Test Bank for Contract Law for Paralegals: Traditional and e-Contracts, 3rd Edition
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Online Instructor’s Manual to accompany Contract Law for Paralegals Traditional and E-Contracts Third Edition John J. Schlageter, III Henry R. Cheeseman Kathleen Reed
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iii TABLE OF CONTENTS Chapter 1 Nature of Traditional and E-Contracts 1 Chapter 2 Agreement 9 Chapter 3 Consideration and Equity 22 Chapter 4 Capacity and Legality 31 Chapter 5 Genuineness of Assent 46 Chapter 6 Writing, Formality, and E-Commerce Signature Law 60 Chapter 7 Third-Party Rights and Discharge 73 Chapter 8 Remedies for Breach of Traditional and E-Contracts 89 Chapter 9 E-Contracts and Internet Law 106 Chapter 10 Formation of Sales and Lease Contracts 119 Chapter 11 Performance of Sales and Lease Contracts 130 Chapter 12 Remedies for Breach of Sales and Lease Contracts 142 Chapter 13 Sales and Lease Warranties 155 Chapter 14 Relationship of Tort Law to Contract Law 166 Chapter 15 Special Forms of Contracts 183 Test Bank 195
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1 Chapter 1 Nature of Traditional and E-Contracts The movement of the progressive societies has hitherto been a movement from status to contract. Sir Henry Maine I. Teacher-to-Teacher Dialogue We like to open the overview of contracts law by identifying two main teaching objectives from this chapter. The first objective is to introduce the notion of apparent versus hidden “parties” to a contract. By apparent, of course, we are talking about the actual participants or signatories to the contract. These are the persons or entities whose rights and obligations we are about to examine and ascertain. By “hidden” parties, we stress the point that a contract is not, in the end, all that private. What elevates a bare agreement between two or more private parties into a legally recognized contract is the willingness of the public, through its courts, to enter the fray and enforce the contract rights and duties. Thus, the first objective is to interject the notion of public policy participation and support of the contracting process. The second objective is to introduce students to some of the working vocabulary of contract law. As is the case with all specialized forms of endeavor, a contract has a language all its own, and a basic knowledge of some of the key terms used in contracts is essential. The key contract terms used tend to be dichotomous, and you can use that dichotomy as a learning tool. Take, for example, the number of parties to a contract. At least two parties are required in all contracts. One of those two parties has to initiate the contract formation process. The person starting the mutual assent process with a promise is the offeror , the other person is the offeree . Next, look at the dichotomy of the promises being used: Is it a bilateral promise or is it a promise for a unilateral act? Have these promises been expressly made or can they somehow be implied from the circumstances? Does the form that this agreement is taking require certain formalities, such as a negotiable instrument, or can it be done in any informal manner chosen by the parties as long as the elements of contract are met? Once the parties have formed an agreement, are the performance obligations already fully met or executed, or are there still remaining executory performance obligations on the part of one or more of the parties? In addition, you may have to examine issues of enforceability. If all the elements are in place, the agreement is now considered a valid contract. If one or more of the essential elements is missing, the agreement is not raised to the status of contract and may be legally void. There are also certain situations where a contract is created, but it will not be enforced. If a legal defense is found to be in place, such as a writing requirement, the contract may be an unenforceable contract. Sometimes, certain persons are given a legally recognized power to avoid a contract after it has been entered into. These contracts are voidable, and examples of this sort of situation can be found in cases involving young people with limited mental capacity. II. Chapter Objectives • Define contract . • List the elements necessary to form a valid contract. • Distinguish between bilateral and unilateral contracts. • Describe and distinguish between express and implied-in-fact contracts. • Describe and distinguish among valid, void, voidable, and unenforceable contracts.
