was to give damages for proximate cause of the injury.) The appellate court sets a new standard - 2 kinds of damages: a. Damages that are fairly considered to arise naturally - general damages. Damages must be clearly foreseeable to both parties when K made. b. What is known as a probable result of the breach if these special circumstances are communicated and contemplated by the parties at the time of the contract; reasonable contemplation as a probable result. (1) appellate court, "For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them." This goes to the question of specifying in the contract what the damages will be. (See --> 5. below for how the UCC handles this today.) The court imposes a limitation on recovery because the foreseeability requirement was not fulfilled, but it seems like in this case what the court is really saying is that the injury must be certain not just foreseeable. a. MCDONNELL questions if the above explanation is really the explanation for why H v. B was decided the way it was. It seems like the court is dreaming up circumstances. If this is really the explanation, why doesn't the court decide this & then send the case back to the jury with a recharge? The court doesn't want to do that b/c it doesn't want special damages given. b. Why the court doesn't want special damages given -- 2 Theories: (1) Want to protect a national firm from a local jury in a time of economic growth. Want to protect the national firm from too much liability. (2) Effort to limit the burden of the common-law courts. At this time, there was only a total of 15 judges in national common-law courts administering common-law. Cases

2.

3.

29 with lower damages can go to lower courts. Also, this is a time of immense explosion of population & of economic activity in the 50 years before the case. This means more contract cases and deciding H v. B this way helps lessen burden on courts. 4. Contemporary application of H v B - Adjustments: a. Doesn't have to be certain - It's viewed in terms of probability/likely. b. "Tacit Agreement Test" interpretation of H v. B is rejected. "Reason to know" interpretation is adopted. It is only necessary that they had "reason to know." (1) We judge on what was contemplated at the time when they fixed delivery not the time when they made the contract. This is due to concern with an excessive burden on the DF in relation to what he gets paid for doing the work. (2) EX. - Spang - this is the contemporary application of Hadley v. Baxendale with the above adjustments. UCC 2-719 (3) - Consequential damages may be limited or excluded unless the limitation or exclusion is "unconscionable." Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not. a. under UCC 2-719(3) you don't really have to know what the requirements are. You can insist in a general exclusion - "we are not responsible for ..."

5.

B.

UCC adopts "reason to know" interpretation of H v. B in 2-715 (2) (a). 1. UCC 2-715(2)(a) - Consequential damages resulting from the seller's breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise. a. in the absence of excuse, the seller is liable for consequential damages in all cases where he had reason to know of the buyer's general or particular requirements at the time of contracting. If the seller knows the buyer is in business, then it should be foreseeable. particular needs of the buyer must generally be made known to the seller while general needs must rarely be known to charge the seller with knowledge. (1) Under that circumstance, it's often easy in a commercial situation to satisfy the foreseeability requirement. This provision doesn't apply to services, only transaction in goods. It is sometimes applied outside of the sale of goods

b.

30 arena, but the UCC isn't cited. 2. People thought in general that "tacit agreement test" was too strict. Thus, the seller is assumed to know nothing. They wanted to overturn things like the Lampkins case where there was "reason to know" but the tacit agreement test was applied. Lampkins would probably be found differently today. a. EX - Lewis v. Mobile Oil (438 F.2d 500) (8th cir. 1971) Mobile had breached implied warranty of purpose under UCC 2-715(2)(a). Lewis could not recover lost profit damages because the court applied the "reason to know" test. [special oil sought but not adequately provided]. i. Efra: Bank didnt know a failure to transfer would cause losses of $2 millionvery disproportionate (the bank only charged $100). Thus, Cant get consequential damages under 2-715 aa. otherwise, fees would be super high; there would need to be an express agreement for consequential Ds Mitigation factor, reasonably certain factor, & contract clause to exclude consequential damages serve to limit this so you don't need a test as strict as the tacit agreement test. These serve so that we don't unrestrainedly protect the expectation interest b/c it's easy for the commercial buyer today to satisfy the "reason to know." a. Restatement 2d 351 (3) - A court may limit for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. b. Today, the pressure is on the mitigation factor and the need to establish certainty. These two have become more important. Relieves pressure on foreseeability b/c its easy to fulfill.

3.

C.

Mitigation of Damages - cannot recover for damages you could've prevented. 1. One must stop work when a countermand is made. a. Clark v. Marsiglia - P continued to work on cleaning the paintings after D told him to stop. Court: P no right to make the penalty on the D greater than it would otherwise have been able only allows P to recover for work done up to time of countermand. b. Rockingham Co. v. Luten Bridge - Luten continued to build the bridge to nowhere after the County asked him to stop. Court said Luten couldn't recover for continuation beyond time of breach. (1) Formula to use (UCC 2-708 (2): Contract price Expenses = Net Profits; Net Profits + Expenses up to breach = damages. i. can only get net profits and expenses only up to

31 2. repudiation Aggrieved party has a responsibility to mitigate damages if possible. a. Schiavi Mobile Homes, Inc. v. Gironda - Schiavi should've pursued the fulfillment of the contract by the D's father since the father had offered to take on his son's obligation; thus, Schiavi cannot recover damages based on the ultimate reduction in the selling price of the mobile home i. the retailer has a duty to pursue opportunities and minimize the effects of the breach (and go beyond just accepting a legally acceptable offer.McD thinks the court was rough on dealer ii. see pg. 40 of notes iii. Parker v. 20th Century Fox: no duty to take new role b/c its different and inferior; the employee needs to look for work elsewhere; otherwise, no mitigation and no recovery (cant recover for what you could have reasonably avoided); need to ask if she could have found a comparable time during the time she was supposed to do the movie

