Transcript Contracts, Cont’d. Elements of an Offer – Objective Intention to Contract Auctions In an auction, a seller “offers” items for sale via an auctioneer.

Contracts, Cont’d.
Elements of an Offer – Objective Intention
to Contract
Auctions
In an auction, a seller “offers” items for sale via an
auctioneer. However, this is not an “offer” for
purposes of contract formation.
For contract formation purposes, an auction is
considered an invitation to submit offers to buy.
The bidder is the offeror; the offer is accepted only
when the bid is struck off. At any time before that,
the bid can be revoked or the auctioneer can reject
any bid received.
Auction Example
Mr. Martinez puts up his Ferrari for sale at auction. Mr. Belcik is the
auctioneer. The price has quickly risen from an initial bid of $500 up to
well over $500,000. Expecting that her bid will easily be surpassed, but
wanting to give Mr. Martinez a hand, Ms. Moody bids $600,000. Shortly
after, Mr. Moya bids $625,000, which Mr. Belcik takes. The momentum
quickly subsides, however, and while Mr. Rodriguez is looking around the
now silent room for other bids, Mr. Moya realizes that his wife will kill him
if he came home in that thing, and he withdraws his bid. Mr. Rodriguez
looks at Ms. Moody and says “SOLD, for $500,000. Does Ms. Moody have
a new car?
Elements of an Offer – Objective Intention
to Contract
Agreements to Agree
Because the auction was such a disaster, Mr. Martinez and Ozzy Ozbourne
enter into a valid written agreement for Ozzy to lease the car for one year.
The lease provides that Ozzy has the option to renew the lease at the end
of it’s term, for a lease payment to be mutually agreed to by he and Mr.
Martinez at that time.
Is Ozzy’s option worth the paper it’s written on?
NOPE – an agreement to agree won’t be enforced as a contract. The
lease may be valid, but the option to renew is not enforceable.
Elements of an Offer – Definiteness
An offer must have reasonably definite terms; if not, a court
cannot determine if a breach has occurred nor can it give an
appropriate remedy.
The UCC relaxes the requirements for definiteness in some
areas, calling for the court to supply certain missing or
indefinite terms with “reasonable” terms. The UCC is
intended to govern commercial relationships involving the
sale of goods, often among merchants, and has as a primary
purpose the facilitation of commerce
Elements of an Offer – Communication of
Offer
If we don’t tell the offeree how are we going to have a contract?
One type of advertisement that is often held to be an offer is one offering
a reward for, say the return of a lost pet. Suppose Mr. Black places an ad
offering a $100 reward for his lost cat. Mr. White, not seeing the ad, but
recognizing the cat as Mr. Black’s, finds it wandering around and returns it
to Mr. Black.
The offer has not been communicated to Mr. White. Is there a valid
unilateral contract? Does he get the reward?
No, there’s no contract…but Mr. White may still get the reward in some
jurisdictions based on equity, but not on contract theory.
Termination of Offers
A valid offer is made but not yet accepted; what can happen to the offer
before acceptance, and prevent a contract from coming into existence?
Termination by Act of the Parties
Revoked by Offeror (unless irrevocable)
Rejected by Offeree
Counteroffer by Offeree
Terminated by operation of law
Lapse of time
Destruction of subject matter
Death or incompetence of a party
Supervening illegality of the object of the contract
Termination of Offers
Revocation by Offeror
• Generally, offers are revocable as long as the revocation is
communicated to the offeree before he or she accepts.
• If before accepting, offeree learns from another source
information indicating the offer has been revoked, what
happens?
• Generally revocation can be communicated in the same way
the offer was communicated. Now that Mr. White had
reunited Mr. Black with his cat, how might he communicate
that the reward is no longer being offered?
Termination of Offers
Irrevocable Offers – some offers can be made irrevocable
• If offeree has substantially changed position in
reliance on an offer (for example, the guy who began
sailing his boat from San Francisco) it may be held to
be irrevocable.
• Option Contracts are irrevocable; offeror has
received payment or consideration in exchange for
giving up his right to revoke for a specified time.
Termination of Offers
Rejection by Offeree
• If an offeree rejects an offer, it is terminated; the offeree
cannot thereafter change his mind.