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2 • Describe how computers have revitalized society. • Learn how contract law applies to electronic commerce. III. Key Question Checklist • What body of contract law will control the formation, rights, duties, and remedies of this agreement? • Are the four elements of a contract in place? • How is this contract defined? Formal or informal? Executed or executory? • Are there any defenses that make the contract unenforceable? IV. Text Materials Contracts are the basis for most of our activities. They are voluntarily entered into and the terms become a form of private law between the parties. Most are legally enforceable, with the breaching party being subject to damages ordered by the courts. Section 1: Contract Overview A contract is an agreement that is enforceable by a court of law or a court of equity. Parties to a Contract —The offeror makes the offer to the offeree. The contract is created when the offeree accepts the offer. Elements of a Contract —Enforceable contracts require that there be an offer and acceptance, which form an agreement between the parties. To be a contract the agreement must show mutual assent, consideration, capacity, and legality. Defenses to the Enforcement of a Contract —There are two defenses to the enforcement of a contract: genuineness of assent and writing and form. The Evolution of the Modern Law of Contracts —This fits in nicely with the notions of private versus public participants in the contract process as discussed in the teacher-to-teacher dialogue at the beginning of this chapter. It also allows you to get students thinking early on about the “battle of forms” and how the extensive use of forms has severely limited the real bargaining power of the average lay person. Section 2: Sources of Contract Law The Common Law of Contracts —This source of contract law developed from primarily state court decisions that became precedent. The Uniform Commercial Code (UCC) —The UCC has been adopted, in whole or in part, by every state, and takes precedence over common law. Article 2 deals with sales and Article 2A deals with leases. The Restatement of the Law of Contracts —The Restatement, currently in its second edition, is not law, but merely serves as guidance to the legal community. Objective Theory of Contracts —This theory applies the reasonable person standard to contracts. Case 1.1: Kolodziej v. Mason, 774 F.3d 736, 2014 U.S. App. Lexis 23816 (2014). Facts : Attorney James Cheney Mason represented the criminal defendant Nelson Serrano, who stood accused of murdering his former business partner and the son, daughter, and son-in-law of another business partner in Bartow, Florida. During Serrano’s highly publicized capital murder trial, Mason participated in an interview with
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3 NBC News in which he focused on the seeming implausibility of the prosecution’s theory of the case. Serrano claimed he was on a business trip to Atlanta, Georgia, several hundred miles away from where the murders were committed in central Florida, and therefore he had an alibi and alleged he could not have committed the murders. Hotel surveillance video confirmed that Serrano was at a La Quinta Inn in Atlanta, Georgia hours before and after the murders occurred in Bartow, Florida. The prosecution argued that Serrano had committed the crimes during the 10-hour span between the times that he was seen on the security cameras. To commit the murders, Serrano would have had to slip out of the hotel and, traveling under several aliases, fly from Atlanta to Orlando, where he rented a car, drove to Bartow, Florida, committed the murders, drove to the Tampa airport, flew back to Atlanta, drove from the airport to the La Quinta Inn, and made an appearance on the hotel’s security footage again that evening. During the NBC interview, Mason argued that it was impossible for his client to have committed the murders in accordance with this timeline. Mason stated that it was impossible to make it off the airplane in Atlanta and back to the La Quinta Inn within the 28 minutes in the prosecution’s timeline. Mason then stated, “I challenge anybody to show me, and guess what? Did they bring in any evidence to say that somebody made that route, did so? If they can do it, I’ll challenge ‘em. I’ll pay them a million dollars if they can do it.” NBC did not broadcast Mason’s original interview during Serrano’s trial. The jury returned a guilty verdict in Serrano’s criminal case. Subsequently, NBC televised an edited version of Mason’s interview on a national broadcast of its Dateline television program, including Mason’s million-dollar challenge. Dustin Kolodziej, a law student at the South Texas College of Law, who had been following the Serrano case, saw the edited interview and decided to take up Mason’s million-dollar challenge. Kolodziej recorded himself retracing Serrano’s route, traveling from a flight landing at the Atlanta airport to the site of the La Quinta Inn, in less than 28 minutes. Kolodziej sent Mason a copy of the recording of his journey and demanded $1 million. When Mason refused to pay, Kolodziej sued Mason in U.S. district court for breach of contract to recover $1 million. The district court held that Mason’s offer was made in jest and therefore no contract existed between Mason and Kolodziej. Kolodziej appealed. Issue: Was Mason’s million-dollar challenge made on television a legitimate legal offer? Decision: No. Reason: The U.S. court of appeals used an objective test to determine whether a contract is enforceable and found that Mason’s statements were such that a reasonable, objective person would have understood them to be an invitation to contract. The exaggerated amount of “a million dollars”—the common choice of movie villains and schoolyard wagerers alike— indicates that this was hyperbole. Courts have viewed jest or hyperbole as providing a reason for an individual to doubt that an offer was serious. The U.S. court of appeals affirmed the district court’s decision in favor of Mason. Case 1.2 Welles v. Acad. Of Motion Picture Arts & Sci. , No. CV 03-05314 DDP (JTLx), 2004 U.S. Dist. LEXIS 5756, at *1 (C.D. Cal. Mar. 4, 2004). Facts: The right of ownership of Orson Welles’ Academy Award Oscar from the Academy of Motion Picture Arts and Sciences for the Best Original Screenplay for the 1941 film Citizen Kane passed to his daughter Beatrice Welles. In 1988, Welles requested a duplicate Oscar from the Academy, stating that her father had lost the