NOTE: Causation Problem: Olds v. Mapes: Sub enters into K with owner; the contractor was not obligated to enter any kind of 2nd K after the breach b/c its a services K, but not a personal services K (contrast with Parker). Boss doesnt have same mitigation responsibility as employee. Should profits of 2nd K be deducted from damages? The court says they werent caused by the breechthe contractor could have found another job anyway, even if the breach could not have occurredbut for test. No causal connection b/n breach and this job. Therefore, dont subtract profits of 2nd K from 1st K. 3. UCC 2-704 (2) - If the goods are unfinished, an aggrieved seller may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization, either complete the manufacture and wholly identify the goods to the Contract or cease to manufacture and resell for scrap or proceed in any other reasonable manner. a. Problem 3-7 - On Jan. 7, 1986 Seller Co. and Buyer Co. agree that Seller will manufacture standard valves for Buyer for delivery on July 1 at a price of $40,000. On January 30, Buyer repudiates. Seller tells you that it can (1) cease manufacturing the valves, (2) reallocate $15,000 worth of labor allocated to the Buyer Contract to less skilled tasks to produce goods worth $10,000, and (3) resell for $8,000 components purchased for the Buyer Contract for $10,000. Overhead of $2,000 allocated to the Buyer Contract cannot be saved. If They Decide To Scrap: $40,000 Contract Price -27,000 Expenses (labor + components + overhead) $13,000 +$2,000 Overhead

32 $15,000 Net Profits + 0 Incidentals $15,000 +25,000 Expenses up to breach $40,000 -18,000 Savings (Resale of Components + Resale of Labor) $22,000 Damages that seller recovers (1) The point of this problem is that there are situations where it makes sense for the aggrieved seller to go ahead and finish the goods. We ought to protect the seller in making this reasonable judgement; thus, UCC 2-704(2). NOTE: UCC 2-709 --> The buyer is responsible for the full price of the goods if he has accepted them and there is no breach of warranty. XVI. Summary of Ways of Measuring Expectation Remedies: A. Buyer 1. UCC 2-713 Market Price - K Price [+ I + C - Savings] 2. UCC 2-712 Cover - K Price [+ I + C - Savings] 3. UCC 2-714(2) Difference in value (buyer keeps - Difference b/w goods as warranted & as accepted [+ I + C] 4. UCC 2-711 Specific Performance & goods as security interest 5. UCC 2-716 Specific Performance (Buyers right to spec. perf. when goods are unique and there is no market based way to measure) 6. UCC 2-717 Deduct Damages from K Price unpaid 7. UCC 2-718(2) Restitution B. Seller 1. UCC 2-708(1) Unpaid K Price - Market Price + I - Savings 2. UCC 2-706 K Price - Resale Price + I - Savings 3. UCC 2-708(2) Net Profits + Expenses - Proceeds + Costs 4. UCC 2-709 K Price (if goods are accepted by buyer, buyer is prima facie liable for K Price) C. Owner 1. Cost to Complete (not done) 2. Difference in Value (as promised as delivereddone) D. Contractor 1. Net Profit + Expenses (net profit = K price - expected expenses) 2. K Price - Cost to Complete 3. K Price NOTE: Always make the appropriate adjustments when needed.; also, look at 42-43 of notes for specific performance XVII. Certainty A. Aggrieved party must provide concrete evidence of damages and monetary loss; aggrieved party cannot recover if the damages are too speculative B. When Do Problems Arise: 1. Claim of lost profits by a new business enterprise.

33 a. Evergreen (1955) - an older case where appellant, operator of a drive-in movie theatre, was not able to recover for lost profits because this is too speculative & uncertain and too many factors are involved to see if a new business will be profitable. (1) MCDONNELL thinks there is some evidence for lost profits tough. (2) the "new business rule" is in decline - all that may be required in some courts today is a reasonably certain factual basis for computation of probable losses. b. Lakota Girl Scout Council v. Harvey Fund-Raising (1974) - this is the kind of claim the courts are more receptive to because of the quality of the evidence and the expert testimony to prove the claim. PL Wins. Damage to Goodwill a. Question arises of whether or not the aggrieved party can recover for the period after the breach occurred. b. MCDONNELL's important Pennsylvania case - This was a class action suit where PL claimed to represent 150 mini-mart franchises of Arco Oil Co. who were required to purchase gas from Arco. Arco gave from Oxynol as an experimental venture. Franchises said this gas was not marketable and against the implied warranty of merchantability (UCC 2-314). Several damages claimed: (1) general damages under UCC 2-714 for difference in value. (2) loss of primary profits - lost because they couldn't sell the gas supplied. (3) secondary profits - claim that people weren't coming to the store b/c of bad gas, so less profit from the sale of other items. (4) Damage to goodwill - the idea that even after the gas problem was remedied, their reputation and the goodwill of the community had been damaged in subsequent years. (a) PA court didn't rule this out as a matter of law. The court said this is okay if you can prove it. And further that this is a time of sophisticated marketing & that the time of things like this being to speculative is falling by the wayside. However, the court says it must be convinced that all of the above were caused by the breach. (5) (2) - (4) above are all consequential damages. c. Some cases are still found to be too speculative. (1) usually the aggrieved party must rule out other explanations in the causation requirement. d. Mental distress (1) Not usually awarded in contract cases unless of a very personal sensitive nature. EX - Crum - PLs were denied damages for emotional distress when a furnace installed by

2.