• Rejection is effective when received by the offeror.
• Merely inquiring about an offer doesn’t constitute a rejection
Now that the lease on Mr. Martinez’s Ferrari is up, Kobe
Bryant makes an offer of $600,000. Mr. Martinez asks, “is that
the best you can do?” Is the offer rejected?
What if he says “I was really looking for $650,000”?
How about “I’ll take $650,000”?
Termination of Offers
Counteroffer
Now, Mr. Martinez has made a counteroffer. A counteroffer is
a rejection of the first offer and a new offer by the former
offerree. If Kobe Bryant says no, Mr. Martinez cannot then
take him up on his first offer…that offer was terminated by
the counteroffer.
Common law employs “mirror image” rule: if the acceptance
doesn’t match the offer exactly, it’s a counteroffer, and the
original offer is terminated.
Termination by Operation of Law
Termination by Lapse of Time
• An offer may specify that it expires after a given
period of time.
• If a number of days is specified, but the specific
starting date is not, it will normally be held to start
on the day the offer is received, and terminate at
midnight on the expiration date.
• If not specified, then an offer will expire after a
“reasonable” time.
Termination by Operation of Law
Other ways offers can be terminated:
• Destruction of Subject Matter – A offers to sell B a
cow; before B accepts, cow struck by lightning
• Death or Incompetence of Party. Unless irrevocable,
an offer terminates if the offeror or offeree dies or
becomes incompetent.
• Supervening Illegality. A bank offers to loan A money
at 17% interest. Before A accepts, the legislature
passes a law limiting interest rates to 10%. The law
terminates the offer.
Acceptance
A voluntary act by the offeree that shows
assent to the terms of the offer.
Must be unequivocal
Must be communicated to the Offeror
Acceptance
Mr. Martinez offers to sell his Ferrari to Kobe
Bryant for $600,000. If Kobe Bryant doesn’t
respond right away, can Lindsay Lohan accept
the offer?
No…Only an offeree – the person or one of
the persons to whom the offer was intended
to be made – may accept (their agents may
also accept)
Acceptance
Kobe Bryant is considering Mr. Martinez’s offer to
sell the Ferrari. He decides to accept, but wants Mr.
Martinez to put a trailer hitch on it so he can pull
his cutting horse trailer behind it. Has he accepted?
No…this is the other half of the “mirror-image” rule
we talked about earlier. By adding terms, Kobe
Bryant has made a counteroffer. If Mr. Martinez
refuses to add the trailer hitch, can Kobe Bryant
back-up and say, “well, OK I’ll take it without the
trailer hitch”?
Acceptance
 Let’s say that Mr. Martinez transmits his offer to sell the
Ferrari to Kobe Bryant and the offer says “unless I hear
from you within 10 days, I’ll assume that you have
accepted my offer.” Kobe Bryant remains silent. We got a
deal?
 No – generally, silence cannot be an acceptance.
However, in what circumstances might silence operate as
an acceptance?
 (1) where the parties have an established course of
dealing between them, there can be a duty to speak, and
(2) where the circumstances are such that silence can
create an implied-in-fact contract
Acceptance
Communication of Acceptance
In a unilateral contract, acceptance is
communicated by performance
In a bilateral contract, it has to be communicated
separately from performance (unless the offer itself
dispenses with the requirement of communication
of the acceptance).
If the offer specifies how acceptance is to be made,
then that’s how it has to be accepted
Acceptance
Communication of Acceptance
George Bush sends a letter to Mr. Martinez offering
$700,000 for his Ferrari, but stating that his offer
expires on October 15. Mr. Martinez writes a letter
back, saying “I accept your offer.” He puts it in the
mail on October 12 (properly addressed and with
proper postage). It doesn’t arrive until the 17th.
Meanwhile, George Bush has heard about the
starting problem, and has found a nice cherry Yugo
that he’d rather spend his money on. Has George
Bush bought the Ferrari?
Yup…’fraid so. This is the “mailbox rule.” What if
Mr. Martinez used the wrong address or didn’t use
enough postage on his letter? Different result?
Acceptance
Communication of Acceptance
• Mailbox Rule: Revocation of an Offer is effective when
actually received; but acceptance of an offer is effective
when placed in the mail (assuming it’s properly addressed
and posted). WHY?