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4 original Oscar many years ago. The Academy provided her with a duplicate Oscar, and she signed a Receipt and Addendum acknowledging that the receipt of the duplicate Oscar did not entitle her to any copyright, trade-mark and service mark of the statuette. In 1994, Welles found the orignal Oscar and wanted to sell it at public auction through Christie’s. The Academy objected; and Welles sued for the right to sell it. She argued that the language of the Addendum “Any member of the Academy …” did not apply to her because she was not a member of the Academy. The Academy responded that it intended that the language should apply to Welles and asked the court to reform the Receipt and Addendum to apply to Welles and to order that the Academy had a right of first refusal to purchase the original Oscar for $1.00. Issue: Does the Receipt and Addendum prohibit Welles from selling the original Oscar? Decision: No. Reason: Here, the Academy failed to ensure that the Addendum applied to Welles. The court applied the objective theory of contracts and decided that the Academy’s subjective belief that the Addendum applied to Welles did not change the express language of the contract. Therefore, the Academy did not have a right of first refusal in Welles’s original Oscar. The court held that Welles had unrestricted property rights in the original Oscar, which she could dispose of as she wished. Uniform Electronic Commerce Act Adopted – The Uniform Computer Information Transactions Act (UCITA) establishes uniform legal rules for the formation and enforcement of electronic contracts and licenses. The Uniform Electronic Transactions Act (UETA) provides a legal framework for electronic transactions. Section 3: Classifications of Contracts Bilateral and Unilateral Contracts —A bilateral contract is a promise for a promise. The exchange of promises creates the enforceable contract. A unilateral contract is one where the offer can be accepted only by the performance of an act by the offeree. Incomplete or Partial Performance —Offers can be revoked by the offeror at any time before the offeree has begun performance. Express and Implied-in-Fact Contracts —Express contracts may be either oral or written, whereas implied-in-fact contracts are implied by the activities of the parties. Implied-in-fact contracts require that the plaintiff supply property or services to the defendant that they expected to be paid for, and that the defendant had an opportunity to reject the property or services and failed to do so. Case 1.3: Wrench LLC v. Taco Bell Corporation Facts : Rinks and Shields created a “Psycho Chihuahua” cartoon character that they promoted through their company, Wrench LLC. They were approached by Taco Bell to adapt the character for use in their advertising. Later, the idea was adjusted to include a real dog that was digitally manipulated. Rinks and Shields created several ads, including one in which a male dog passes up a female dog to get to the Taco Bell food. Taco Bell did not enter into an express contract with them, but, a few weeks later, hired Chiat/Day to produce the same style ads, one of which was the male dog passing on up a female dog to get the Taco Bell food. Wrench, Rinks, and Shields sued for breach of an implied contract. The District Court granted summary judgment to Taco Bell, and the plaintiffs appealed.
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5 Issue: Did the plaintiffs state a cause of action for the breach of an implied-in-fact contract? Decision: Yes. Reason: The U.S. Court of Appeals held that Taco Bell understood that if they used the “Psycho Dog” concept, it would have to pay the plaintiffs. They found that there was strong circumstantial evidence that Taco Bell was using the concept, and reversed and remanded the case back for trial. Quasi-Contracts (Implied-in-Law Contracts) —This is an equitable remedy that allows a court to award monetary damages to prevent unjust enrichment and unjust detriment in the case where there is no enforceable contract between the parties. Case 1.4: Powell v. Thompson-Powell, No. 04-12-0027, 2006 Del. LEXIS 10, *1 (C.P. Kent Jan. 18, 2006). Facts: Samuel E. Powell Jr. and Susan Thompson-Powell, husband and wife, borrowed $37,700 from Delaware Farm Credit and gave a mortgage to Delaware Farm Credit that pledged two pieces of real property as collateral for the loan. The first piece of property was 2.7 acres of land owned as marital property, and the other piece of property was owned by Susan, which she had inherited. Eight years later, Samuel Jr. and Susan defaulted on the mortgage. Samuel Jr. went to his father, Samuel E. Powell Sr., and orally agreed that if his father would pay the mortgage and the back taxes, he would pay his father back. Samuel Sr. paid off the mortgage and the back taxes owed on the properties. Susan was not a party to this agreement. Two years later, Samuel Jr. and Susan were divorced. The divorce court ordered that the 2.7 acres of marital real property be sold and the sale proceeds divided 50 percent to each party. When the property was sold, Samuel Jr. paid Samuel Sr. half of the monies he had previously borrowed from his father. Samuel Sr. sued Susan to recover the other half of the money. Susan defended, alleging that she was not a party to the contract between Samuel Jr. and Samuel Sr. and therefore was not bound by it. Samuel Sr. argued that Susan was liable to him for half of the money based on the doctrine of quasi-contract. Issue: Is Susan liable for half the money borrowed by Samuel Jr. from Samuel Sr. under the doctrine of quasi-contract? Decision: Yes. Reason: The court found that plaintiff’s acts in preserving the real estate from foreclosure conferred a substantial benefit upon Susan Thompson-Powell at the plaintiff’s expense and that the retention of the benefit in this case would be unjust. Accordingly, the court held that Samuel E. Powell Sr. was entitled to recover from Susan Thompson- Powell half of the money advanced for her benefit. Formal and Informal Contracts —Contracts may be formal, such as negotiable instruments, letters of credits, recognizances, and contracts under seal, or informal or simple contracts, like leases, sales contracts, and service contracts. The distinction is that formal contracts require a special format or method. Valid, Void, Voidable, and Unenforceable Contracts —Valid contracts meet all the essential elements and are enforceable by at least one of the parties. A void contract has no legal effect, and neither party can enforce it. Contracts where at least one party can avoid their contractual obligations are voidable contracts. If there is a legal defense to the enforcement of a contract, it is called an unenforceable contract, but the parties may choose to voluntarily perform the contract.