34 e. the DF caused a fire which destroyed their house. Attorney fees - not usually awarded in a contract case unless in the agreement or specified by statute: (1) OCGA 13-1-11: An attorney fee provision cannot be enforced unless written notice was sent to the debtor (i.e. "pay within ten days or you'll be liable for attorney's fees") (2) OCGA 13-6-11: (unique to GA) - in a contract action, PL can recover attorney's fees if DF acted in bad faith or put PL to unnecessary expense or DF was "stubbornly litigious" in the litigation phase. (3) 15 USC 2310 (d) (2) - in part of the Magnuson-Moss Warranty Act concerning written warranties on consumer goods. This provides a federal cause of action for failure to properly disclose warranty terms or for breach of warranty. If the consumer prevails, the court may provide attorney fees. This is regularly awarded by the courts. PART SIX DEVELOPMENT OF A CONTRACT: THE AGREEMENT PROCESS XVIII. The Nature of Assent: What is our agreement? A. General - Agreement Supported by Consideration 1. 2. 3. 4. 5. Consideration - you've got to have an exchange Agreement - the parties must agree on the same terms. Contractual liability is predicated on the consent of the parties. a. You can put anything you want in a contract. EX - "We aren't liable if the plant is closed due to a strike." or indemnity clauses. Lawyers on both sides are actively involved in protecting client's interests when drafting the contract. Requirements Contract - distinguishable because of the exclusivity. a. UCC 2-306 - "Output, Requirements and Exclusive Dealings." (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. A lawful agreement by either the seller or the buyer for exclusive dealings in the kinds of goods concerned imposes, unless otherwise agreed, an obligation by the seller to use

(2)

35 best efforts to supply goods and by the buyer tot efforts to promote their sale. b. c. EX. - Stacks case (1982) - D tries to say agreement is too indefinite to be enforceable, but the court disagrees & follows the UCC. 7 factors the courts look to in deciding in a requirements contract: (UCC 2-306 cases) (1) (2) Language of the contract. Motive of the party seeking to escape from the relationship. (a) If just trying to get out of an unfavorable economic deal (this contract), courts look down on this, but if it's part of an overall business strategy, its another thing. Reliance on the contract by the party seeking to continue the relationship. Degree of hardship on the party seeking to escape Length of the contract - the longer the contract, the more likely the court is to say you can get out. Trade usage in the business - is this something that happens routinely? Honesty in stating reasons for cessation

(3) (4) (5) (6) (7) B.

Objective Theory of contract formation: [manifested consent not actual consent] 1. Under this theory, courts judge whether a contract is formed by objective (actual) manifestations of the parties - neither contracting parties or courts are "mind-readers": a. History: (1) Medieval Scholastic Approach - Court looked at fairness of exchange. (2) Will Theory or Subjective Approach - English courts looked at the intent of the parties - contract existed b/c parties wiled it. There was a "meeting of the minds." (3) Market conditions required the objective approach to avoid contract errors. The courts will use the objective approach especially where there are other justifications for affirming the existence of a contract (reliance, fair price, injured widow). Subjective intent is irrelevant.

b.

Restatement (2nd)211: (1) Where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of

36 agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in writing. (3)*Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement 2. Test for intent - objective test is satisfied if a reasonable person in the position of the other party would conclude that the first party intended to make a valid contract. There is also a subjective element: P has to have a subjective belief that there was an intent to make a Kclaimant has to subjectively believe there was a legit K. a. Secret Intent - secret intentions of a party are irrelevant in determining whether a contract exists. If a reasonable employee would assume a contract, then it is good. Embry v. Hargadine, McKittrish Dry Goods (1907). Joke Contract - "a person cannot set up that he was merely jesting when his conduct and his words would warrant a reasonable person in believing that he intended a real agreement." Lucy v. Zehmer. Zehmers were bound to sell the Ferguson Farm even if they did not intend t sell; because Lucy took him seriously and was not unreasonable according to evidence (there was also some reliance by Lucy which helps). We want more stability - it's too easy for a party to simply say what a minute, I was joking. A way to get out of this K would have been to show that Lucy thought it was a joke (subjective requirement of claimant). Note: this should have been under SOF and need all essential terms (land). (1) If joke made clear and offer revoked before reliance, contract can be enforced awarding expectation interest but because there is no reliance we will not use promissory estoppel. ii. Hypo: reasonable person believes both parties are serious and relies, but both were joking? No K. The objective theory imposes liability on a D for what he did not intend to do (Business argument). Judge Learned Hand in Hotchkiss (1911). "A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract 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 usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake, or something else of the sort." However, objective analysis is not entirely objective b/c if the party subjectively didn't think that, he cannot bring an action.

b.

c. d.

e.

37 C. Social and Domestic Situations 1. Agreements between husband and wife are generally not enforceable because a legal relation is not intended. Balfour v. Balfour (1919) - The same holds for a gentleman's agreement. However, the Restatement 2d. 21 comment (c) says that a separation settlement between family members not living together happily will be presumed to have been intended to be legally enforced. Thus, such an express contract would be enforced. (Rest. okays divorced and separated people making arrangements.) a. If two friends agree to go to lunch, this is not a K, b/c neither party intended there to be a binding obligation i. even if its specifically spelled out, there is no K if a legally binding obligation was not intended

XIX. The Nature of Assent - Misunderstanding A. For there to be a contract, there must be a manifested meeting of the minds. If both parties think they are agreeing to the same deal in error it may prevent a contract from existing at all. (Peerless - boat delivery). If the agreement is ambiguous and a misunderstanding involves a material term (i.e. when goods will arrive) and neither party knew or had reason to know of the misunderstanding, then there is no contract. Today we strain to avoid the outcomes of Peerless. NOTE: Conditions to negate a K based on a misunderstanding: a. ambiguity b. no reason to prefer one over the other c. parties attach different meanings 1. UCC 2-322 (1) - Unless otherwise agreed, a term for delivery of goods "ex-ship" (or similar terms) is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where the goods of the kind are usually discharged.

B.

UCC 1-201 (3) - "Agreement means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act." Restatement 2d. 20 - No contract exists because of lack of manifestation of mutual assent if: 1. 2. Neither party knows or has reason to know of the other's meaning. Each party knows or has reason to know of other's meaning. This handles problems of the knowing welsher.

C.

D.