• It’s to prevent confusion that can occur when revocations
and acceptances cross each other in the mail – If the
revocation were effective when mailed, then the offeree
could accept it without knowing it had been revoked. It’s
a rule that is designed to facilitate the formation of
contracts.
Acceptance
Communication of Acceptance
 Authorized means of communication of acceptance – Can be
expressly stated or implied by the facts or implied by law
 If the offeror chooses one means (say mail) to transmit the
offer, then the offeree may accept in the same way or by a
faster means.
 When the parties are at a distance, mailing is impliedly
authorized.
 Exceptions: (1) If not properly addressed or posted or (2) if
the offer explicitly says it won’t be effective until received.
Acceptance
Communication of Acceptance
• So what happens if an offeree screws up the
mailbox rule – for instance, he sends a
rejection first, but then transmits an
acceptance?
• Here, the law cancels the rule that says the
acceptance is valid on deposit in the mail,
and whichever is first received by the offeror
is effective.
Consideration, Capacity, Legality,
Assent and Form
Consideration
Definition: “the value given
in return for a promise”
Two Elements:
۩ Legal Value.
۩ Bargained-for Exchange.
Consideration
Hamer v. Sidway
Mr. Story told his nephew that, if he would not smoke, drink
or play cards or pool until he was 21, that he’d give him
$5,000.
Nephew did not smoke, drink or play cards or pool for six
years, when he became 21. Nephew reported to Uncle that
he had fulfilled his end of the deal, and Uncle responded,
saying that Nephew would have his reward, and could
consider the money to be invested with interest.
Nephew left the money with Uncle for 12 years. At some
point, he assigned the money to another person. After Uncle
died, Nephew’s assignee asked the Uncle’s executor to pay.
The executor refused, saying there was no consideration for
Uncle’s promise.
What result?
Consideration
Court held that the executor had to pay the nephew’s assignee
because the promise was an enforceable promise. The court
said:
“The promisee used tobacco, occasionally drank liquor, and
he had a legal right to do so…that right he abandoned for a
period of years upon the strength of the testator that for
such forbearance, he would give him $5,000.”
The court said the issue was not how difficult this was for the
nephew, the issue was that he had a legal right to indulge,
which he gave up because of the Uncle’s promise. The
consideration was legally sufficient.
Consideration
Legal Value
Must be something of “legally sufficient”
value
A promise to do something that one is not
otherwise legally bound to do
Performance of an action one is not otherwise
legally required to perform
Refraining from action one is otherwise legally
authorized to take
Consideration
Key Concept:
☺To give “legally sufficient” value, the party has
to do something he or she is not otherwise
legally required to do
☺This assures that the consideration is indeed
intended to support or be exchanged for the
promise by the other party
Consideration
“Legally sufficient” is not a mathematical
concept. The inquiry as to “sufficiency” is not
into how much consideration is offered. The
court’s don’t evaluate what the consideration
is worth. Why is this?
If it were, then people wouldn’t have the
freedom to contract as they wish.
Consideration
Bargained-for Exchange
Mr. Arruda has become fabulously wealthy, and now
he has ungrateful children that won’t come see him.
In a conversation with his son, he says, “My boy,
Lattimore, in consideration of the fact that you don’t
have enough money to come see me very often, I am
going to give you $500 a month for the next year.”
Has Mr. Arruda made an enforceable contract with
little Lattimore?
Consideration
No…Despite the fact that Lattimore really doesn’t come see
his dad very often, he’s not been asked to do anything,
forbear from doing something, or to incur any “legal
detriment.”
What if Mr. Arruda had instead said, “Little Lattimore, my
son, if you will come see me three times a year, I’ll give you
$500 a month.” Contract here?
Yes. Why?
Because now, Lattimore has been asked to do something for
the promised money…he has to come and see his dad
Consideration
Change it up: Little Lattimore is a minor; he’s 16,
and a royal pain. Some of Lattimore’s wealthy
friends parents are afraid that because of Lattimore’s
bad attitude that Mr. Arruda is about to boot him out
of the house; if that happens, they’re afraid that he’ll
want to live with them.
They offer to pay Mr. Arruda $500 per month if he’ll
agree to continue to support Little Lattimore. Can
Mr. Arruda enforce the promise?