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6 Executed and Executory Contracts —Contracts that have not yet been fully performed by either side are called executory contracts; those that have been completed are executed contracts. V. Case Scenario Revisited Case This Case Scenario is based on case of Marvin v. Marvin , 557 P.2d 106 (Cal. 1976). In Casey and Tom’s case, the court would focus on whether an implied-in-fact contract can result from the conduct of unmarried persons who live together. An implied-in-fact contract arises where (1) the plaintiff provided property or services to the defendant, (2) the plaintiff expected to be paid for the property or services, and did not provide the property or services gratuitously, and (3) the defendant was given an opportunity to reject the property or services, but failed to do so. In the Marvin case, the court found that the plaintiff provided services while the defendant provided property. As a result, there was no reason to presume that services were contributed as a gift. The court found that in these cases is better to presume that the parties intended to deal fairly with each other. To hold otherwise would disproportionately enrich one partner at the expense of the other. Therefore, the court held that courts may inquire into the conduct of the parties to determine whether that conduct demonstrates an implied-in-fact contract. VI. Sample Answer to Hands-On Drafting Exercise WITNESSETH: WHEREAS, All You Can Eat Ice Cream Buffet, Inc. manufactures ice cream for the purpose of selling ice cream to grocery stores; WHEREAS, ABC, Inc. is the owner of a grocery store and is in the business of selling ice cream to its customers; WHEREAS, All You Can Eat Ice Cream Buffet, Inc. would like to sell ice cream to ABC, Inc. and ABC, Inc. would like to purchase ice cream from All You Can Eat Ice Cream Buffet, Inc., all on the terms set forth; VII. Answers to Critical Legal Thinking Cases Bilateral or Unilateral Contract Case 1.1. Bickham v. Wash. Bank & Trust Co., 515 So. 2d 457 (La. App. 1987). The contract is a bilateral contract. A contract is bilateral if the offeror’s promise is answered with the offeree’s promise of acceptance. The court found that the agreement between Mr. Bickham and the bank on January 23, 1974, was a bilateral agreement. Bickham agreed to do his banking in return for the bank’s agreement to make loans at 7 1/2 percent. If Bickham had said “If you promise to loan me money at 7 1/2 percent, I will do all my banking with your bank,” the offer would have been to create a unilateral contract. The court further held that bilateral contracts can only be altered with the consent of both parties and that the bank acted unilaterally in changing the interest rates on the loans. Therefore, the Appellate Court upheld the trial court’s ruling that the bank had breached its contract. In addition, the court held that each of the subsequently executed notes were bilateral contracts. The court stated that although the agreement was silent at the time, it would impute a “reasonable time” into the agreement.
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7 VIII. Answers to Ethics Cases Case 1.1. Chenard v. Marcel Motors , 387 A.2d 596 (Me. 1978). The contract is a unilateral contract. A unilateral contract is one in which the offer can only be accepted by the performance of an act by the offeree. Here, there is no contract until the offeree performs the requested act. The offer cannot be accepted by Chenard promising to get a hole-in-one. This would constitute a bilateral agreement. The court held that where Chenard, the offeree, shot a hole-in-one, he had accepted the offeror’s offer of a unilateral contract thereby obligating performance of the promise. Accordingly, the Appellate Court upheld the Superior Court’s ruling that Chenard is entitled to the car. Case 1.2. Winkel v. Family Health Care, P.C. , 668 P.2d 208 (Mont. 1983). No, Winkel does not receive the profit-sharing bonus. Under the equitable doctrine of quasi-contract, a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed between the parties. This doctrine does not apply where there is an enforceable contract between the parties. In this case, there was a written employment contract between the parties. Thus, for Winkel to be entitled to the profit-sharing bonus the court must find that the written employment contract was altered in writing or by an executed oral contract. Winkel testified that the agreement to receive profit-sharing was an oral agreement. Thus, the question becomes whether the oral agreement was executed, i.e., fully performed. The court held that because Winkel had not been paid his salary and bonus, the contract was not executed. Accordingly the appellate court reversed the trial court’s holding that Winkel was entitled to his bonus. IX. Terms • Bilateral contract—A contract entered into by way of exchange of promises of the parties: a “promise for a promise.” • Common law of contracts—Contract law developed primarily by state courts. • Equity—A doctrine that permits judges to make decisions based on fairness, equality, moral rights, and natural law. • Executed contract—A contract that has been fully performed on both sides: a completed contract. • Executory contract—A contract that has not been fully performed. With court approval, executory contracts may be rejected by a debtor in bankruptcy. • Express contract—An agreement that is expressed in written or oral words. • Formal contract—A contract that requires a special form or method of creation. • Implied-in-fact contract—A contract where agreement between parties has been inferred from their conduct. • Informal contract—A contract that is not formal. Valid informal contracts are fully enforceable and may be sued upon if breached. • Legally enforceable contract—If one party fails to perform as promised, the other party can use the court system to enforce the contract and recover damages or other remedy. • Objective theory of contracts—A theory that says the intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties. • Offeree—The party to whom an offer to enter into a contract is made.