Restatement 2d. 20 - There is assent of:

38 1. E. One party knows, or has reason to know, of the meaning attached by the other. In this case, the meaning known to both panties prevails (SEE BELOW) Restatement 2d. 201 - Whose meaning prevails? 1. 2. Both parties understand the same meaning - the meaning prevails. Both parties attach different meanings to major terms, but if: a. One party knows that he has a different meaning that the other (and/or he knows of the other's meaning) then the contract will be formed on the terms as understood by the other (unknowing) party. We want to avoid ambiguity giving knowing party a chance to welch. Thus, the party who is "more at fault" is bound by the contract on the other party's terms. Dickey v. Hurd - Mr. Hurd knew that Dickey thought a letter would be sufficient acceptance but he alleged that he meant for cash to be tendered before acceptance was valid. he "lied quietly." If neither knows of the others meaning, they are not bound - Peerless.

3. F.

If misunderstanding is on a minor term, the court will attempt to choose the more reasonable, fairer meaning. Also, if both parties attach the same meaning to an ambiguous term, then the contract is valid per Rest. 2d 201 --> E. (1) above. Thus, the objective theory of contract does not strictly apply -- what did the parties manifest? We don't know, but we do know they both attached the same meaning to the term. 1. Also, if the court finds there is no contract it may still award restitution if there has been unjust enrichment.

G.

If it is irreconcilable ambiguity, nothing can be inferred to favor either party, so the courts will say either: 1. 2. No contract -- MCDONNELL's preference a. Under this, the buyer gets his money back in restitution. If either party sues for breach, they will not be able to carry their burden of proof. a. Under this, the buyer can't prove, so he won't be able to get restitution.

NOTE: K law is aimed at holding people to terms when they try to change their position in order to gain an advantage. Where it is a mistake, the court may not allow recovery, unless it is relied on 1. If there is time for P to readjust, then no remedy 2. If P relies, there is remedy (i.e.if D put wrong term in K) XX. THE OFFER - puts ball in offeree's court [reasonable completeness (definiteness) & criticality (critical communication)]

39 *Criticality: If you say yes, we have a K (putting the ball in the court of the addresseetelling offeree, your consent seals the deal) A. An offer is a proposal to enter into a bargain that communicates to the offeree that his manifest consent to the offer will seal the deal. An offer is an expression of assent in definite terms. It is not preliminary talk and it is difference than what has gone before. Often the presence of a quantity term will differentiate an offer form a price quotation. The offer confers a power of acceptance on the offeree while the price quote does not. There must be some affirmative language to constitute an offer (ex - "I promise" & "I offer") and a definite addressee. note: usually ads are not offers even with prices included. 1. Rest. 2d. 24 says an offer is the manifestation of willingness to enter into a bargain so made as to justify another person on understanding that his assent to the bargain is invited and will conclude it." 2. Objective measure - the offeror is bound to the apparent intention manifested to others. Promise is contained in an offer. 1. An offer usually contains a conditional promise, and proposes that the other party make a promise to accept. (EX - " I promise to buy your car for $5,000" you must in turn promise to deliver your car to accept the offer) In deciding whether something is an offer, look at the intent of the parties. Thus, if the offeree requests a price quote for a definite quantity, a contract is formed on his acceptance of the offeror's price quote. 1. 2. Do not look at "formalism;" you must analyze the whole context. Each communication must be read as a whole. Weigh the pros and Cons. Fairmont v. Grunden-Martin - standing alone the price quote would be insufficient, but it is in response to an inquiry so the court sees it as an offer. Also, Southworth v. Oliver, prior talks with an objective manifestation was held to be an offer.

B.

C.

D.

To be an offer, it must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. Three questions to ask: (remember to look at the WHOLE CONTEXT) 1. Was there an expression of a promise, undertaking or commitment to enter a contract?. 2. Certainty and definiteness in the essential terms? a. UCC 2-204 (3) - "Even though one or more terms are left open, a contract for sale does not fail for indefiniteness (1) if the parties have intended to make a contract AND (2) there is a reasonably certain basis for giving an appropriate remedy." b. UCC 2-311 (1) - "An agreement for sale which is otherwise sufficiently definite to be a contract is not made invalid by the fact

40 that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness." c. UCC 2-204(1) - An agreement for sale which is other wise sufficiently definite to be a K is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Was the communication specifically to the offeree? (not a mass mail) a. surrounding circumstances b. Prior relationship of the parties c. Industry custom/generally accepted d. Method of communication (EX - an ad circular is usually not an offer unless it is misleading advertising.)

3.

NOTE: You can have an agreement if the conduct of the parties shows it, even if there is no actual point where there is an offer and acceptance. Also, ads in the newspaper frequently dont qualify b/c they are not sufficiently definite and critical. Leftkowitz is the exception. a. For price quotes, ask if it is specific tot he ofereenot a price out of the blue, but in response to a request for, eg, a lowest price b. Also, look to past custom of dealing E. MCDONNELL's Two key things 1. 2. Some reasonable completeness - the kind of terms you need to have. a. proposal must have everything needed for a deal. Criticality - puts the power of acceptance in the hands of the addressee. a. moves parties past negotiation phase. After you accept, you cant walk away.

XXI. ACCEPTANCE A. Ardente v. Horan (1976) - important case, uses 'mirror image rule'. 1. Acceptance by offeree must be exactly like the offer, In this case, the D returned an acceptance that requested that certain furniture and fixtures remain in the house. According to the court, this communication did not mirror the offer and thus was not an acceptance but a counter-offer. Thus, if acceptance doesnt mirror the offer, its a counter-offer a. Counter Principal: suggestions and requests dont spoil the deal this could have been used here 2. Acceptance should not state new terms; however, if you make a suggestion, it is okay. Materiality is the key here. Thus, if the court in Ardente v. Horan had found the language in the purported acceptance to be merely suggestions, the acceptance would have been valid. 3. MCDONNELL says the reality here is that Black letter doctrine doesn't control this case b/c the court has in its power to decide it either way. A significant range of appellate cases are like this.

41 4. Mirror Image cases can be decided either way but materiality of suggestion is vital to decision -- if furniture is unique and a large amount of $$, then it is certainly not a mirror image.