No…why not?
Consideration
Since Little Lattimore is a minor, Mr. Arruda has a
legal duty to support him, whether he gets the
money from the neighbors or not. There’s no
legally sufficient consideration. He has a “preexisting duty.” This matters why?
If you pay someone to do something they are
obliged to do anyway, then there’s no
consideration.
Consideration
Mr. Geistman contracts with Ms. Canales to build a
building for him. The contract requires her to build
the building for a fixed sum of $1 million. In the
middle of doing the work, she encounters problems
that double her cost of doing the work. She tells Mr.
Geistman that she needs more money or she’ll stop
work. Mr. Geistman, needing to have the building
ready because his lease is expiring, agrees. Can Ms.
Canales enforce the amendment to the contract?
Consideration
Generally No. Why?
Because Ms. Canales had a preexisting duty to build
the building for the agreed price. If this weren’t the
rule, what injustice would result?
This would facilitate extortion, wouldn’t it? That
being said, are there still a kind of unforeseen
difficulties that may justify an amendment like Ms.
Canales made with Mr. Geistman?
Extraordinary and completely unforeseen; also NOT
the kind of risks ordinarily assumed by builders.
Consideration
Mr. Cano is a real estate agent. He sells Ms.
Williams’s house for her, but because they are
friends, does not charge a commission. Ms. Williams
later on tells Mr. Cano that, because he did such a
good job selling the house, that she will give him
$3,000 out of her next paycheck. If Ms. Williams
doesn’t pay, can Mr. Cano sue her for breach of
contract?
No. Why not?
Past consideration is no consideration. Ms.
Williams’s offer is merely a statement that she
intends to make a gift.
Consideration
Ms. Garcia is president of Ceilingmart (get it?) She
tells her employees that if they gain an additional
10% in market share against their close competitor,
Wallmart, she’ll give them all a 10% bonus, if
management approves it.
Can the employees hold her to this?
No, there’s really no promise here, is there? This is
called an “illusory promise.”
Consideration
Ms. Garcia offers to hire Lindsay Lohan as Vice
President of Ceilingmart for one year. She offers
Lindsay $10,000 a month, but reserves the right to
terminate her at will (at any time and for any reason
or no reason – employment at will).
What’s the effect?
Again, it’s an illusory promise. Does this mean
there’s no contract? What is the contract that
results?
Consideration
Same situation, except that this time, Ms. Garcia
offers to hire Lindsay Lohan for a year, but she
provides that the company can terminate the
employment on 30 days notice.
Any difference in your answer?
Yes – this is not illusory; Ceilingmart is giving up the
right to hire somebody else as VP for at least the 30
day period during which Lohan is entitled to notice.
Its’s just not fair…
Consideration
Mr. Gray’s aging uncle, Mr. Blue, is very wealthy and
enjoys spending time with his nephew. Mr. Gray
likewise enjoys spending time with Mr. Blue.
One day, Mr. Blue promises to pay Mr. Gray $35,000
a year so that Mr. Gray won’t have to work anymore.
In reliance on the promise, Mr. Gray quits his job
(which paid him $30,000/yr).
Mr. Blue doesn’t pay. Is there a Contract?
No, no consideration. Is there anything that Mr.
Gray can do?
Consideration
Promissory Estoppel
Sometimes when there has been justifiable and
reasonable reliance by a person upon a promise
made without consideration, courts will hold that the
promisor should be prevented, or estopped, from
failing to make good on the promise. This is the
doctrine of Promissory Estoppel.
In our example with Mr. Gray, Uncle Blue may be
estopped to deny his promise of payment.
What does it take for the doctrine of promissory
estoppel to apply?
Consideration
Elements of Promissory Estoppel
Clear and definite promise
Promisee must justifiably rely on the promise
The reliance must be of a substantial and
definite character
Justice will be served by enforcing the
promise
Capacity
Persons who sometimes lack
capacity to enter into Contracts:
• Minors (aka “infants”)
• Intoxicated persons
• Mentally incompetent persons
There are exceptions to all of the above
Capacity
Minors
Little Lattimore is 16 but looks like he’s 22. He
buys a computer at Walmart. The next day, he
returns the computer to Walmart and says
that he doesn’t want it anymore. Can he do
this?