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8 • Offeror—The party who makes an offer to enter into a contract. • Quasi- or implied-in-law contract—An equitable doctrine whereby a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed. The doctrine is intended to prevent unjust enrichment and unjust detriment. • Restatement of the Law of Contracts—A compilation of model contract law principles drafted by legal scholars. The Restatement is not law. • Unenforceable contract—A contract where the essential elements to create a valid contract are met, but there is some legal defense to the enforcement of the contract. • Uniform Commercial Code—Comprehensive statutory scheme that includes laws that cover most aspects of commercial transactions. • Unilateral contract—A contract in which the offeror’s offer can be accepted only by the performance of an act by the offeree: a “promise for an act.” • Valid contract—A contract that meets all of the essential elements to establish a contract: a contract that is enforceable by at least one of the parties. • Void contract—A contract that has no legal effect: a nullity. • Voidable contract—A contract where one or both parties have the option to avoid their contractual obligations. If a contract is avoided, both parties are released from their contractual obligations. X. Sample Answer to Portfolio Exercise OWNERSHIP AGREEMENT This Agreement entered into this __________ day of __________, 20 ___, between the undersigned parties, Emma Smith residing at 1234 Bancroft Street, Toledo, Ohio 43606, Grace Smith residing at 5678 Bancroft Street, Toledo, Ohio 43606 and Jack Smith of 4321 Bancroft Street, Toledo, Ohio 43606, all hereinafter collectively referred to as “Owners”. WITNESSETH: WHEREAS, Owners wish to form an Ohio corporation to engage in the manufacturing and sale of ice cream to individuals and businesses, and WHEREAS, Owners wish to have an equal ownership in such business to be named All You Can Eat Ice Cream Buffet, Inc. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, it is mutually covenanted and agreed between the parties as follows: Witnesses: ____________________________ ____________________________ Emma Smith Grace Smith ____________________________ Jack Smith
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9 Chapter 2 Agreement “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean – neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master – that’s all.” Lewis Carroll I. Teacher-to-Teacher Dialogue The concept of mutual assent can sometimes be a rather nebulous ideal for students who want their knowledge handed to them in some sort of lock-step manner. We try to accommodate students by starting with the elements of contract and how these various subcomponents are formulated in the contracting process. The first element of contract is finding mutual assent between the contracting parties. Mutual assent is defined as a reciprocal agreement based on a meeting of minds of all of the parties to a contract. The steps leading to mutual assent start with the offer and acceptance process. These steps can be broken down into subparts, and a familiarization of those subparts is essential to the study of contract law. The offer is broken down into three main subcomponents: intent, certainty, and communication. As an alternate memorization device, students may consider using an anagram called the QQC test. The first Q represents quality of the offer. In the eyes of the offeree, does this offer sincerely represent an objective intent to be bound? The second Q stands for quantity of the offer. If necessary, can a court, looking at this offer, find a basis upon which it could be measured, i.e., is the quantity of the offer readily determinable? The C represents communication. The offer must be communicated to the offeree in order to be effective. Once a good offer is made, the other player must make his or her opening response. Remember, that response is dictated in many ways by the terms of the offer. Under the traditional common law mirror image rule, the acceptance must reflect the terms of offer. If it fails to do so, it may be deemed to be a rejection of the offer. And if it brings new terms to the table, it may be deemed a counteroffer. A counteroffer is, in fact, a new offer and sets the whole cycle of play into motion again from the reverse angle. The original offeror is now the new offeree. Once we have a good offer, coupled with a good acceptance, the first element of contract, agreement or mutual assent, is arrived at. There are many variations on this basic theme as illustrated by the common law rules on advertising, auctions, and implied contracts based on the actions of the parties. They all have one common denominator: Sooner or later some sort of basis for mutual assent must be found before a court will go forward with enforcement of the agreement. II. Chapter Objectives • Define offer and acceptance. • Identify the terms that can be implied in a contract. • Understand special offers like auctions and advertisements.