B.

Manner of Acceptance 1. The offeror is the "master of his offer" and may prescribe any manner of acceptance; however, he must state his terms unambiguously. a. Restatement 2d. 30 (2) - if the mode of acceptance is not stated by the offer, acceptance is valid by "any manner and by any medium reasonable in the circumstances." b. UCC 2-206 (1) - same as above for sales of goods and adds that acceptance must be made within a reasonable time if performance is the mode of acceptance (EX. "ship goods" ... now). "Unless otherwise unambiguously indicated by the language or circumstances, an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances." (1) Thus, the offeree is given wide discretion unless expressly indicated. i. ex: Eliason: the suggested manner of acceptance in the K is binding. The court construes this so strictly b/c it dealt with a commodity (flour). c. Also, Restatement 2d. 32 - the offeree may accept by either performing or promising to perform. However, under the objective theory, the performance must be made known to the offeror. EX White v. Corlies - The court found no acceptance b/c the beginning of the work was not manifested to the offeror. (didnt see the building). Must send communication calculated to reach the offeror. If builder had sent a note that told him he was proceeding, this would have been acceptance b/c of the Mailbox Rule. i. Mailbox: as soon as its sent, its accepted (1) actions in secret are no good as acceptance. d. Unilateral contract trick - if acceptance is deficient in only a minor manner, the offeror cannot seize on this to get out of the contract under UCC 2-206. 2. Things to look to in an acceptance of a contract: a. Rules that are announced. Does Black letter doctrine control the result or merely apply to a court's discretion? b. Place - is a place of acceptance designated in the offer? c. Time - does the offer specify a time within which acceptance must be made? NOTE: You must decide if it's a requested method of acceptance or a required method of acceptance. But remember, UCC 2-206(1)(a) & Restatement 2d. 30(2) give courts wide discretion in this area. 3. Silence as acceptance Silence is not acceptanceacceptance must be an affirmative actionexcept in:- Rest. 2d. 69 - Silence is

42 only good if: offeree takes services or benefits where he has opportunity to reject. (With goods, they don't have the burden of affirmative returning.) b. offer states that silence will be acceptance and offeree is silent b/c he intends to accept the offer. (This only operates to the benefit of the offeree b/c offeror cannot prove this.) c. Because of previous dealings, silence may be okay - bartender placing a beer in front of you. d. Exemption to Rest. 2d. 69 is 39 U.S.C. 3009 - you may be silent and keep unordered merchandise mailed to you. Treat as gift. NOTE: Importance of the discretion of the court is key b/c it can pick which communication is an offer and which is an acceptance. a. XXII. WAYS OF EXTINGUISHING AN OFFER - Exceptions to the offer being revocable **Acceptance is only valid while the power of acceptance (offer) is still in effect. A. Restatement 2d. 36 - "(1) An offeree's power of acceptance may be terminated by (a) rejection or counter-offer by offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree." An Offer can end by: Lapse of time: Offerers as "master of offer" (master of the duration) can set a definite time limit. If he does not, the offer will end "at the end of a reasonable time period" Restatement 2d. 41 (2). 1. If negotiations are going on face to face, the power to accept continues only during the conversation, (Akers v. Sedberrry - "I will quit if you want me to" - several days later boss could not accept the offer - also, in this case, the boss probably rejected the offer to let the employee tell his opinion of what was wrong with the company.) a. Exception: If offeree says: "I let you know in a few days" The manifestation of the acceptance will overrule the conversation rule. b. You can reject an offer by implied means 2. Restatement 2d. 40 (3) - offer made by mail. acceptance should be mailed the same day as received. 3. When a communication becomes Effective: If the offer specifies a period of time it will remain open, the time is measured from the time the offer is received - "strikes the ears", not the time it was sent. (Caldwell v. Cline "I will give you 8 days.") Note that the offeror can alter this rule by stating differently. "You have 8 days from the transmission of this letter." 4. Delay in transmission a. Obvious delay - acceptance period began to run from the date it would have been received had there been no delay. b. Non-obvious delay - period still runs on receipt by offeree. 5. UCC 2-201 - It becomes an offer when brought to the place of business of the offeree. Offer is effective when brought to attention of organization

B.

43 6. C. or should have come to their attention if due diligence had been exercised. Late acceptance acts as an offer and may be accepted by the original offeror. (acceptance can include silence)

Counter offer (By Offeree) 1. if the offeree makes a counter, he has lost his power to accept the original offer. If this was not so, there would be two outstanding offers on the table. Also, the offeror may rely on the counter offer so you can't change back after countering. Courts dont want 2 powers of acceptance at same time. If the original offer is irrevocable (option contracts) a counter offer will not terminate the offer. (Ryder v. Wescoat - Ryder said he would pass) Restatement (2nd) 39(2): An offerees 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. Once the counter-offer is made, the power of acceptance shifts to the original offeror

2. 3.

4. D.

Rejection (By Offeree): Kills power of acceptance b/c the offeror may rely on conduct 1. If the offeree rejects the offer, the offer ends unless: a. The offeror indicates that the offer still stands - new offer: b. Restatement 2d 38 (1) & (2) - The offeree states that although he does not want to accept now, he wants to consider further.

E.

Revocation (By offeror) - must be communicated to offeree. I take it back. *Restatement 2d. 69 - the offeree is deemed to have revocation when it comes into his possession. 1. Offeree must be made aware that the offeror no longer wants to go forward with the deal (Dickenson v. Dodd - Offeree learned from Mr. Berry that Dodds was agreeing to sell land to another). Indirect Communication of revocation is okay. a. a promise not to revoke is not effective (b/c its not supported by consideration) unless it is put into the bargain context i. CL: promise to hold an offer for a period of time is not binding b/c it is not supported by consideration 2. In the absence of consideration, the offeror does not have to keep the offer open, he can revoke. 3. If notice of revocation is lost (ex. letter), then the revocation is NOT effective to end the offer. a. Restatement 2d. 42 - A revocation by the offeror must be received before the offerees power of acceptance is terminated.