Yes. Lattimore has “disaffirmed” his contract.
Capacity
What if on the way back home from Walmart,
somebody runs a stop sign and hits his car at
an intersection. The computer is smashed.
Can he still return it?
Yes, in most states, he can even if it’s
damaged.
Capacity
Change facts a bit. What if Lattimore bought a car for $2,500
from a used car dealer. He drives it for a year, at which time it
begins to smoke and run poorly. Lattimore ignores this, and
keeps driving it until the engine blows up. He goes back to
the dealer and says, “I am returning this car; I disaffirm my
contract to buy it on the basis that I am a minor.” What
happens here?
Depends on the state. A Tennessee court under similar
circumstances said that he could disaffirm and return the
car, but he had to compensate the dealer for the depreciated
value (not the purchase price) of the car. In Texas…maybe
not.
Capacity-Minors
In general, minors can enter into contracts just as adults
can and those contracts are valid and enforceable up to
the point that the minor chooses to disaffirm. Thus, they
are voidable at the option of the minor...but not at the
option of the adult.
Generally, the minor disaffirming the contract has to
return the consideration or property received by them, if
it is still in their possession. Courts differ from state to
state about the effect of damage to the property or what
causes the damage.
Disaffirmance can normally occur at any time up to the
time of reaching majority, and for a reasonable time
thereafter. Once majority is reached, the person can
ratify the contract, making it no longer voidable.
Capacity-Minors
• Misrepresentation of Age: Generally has no effect. Some
states have statutes or have adopted common law rules that
limit or prevent disaffirmance where minor misrepresents his
or her age (for instance, allowing disaffirmance only if the
minor can return the consideration or property) Others will
hold the minor liable in tort for fraud. But this is a minority
view; most won’t hold a minor liable in tort as a way to
“bootstrap” into contract liability.
• Contracts for Necessaries: Almost all states recognize an
exception where the minor contracts for things that are
necessary to sustain the minor’s existence. Are chinchillas
“necessaries?”
Capacity
Texas Law – the Case of
the Fragile Chinchillas
Capacity-Minors
Chinchillas aren’t but consider this case:
Young boy named Fountain was accidentally shot in the head
by a playmate. He required extensive emergency lifesaving
medical treatment. One provider, Yale Diagnostics, billed
Fountain’s mother for the services. She did not pay, and filed
for bankruptcy, which discharged all her debts, including the
one to Yale.
However, Fountain’s mother did sue the playmate’s family on
behalf of her injured son, and received a settlement, which
was paid to the son’s estate. Yale Diagnostics, being unable to
continue to try to collect from the mother, made a claim for
payment from the son’s estate, which now had some money.
Could Yale recover payment from the minor son?
Capacity-Minors
The Connecticut Supreme Court said yes. Why?
There is a longstanding rule that a minor can’t avoid contract
liability for goods or services necessary to the minor’s health
Rule is based on Quasi Contract (implied-in-law contract; not
a real contract)
When a necessary medical service is provided to a minor, two
contracts arise. One is a real one between the provider and
the parents who are responsible for the minor’s care; the
other is a contract implied in law between the provider and
the minor to prevent unjust enrichment.
Do you agree with this? Why or why not?
Capacity-Minors
Necessaries
• Basic needs: food, clothing, shelter, medical services. Not
chinchillas.
• Some element of appropriateness of the need to the
particular minor’s station in life; value may be up to the level
required to maintain current living standards
• Is minor in the care of someone else who is obliged to
provide? If so, then it may not be “necessary” for minor to
acquire from the seller
Unless all elements are met, the contract can be disaffirmed,
usually without the minor being responsible for the value of
the goods
Capacity-Minors
Recall that Lattimore, our minor, bought a computer at
Walmart. Say that Lattimore keeps the computer and uses it
until he turns 18, then sends an email to Walmart telling it
that he likes the computer and believes that he’ll keep it.
What effect?
Lattimore has expressly ratified the contract; it’s binding on
him now.
Now assume that he doesn’t email Walmart, but he just
continues to use the computer well beyond his 18th birthday.
What effect?
Same thing. He’s ratified the contract, but he’s done so by
implication…this is implied ratification.