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10 • Define counteroffer and describe the effects of counteroffers. • Describe how offers are terminated. • Describe auctions. • Understand how an offer can be accepted, including acceptance by silence. III. Key Question Checklist • Who has the power to make an offer? • If a statement or promise is made, does it constitute a good offer, using the elements of the QQC test (quality, quantity, communication)? • If the offeree wants to accept the offer, what moves should he or she make? • Is the proposed acceptance valid? IV. Text Materials Section 1: Agreement Agreement is created when an offeror’s offer is accepted by the offeree. Case 2.1: Marder v. Lopez , 450 F.3d 445 (9th Cir. 2006). Facts: Paramount Pictures Corporation used information from Maureen Marder, a nightbclub dancer, to create the screenplay for the movie Flashdance . Paramount paid Marder $2,300 and Marder signed a General Release releasing Paramount from numerous claims relating to the movie. Paramount released the movie Flashdance , which grossed over $150 million in domestic box office and is still shown on television and distributed through DVD rentals. Subsequently, Sony Music Entertainment paid Paramount for release of copyright and produced a music video for the Jennifer Lopez song “I’m Glad.” The video featured Lopez’s performance as a dancer and singer. Marder believed that the video contained recreations of many well-known scenes from Flashdance . Marder brought a lawsuit in U.S. district court against Paramount, Sony, and Lopez. Marder sought a declaration that she had rights as a co-author of Flashdance and a co- owner with Paramount of the copyright to Flashdance . She sued Sony and Lopez for allegedly violating her copyright in Flashdance . The district court dismissed Marder’s claims against Paramount, Sony, and Lopez. Marder appealed. Issue: Was the General Release signed by Marder an enforceable contract? Decision: Yes. Reasoning: The Release’s language was exceptionally broad and the court found that it was fatal to each of Marder’s claims against Paramount. The Release of “each and every claim” covers all claims within the scope of the language. Accordingly, the law imputed to Marder an intention corresponding to the reasonable meaning of her words and acts. Here, Marder released a broad array of claims relating to any assistance she provided during the creation of a Hollywood movie. Thus, the court found that the only reasonable interpretation of the Release was that it encompassed the various copyright claims she asserted in the lawsuit. The court acknowledged that agreement appeared to be unfair to Marder—she only received $2,300 in exchange for a release of all claims relating to a movie that grossed
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11 over $150 million —however, the court found there was simply no evidence that her consent was obtained by fraud, deception, misrepresentation, duress, or undue influence. Section 2: Offer There are three elements for an offer to be effective: the offeror must have intended to have been bound by the offer, the terms must be reasonably certain, and the offer must have been communicated to the offeree. Objective Intent —The objective theory of contracts asks the question of whether a reasonable person would conclude that the contracting parties intended to be bound by the terms of their agreement. Definiteness of Terms —The terms of a contract must be clear and unambiguous, including the names of the parties, the subject matter and quantity, the consideration, and the time of performance. Implied Terms —Under common law, if an essential term was omitted from the contract, the courts held that no contract had been made. Under the Restatement , the terms need only be “reasonably certain.” The court can imply missing terms. A Contract is a Contract is a Contract —The designer of the Mighty Morphin Power Rangers was paid only $250 to transfer his copyright ownership in the logo. He subsequently sued and lost because he was bound by the agreement he signed. The moral? Be careful not to sign your rights away. Communication —An offer must be communicated to the offeree before it can be accepted. Section 3: Special Offers Advertisements —These are treated as invitations to make an offer, unless they are so definite as to make it apparent that the advertiser had a present intent to bind themselves by the advertisement. Case 2.2: Mesaros v. United States , 845 F.2d 1576 (Fed. Cir. 1988). Facts: The Mesaroses received an advertisement from the U.S Mint for certain limited edition coins. They responded to the advertisement by placing an order for certain coins by the deadline stated in the advertisement. The demand for a certain gold coin exceeded the limited supply, and the Mint notified them that they were unable to fill their order. The coin greatly increased in value, and the Mesaroses sued for breach of contract. The lower court decided for the Mint, and the Mesaroses appealed. Issue: Was the advertisement an offer? Decision: The advertisement was a solicitation of an offer, not an offer. Reasoning: Generally advertisements are not offers. The test is whether a reasonable offeree would reasonably believe the advertisement was an offer or a solicitation. The wording of the advertisement was such that a reasonable offeree would not reasonably believe it was an offer. Therefore, the decision of the lower court was affirmed. Rewards —An offer to pay a reward is treated as a unilateral contract. In order to be able to collect the reward, the offeree must have knowledge of the offer and have performed the requested act. Auctions —Sellers can offer goods for sale through an auctioneer. These auctions with reserve are usually considered as an invitation to make an offer. The seller may refuse the highest bid and withdraw the goods, and the bidder may withdraw their bid at any time prior to when the