44 F. Death of offeror - ends the offer unless it is an option contract.

XXIII. Irrevocable offers - EXCEPTIONS to revocation killing an offer. (i.e.ways it doesnt kill off an offer) A. Standard Option Contract [Restatement 2d. 87(1)] 1. Option with consideration - common law - an option contract can be formed if the offeree gives consideration. If this is done it is irrevocable (Marsh v. Lott - 25 cents for option to purchase an expensive house). With an option contract, a revocation will not terminate the offer. The offer is irrevocable for a set period of time. Restatement 2d. 87 - a written and signed by the offeror option contract can be formed without actually giving consideration as long as it "recites a purported consideration," and proposes exchange on fair terms within a reasonable time. The substantive exchange must not be grossly unfair though ($1.00 for IBM Tower). (cannot be grossly disproportionate). a. a reasonable offer which includes reliance is binding to avoid injustice. b. Even if the offeror says the offer is irrevocable for a period of time and even if he uses the word option, the offer is revocable unless consideration has been paid. c. Idea that the offer of the option is ancillary to the substantive deal which is a valid business agreement - fairness. There is a need for this in business. d. Nominal Consideration is enoughindicates an intent to make it binding

2.

B.

"Firm Offers" under the UCC 2-205 - not revocable (MERCHANT) 1. An offer by a merchant to buy or sell good is irrevocable if: a. it is signed in writing by both; and b. it gives explicit assurance that the offer will be held open (does not require consideration) 2. duration of firm offer a. If no time is stated is irrevocable for a reasonable period of time; however, it cannot be made irrevocable for longer than 3 months. 3. Comment 4 - If a firm offer is established by a ford drafted by the offeree, it is only irrevocable if signed by the offeror. (Offeree cannot develop a form to establish an irrevocable offer.) Restatement 2d 45 - Reliance on the offer (Causes Unilateral Ks to be revocable). Unilateral v. Bilateral Ks: *Bilateral: requires a promissory response *Unilateral: requires a performance response

C.

45 The offer is a unilateral contract and the offeree begins to perform. The beginning of performance by the offeree creates and option contract; once the offeree starts to perform the offer becomes irrevocable under 45 (1). This is to protect the reliance interest of the offeree. a. Brackenburry v. Hodgkin - If the Brackenburys leave their homes and come to Maine, they will inherit the place when Mrs. Hodkin dies. Trouble develops but the offer is still irrevocable. Reliance and Partial Performance. Partial Performance is valid when offeror put up some obstacle. b. Preliminary Preparations that are not called for in the offer do not count. Putting gloves on before climbing the flagpole would not count. You must examine facts of each case to determine. Here, reliance isnt good enough c. If the offer is explicitly revocable, it is okay. Offeror is still the master of offer; however, performance will be excused if the offeror ignores his duty to cooperate as in Brackenbury. NOTE: Restatement 36(1)(d): death of offeror terminates the power of acceptance 2. It is not clear whether the offer is unilateral or bilateral contract and the offeree begins to perform: a. Restatement 32 - Offeree may accept by performing or promising to perform. b. Allied Steel v. Ford Motor Co. - Allied did not return copy as suggested. It did not matter b/c they had started work on the contract and were bound. Once the offeree has begun performance he has accepted the contract and is bound to complete it. Restatement 63. (1) Credit Cards are individual unilateral contract by each transaction. * bilateral Ks are irrevocable once the offeree begins to tender performance (walks up with $) 3. If offeree makes preparation prior to acceptance. Building in Construction Project. Is subcontract offer irrevocable? a. Often yes. Restatement 2d. 90 (Promissory Estoppel) applies and grants a general contractor limited irrevocability of the subcontractors' bids. The subcontractor's bid is usually held to be irrevocable for the time necessary for the general contractor to obtain the job and accept the sub-contractor's bid. THE BIDS ARE: (1) expected to induce action; AND (2) binding work on offers to the extent necessary to avoid injustice under Restatement 2d 87 (2). b. Drennan v. Star Paving - Sun-contractor submits the lowest bid die to error. His bid is used and the general gets the contract. Traynor ("I'm a stud too") held that because the general relied, there is a period of irrevocability. This is promissory estoppel - the sub can't revoke b/c there is a reasonable and foreseeable reliance. 1.

46 The Reliance was reasonable because: (1) the general can't delay long; sub waits to last minute. (2) the general can't attempt to bargain much faster. (3) the general can't shop around at the last minute. (4) the sub is seeking to advance his own economic/commercial self-interest in this situation. Note that there is no mutuality of obligation. The general does not have to use the subs he submits with his bid. EX - Hoffman because 1) No reliance on part of the sub and 2) General needs flexibility after the award of the contract. Compare to James Baird v. Gimbel Bros. - where Learned Hand (1 year after the Rest.) held that the sub was not bound because promissory estoppel works only in a charitable/donative context, not with a bargain contract with consideration situation. Hand said the general had a ready escape/means of protection b/c he could have formed a contract with the sub prior to using the sub's figures. Traynor has been followed by most courts rather than Hand.

c.

d.

e. D.

Restatement 2d. 90 - Promissory Estoppel (see above C. 3.) 1. Situations where promissory estoppel is used: a. Family situation with o consideration b. Too indefinite for a bilateral contract (Hoffman v. Red Owl) c. To get around the Statute of Frauds d. Like the Drennan Case.

E.

Restatement 87 (1) - If the offeror reasonably expects to induce action or forbearance by offeree then there is a binding option contract.