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12 gavel is brought down by the auctioneer. If the highest bid does not meet the minimum set, the seller does not have to sell the item. If the auction is announced as an auction without reserve, the seller is considered the offeror and the bidders, the offeree. The seller must accept the highest bid. Case 2.3: Lim v. The.TV Corp. Int’l , 121 Cal. Rptr. 2d 323 (Ct. App. 2002). Facts: The dotTV Corporation, acting as an agent for the island of Tuvalu, offered the domain name golf.tv for auction on its Web site. It was bought by Lim for just over a thousand dollars, and he was sent an e-mail confirmation and instructions. A little later, he received a release from bid, and was instructed to disregard the earlier communication. The dotTV Corporation then offered the same domain name at an opening bid of $1 million. dotTV claimed that its original communication with Lim was regarding a domain named - -golf.TV, but Lim argued that dashes are not recognized on the Internet. Lim sued for breach of contract, but the trial court dismissed the case. Issue: Did Lim state a cause of action for breach of contract against dotTV? Decision: Yes. Reasoning: The court determined that the announcement was an invitation to offer and that Lim’s bid was an offer that was accepted by the confirmation e-mail. The Court of Appeals held that Lim had properly pled a cause of action and reinstated the case. Section 4: Termination of Offers Revocation of an Offer by the Offeror—An offer may be revoked at any time prior to its acceptance by the offeree by an express statement or an act that is inconsistent with the offer. The revocation is generally not effective until it has been received by the offeree or their agent. Rejection of an Offer by the Offeree —An offer is terminated if the offeree rejects it, even against subsequent acceptances by the offeree. Counteroffer by the Offeree —Counteroffers simultaneously terminate an offeror’s offer and create a new offer. Destruction of the Subject Matter —An offer terminates if the subject of the offer is destroyed prior to the acceptance by the offeree . Death or Incompetency of the Offeror or Offeree —Because capacity is a requirement for a valid contract, death or incompetency will terminate an offer. Supervening Illegality —Offers terminate if the object of an offer is made illegal prior to the offer’s acceptance. Lapse of Time —Offers expire. If a specific date is given, they expire on that date; if the offer is for a certain number of days, the days start to run when the offer is received. If no time is stated, then it is for a “reasonable time” period. Option Contracts —An offeree can prevent the offeror from revoking his or her offer by paying the offeror compensation to keep the offer. Case 2.4: Ehlen v . Melvin 823 N.W.2d 780, 2012 N.D. Lexis 252 (2012). Facts: Paul Ehlen signed a document titled “Purchase Agreement” (Agreement) offering to purchase real estate owned by John M. and LynnDee Melvin (the Melvins) for $850,000, with closing to be within 12 days. Two days after the offer was made by Ehlen, the Melvins modified the terms of the Agreement by correcting the spelling of LynnDee Melvin’s name and the description of the property, adding that the property was to be sold “as is,” that the mineral rights conveyed by the Melvins were limited to the rights
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13 that they owned, and that the property was subject to a federal wetland easement and an agricultural lease. The Melvins handwrote the changes on the Agreement, initialed each change, signed the Agreement, and returned it to Ehlen. When the Melvins had not heard from Ehlen on the date of the proposed closing, they notified Ehlen that the transaction was terminated. Ehlen sued the Melvins to enforce the Purchase Agreement as modified by them, alleging that there was a binding and enforceable contract. The trial court held that the Melvins had made a counteroffer that had not been accepted by Ehlen, and therefore there was no contract. Ehlen appealed. Issue: Was a counteroffer made by the Melvins that Ehlen accepted? Decision: The supreme court of North Dakota held that no agreement existed between Ehlen and the Melvins. Reasoning: The parties’ mutual assent is determined by their objective manifestations, not their secret intentions. The supreme court of North Dakota concluded that the evidence supports a finding that the parties did not agree to the essential terms of the agreement and the Melvins’ modifications to the agreement constituted a counteroffer. Ehlen did not sign the modified agreement or initial the changes. The evidence further supports the finding that Ehlen did not accept the Melvins’ counteroffer. Section 5: Acceptance The offeree’s assent to the terms of the offer is considered an acceptance. Who Can Accept an Offer? —Only the offeree can accept an offer and form a legally binding contract. Unequivocal Acceptance —The mirror image rule establishes that the offeree must accept the terms as stated in the offer. Case 2.5: Montgomery v. English, 902 So. 2d 836 (Fla. Dist. Ct. App. 2005). Facts: Norma English made an offer to purchase a house from Michael and Lourie Montgomery. English included in her offer a request to purchase several items of Montgomerys’ personal property. After the Montgomerys received English’s offer, they made several changes to the document, including (1) deleting certain items from the personal property section of the offer, (2) deleting a provision regarding latent defects, (3) deleting a provision regarding building inspections, and (4) adding a specific “AS IS” rider. The Montogomerys signed the counteroffer and delivered it to English. English initialed some, but not all, of the Montgomerys’s changes. When the Montgomerys refused to sell the house to English, English sued for specific performance of the contract. The trial court held in favor of English and ordered specific performance. The Montgomerys appealed. Issue: Was an enforceable contract made between English and the Montgomerys? Decision: The court of appeals held that no contract had been created between the parties. The court of appeals reversed the trial court’s order of specific performance and remanded the case to the trial court with instructions to enter summary judgment in favor of the Montgomerys. Reasoning: The Montgomerys argued that the trial court erred in denying their motion for summary judgment because the record demonstrated that there had been no meeting of the minds between the parties as to the essential terms of the contract. The court of appeals agreed. Florida employs the “mirror image rule” with respect to contracts. Under this rule, in order for a contract to be formed, an acceptance of an offer must be