XXIV. Agreement to Agree [How much indefiniteness can you have and still have an enforceable contract?] A. Arnold Palmer Golf v. Fuqua Industries (1976). 1. Parties signed Memorandum of Intent - "we will have to consent again to a more formal agreement in the future." They had a relationship, courts wish to avoid welchers. Agreement to agree is not binding without other factors: reliance, intent, fairness (UCC 2-204). Action indicates intent to be bound.

2. B.

Further Indefiniteness in Contract/NOT OFFER 1. Joseph Martin Jr. Deli v. Schumacher - There was an agreement to rent store with renewal at a rent "to be agreed upon." Dissent is the best rule:

47 The court should insert a fair market rental if the parties manifest an intent to contract. 2. According to Restatement 2d. 33 (2) - as along as the agreement is definite enough to allow court to determine whether a breach occurred and to award damages, the contract is not void (terms must at least provide a basis for duty & a breach) - Open terms are okay per Restatement (similar to the UCC 2-204 (3)). UCC 2-204 (3) - Much indefiniteness is tolerated. A contract is formed if: a. b. The parties intended to be bound (intended to make a contract). There is a reasonable basis for awarding an appropriate remedy (1) open price term - UCC 2-305 (1) - court set reasonable price. (2) No specific place of delivery - UCC 308 (a) - Seller's place of business or his residence - buyer must pick up goods. If they are stored elsewhere & it is known, buyer must pick up. (3) Time open term - UCC 2-309 - reasonable time for shipment and delivery. (4) Time of payment not in contract - payment is due at the time and place at which the buyer is to receive goods. Buyer cannot get credit unless specified by the contract. (He can pay be check though - UCC 2-310 (a)). Note that indefiniteness can be cured by performance (Objective type manifestation). Restatement 2d 27 - a contract can exist due to manifestation of assent regardless of the parties intention to form a future written memorial. Parties should agree that the general contract will contain terms they agreed to. However, the subsequent written document can be different and valid.

3.

c. d.

PART SEVEN When is Acceptance Effective XXV. Mailbox Rule - effective when put in mailbox. [English rule - mail is the agent of offeror]. A. "Acceptance is effective upon proper dispatch."

48 1. 2. 3. 4. 5. B. Acceptance is effective even if it never reaches the offeror. Restatement 2d. 63 (a). The offeree needs to know that if he accepts, the offer will not be revoked before his acceptance is received. The mailbox rule also binds the offeree, once his acceptance has been mailed he cannot invalidate it with a rejection mailed later. (if acceptance is received first it is valid.) The time period begins running when the offer is received and the acceptance must be sent before the deadline. But some courts say acceptance must be received within the time period. Note: the terms of the offer can override the mailbox rule. The offeror as "master of the offer" can say "acceptance is effective when received by me" Restatement specifically exempts option contracts from the mailbox rule and makes acceptance effective only upon receipt.

Counterweight Rule - Rest. 2d 63 - Worms v. Burgess 1. The offeree needs a dependable basis for acceptance. a. The dispatch rule provides a counterweight to the offeror's power of termination of the offer by revocation. Any permissible means of acceptance is okay. Risk of Mistake - Ayer v. Western Union Telegraph - (Telegraph Co. made an error and offer was incorrectly transmitted). 1. If the terms are mistakenly changed, the contract is formed based on the terms received by the offeree. 2. However, if the offeree knows or should reasonably know of mistake, he cannot "snap up" an offer (EX - offers that are too good to be true.). Acceptance of Option Contracts - MCDONNELL has option to sell painting 1. Acceptance of an option contract is effective on receipt by the offeror, not on dispatch. (Rest. 2d 63 (b)). 2. Rationale - an option contract is irrevocable so we do not need counterweight rules to protect the offeree. 3. Worms v. Burgess (1980) - disagrees with the Restatement Rule above. Court says words "giving notice" mean mailing an acceptance, also uses Oklahoma statute which says that a "proposal" is accepted when the party accepting has put his acceptance "in the course of transmission." a. O.C.G.A. 13-3-3 - GA statute deals with above. Mailbox rule applied to offers. But GA courts are not locked in an option contract acceptance - they use the Code or the Restatement. Look at what is fair and wording of the contract for intent. The offeree is not allowed to speculate at the expense of the offeror. Of a rejection is sent after an acceptance has been mailed and arrive first (rejection sent by speedier means - ex. - telephone); the offeror can decide whether or not the rejection will be valid. 1. Also, if the rejection is received first and the offeror relies on it (selling the

C.

D.

E.

49 goods, etc.); the offeree can be estopped from enforcing the contract by using the mailbox rule. Rest. 2d 40 - A rejection or counter offer is not valid until received; but, an acceptance mailed after a rejection amounts to a counter offer.

2.

XXVI. Battle of the Forms Uniform Commercial Code 2-204 (2). An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. Uniform Commercial Code 2-207. Additional Terms in Acceptance or Confirmation 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 within a reasonable time after notice of then is received. 3. Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although a writings of the parties do not otherwise establish a contract. In such 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 provisions of this Act (UCC). Battle of the Forms A. Introduction: 1. Commercial contracts are often informal agreements, not fully negotiated. Why? a. Press of business - high volume. b. Optimistic Sales people - do not discuss things like warranties. 2. The parties discuss only a few crucial items; typically: a. type of goods b. price & quantity c. time of delivery d. payment terms 3. To flesh out the contract, they rely on pre-printed forms which are seldom 1.

II.

50 read. The courts must decide if there is a contract and what its items are because the forms seldom agree due to the different interests of buyer and seller. [forms usually advance each one's particular interests] the UCC drafters helped out with 2-207. (Llewelleyn)

4. B.

Understanding UCC 2-207. 1. Inspiration - Enforce the Bargain if Fact. a. 2-207 allows a court to put aide formal and traditional doctrine of offer and acceptance and analyze what actually happened instead (what the parties actually agreed to). b. Definition of Bargain in Fact - What the parties agreed to and what they should have agreed to in light of: (1) usage of trade (2) prior dealings and correspondence (course of performance) What 2-207 does when implemented: a. Displaces the "Mirror-Image" Rule: (1) Under the Mirror Image Rule, an acceptance which included different terms was a counter offer. (2) Since the forms of buyer and seller seldom matched in this battle, contracts were seldom formed due to the mirror image rule. (a) If a market swing made performance unattractive a party could welch and claim there was not contract. Created an incentive to welch. (3) 2-207(1) repeals the Mirror Image Rule by stating that an "expression of acceptance" may include terms that vary from the offer; a contract is still formed. Displaces the "Last-Shot" Doctrine (1) This doctrine specified that when a contract was formed by performance (ex - shipping/accepting goods), the terms of the latest or last form on the table were accepted by the performing party. The party who served its form last (last shot) before accepting performance was able to impose its boilerplate in the other. (2) The "Last-Shot" doctrine and the "Mirror Image" rule tended to favor the seller. 1) the buyer would ship an order. 2) the seller would reply with an acknowledgement form with different terms (there was no contract because of the mirror-image rule). 3) Seller would ship goods which were then accepted (acknowledgement serves as last shot & contract). (a) under these rules, the acceptance of goods worked to tie the buyer into the seller's twist on the offer.

2.

b.

51 c. 2-207 (3) helps out here because the contract is formed by conduct, not the mere exchange of forms. The contract consists of the terms agreed on and other terms incorporated by the UCC (EX - having a warranty disclaimer - you must bargain for it & state it correctly under 2-314, 2-315, 2-316(2)). (1) The offer expressly limits acceptance to its terms. (2) The new terms materially alter the offer. (3) Notification of objection has already been given & given within a reasonable time. Common Supplementary terms incorporated under the UCC: 1. Gap filler provisions a. Implied Warranty 2-314 & 2-315 b. Code allows recovery of consequential damages due to breach of warranty (incl. loss of profits) 2. trade usage 1-201 (3) - parties usually want common terms to be part of the contract. d. Note that the contract can consist of the new or additional terms under 2-207 (2) unless: (1) course of dealing - 2-207 (3) - past experience with each other. Apparent preference for offeror under 2-207 (1) The only problem with c. and d. above is that at first glance they appear to favor the offeror (who is usually the buyer). The seller's acknowledgement form now operates as an acceptance (of buyer's offer/order form). Any additional terms that are material will not become part of the contract (EX - warranty disclaimer sent by seller - INVALID). The buyer gets the goods without any new terms designed by the seller (EX - he gets goods without a disclaimer and keeps an implied warranty). The buyer's terms will control when there has been acceptance under UCC 2-207 (1). (a) he buyer really only gains a tactical advantage. The offeror's terms can be avoided when they would be unfairly imposed on the offeree.

e.

UCC 2-207 takes power away from corporate counsel and gives it to the Court. C. Points of Flexibility for the Court ("the SEVEN Questions") under 2-207 - ways of mitigating preference for the offeror. 1. The court can determine what the offer is. a. The labels the parties put on forms do not control (EX- latter of

52 b. 2. intent). If calling a certain form the offer results in unfair terms for offeree, that form is not likely to be called the offer.

The court can find that the offer includes terms in addition to those on the form itself: a. Offer can include: (1) something that has gone before -- a letter. (2) terms due to trade usage (3) terms due to prior course of dealing (4) term due to performance of contract (related to 3 above) EX - is buyer aware of disclaimer? The court can determine if there has been an acceptance a. If the acceptance shows a variation on one of the basic crucial bargain terms (type, price, quantity, delivery), the court can say a contract was not formed under 2-207 (2). The court can then look for conduct which would form a contract under 2-207 (3), and under 2-207 (2), new terms are not automatically eliminated instead look for bargains in fact. If conduct does not establish a contract under 2-207 (3), the court can find no contract (under mirror image type rule, if bargained for terms were never argued to). The court can determine which additions are Material. a. Material additions are not part of the contract. These terms will be excluded from the contract of knocked out. (offeror's terms win). b. The court can decide that the seller's new terms are immaterial and make them part of the contract. The court can find an Opt Out - A contract term to opt out of contract formation as determined by 2-207 (1), means the court will define the contract under 2-207 (3) (i.e. the bargain in fact and Supplemental UCC terms) [NOTE: Offeror is still the master of his offer] a. Opt out by offeror - "We don't have a contract unless you agree to terms of the offer." 2-207 (2) (a). b. Opt out by offeree - 2-207 (1) - "Our acceptance is expressly conditional on your assent to additional or different terms..." If the court finds this opt out, the acceptance becomes a counter offer. If the contact is performed, its terms are determined by 2207 (3) then we use the Bargain in Fact & Supplemental UCC terms. (1) A seller should think before opting out - the terms supplemented by the UCC are not always favorable to sellers (EX - Implied warranty of merchantability)

3.

4.

5.

53 6. Court can find a Knockout provision. a. Some courts treat offers differently under 2-207. They say that if the acceptance states different not just additional terms, then the offer does not control just because it is the offer. (1) These courts find that the contract is not formed under 2207 (1), (and 2-207 (2) is not applicable) because of conflicting terms. Instead, the contract is formed under 2207 (3) (Bargain in Fact & Supplemental UCC terms. The courts will look at consent to variant terms. a. If the courts find a party consented to the other, material terms (which vary from bargained terms on form) it will enforce them. Consent can be shown by: (1) signing the other party's form (a) actions of buyer (EX - processing claims under repair & replacement provision of warranty)

7.

Treatment of Different Terms in Acceptance 1. Treat different terms as additional terms under 2-207 (2), & since different terms materially alter the contract, the different terms in the acceptance never become part of the contact. 2. White - Knockout - different terms knock each other out & only nonconflicting terms become part of the contract --> then the UCC will gap-fill the parts "knocked out." 3. Sumers - since 2-207 only applies to additional terms, different terms by the offeree in the acceptance "fall out" (same effect as 1.)