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14 absolute, unconditional, and identical with the terms of the offer. Applying the mirror image rule to these undisputed facts the court held that, as a matter of law, the parties failed to reach an agreement on the terms of the contract and, therefore, no enforceable contract was created. Silence as Acceptance —Silence is not an acceptance unless the offeree has indicated that silence means assent, they have signed an agreement indicating acceptance of delivery as in the case of book-of-the-month club, there were prior dealings between the parties indicating that silence means acceptance, or if the offeree takes the benefit of the goods knowing that the offeror expects to be compensated. Time and Mode of Acceptance —Under common law, acceptance occurs when the offeree has been properly dispatched the acceptance. This is called the mailbox rule. The acceptance may have to be by express authorization, which means that it is made by a specified means of communications. If there are no specified terms, then implied authorization will be inferred from the customary methods for that type of transactions. Case 2.6: Soldau v. Organon, Inc., 860 F.2d 355 (1988). Facts: John Soldau was discharged by his employer, Organon, Inc. (Organon). He received a letter from Organon offering to pay him double the normal severance pay in exchange for a release by Soldau of all claims against Organon regarding the discharge. Soldau signed and dated the release and deposited it in a mailbox outside a post office. When he returned home, he had received a check from Organon for the increased severance pay. Soldau returned to the post office, persuaded a postal employee to open the mailbox, and retrieved the release. He cashed the severance paycheck and brought this action against Organon, alleging a violation of the federal Age Discrimination in Employment Act. The district court granted summary judgment for Organon. Soldau appealed. Issue: Did Soldau accept the release contract? Decision: Yes. The court of appeals applied the “mailbox rule” and found that the acceptance was effective when Soldau first deposited it in the mailbox outside the post office. His later retrieval of the release did not undo his acceptance. Reasoning: Under federal as well as California law, Soldau’s acceptance was effective when it was mailed. The so-called “mailbox” or “effective when mailed” rule was adopted and followed as federal common law by the Supreme Court prior to Erie R.R. Co. v. Tomkins, 304 U.S. 64 (1938). It is almost universally accepted in the common law world. It is enshrined in the Restatement (Second) of Contracts, Section 63(a), and endorsed by the major contract treatises. Commentators are also virtually unanimous in approving the “effective when mailed” rule, pointing to the long history of the rule; its importance in creating certainty for contracting parties; and its essential soundness, on balance, as a means of allocating the risk during the period between the making of the offer and the communication of the acceptance or rejection to the offeror. Case 2.7: Ellefson v. Megadeth, Inc., No. 04 Civ. 5395 (NRB), 2005 U.S. Dist. LEXIS 545, at *1 (S.D.N.Y. Jan. 12, 2005). Facts: Appellants David Mustaine and David Ellefson were original members of the heavy metal rock band Megadeth. In 1990, the parties formed a corporation, Megadeth, Inc., with Mustaine owning 80 percent of the corporation and Ellefson 20 percent. Approximately 13 years later, Ellefson sued Mustaine and Megadeth, Inc., alleging that the defendants (collectively Mustaine) had defrauded Ellefson out of his share of the
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15 corporation’s profits. In October 2003, Ellefson and Mustaine entered into negotiations to settle the case. Both parties were represented by attorneys. Mustaine sent a proposed Settlement and General Release to Ellefson whereby Mustaine would purchase Ellefson’s interest in the corporation and various licensing and recording agreements. The settlement offer was received by Ellefson on April 16, 2004. Negotiations over the proposed settlement continued uneventfully for the next four weeks. Mustaine imposed a 5 o’clock deadline on Friday, May 14, 2004, for completion of the settlement. On May 13, Mustaine e-mailed Ellefson that the offer to Ellefson terminated as of 5 PM PST on Friday, May 14. The following day, Friday, May 15, the attoprneys for both sides traded e-mails proposing changes to the offer. At 4:45 PM, minutes prior to the expiration of Mustaine’s offer, Mustaine e-mailed Ellefson an execution copy (read only) copy of the settlement agreement, reiterated the 5 o’clock deadline, and stated that he reserved the right to make further changes to Exhibits A and B the following week. Ellefson signed a copy of the settlement agreement and faxed the signature page to Mustaine. Mustaine alleges that Ellefson’s faxed signature page was received before the 5 o’clock deadline. Ellefson alleges that his fax was not sent by the 5 o’clock deadline. On Thursday, May 20, 2004, Mustaine sent Ellefson fully-executed copies of the settlement agreement by regular mail. On May 24, Ellefson e-mailed Mustaine that he was withdrawing from the negotiations and was withdrawing all proposals. Mustaine responded that there was a signed Settlement Agreement in place which Ellefson had faxed on May 15, 2004. On June 2, 2004, Ellefson received the finalized Settlement Agreement that had been sent by Mustaine by regular mail on May 20, 2004. Mustaine argued that there was an enforceable Settlement Agreement between the parties. Ellefson argued that there was not an enforceable Settlement Agreement between the parties. Issue: Was there an enforceable settlement agreement reached between the parties? Decision: Yes. Reasoning: The issue is whether the exchange between Ellefson and Mustaine fulfilled the requirements of offer and acceptance. Contracts are often formed after receipt of a defective acceptance. This is because an acceptance that does not unequivocally comply with the terms of original offer is considered a counteroffer. Any new terms or modified terms in the defective acceptance are treated as new terms of the counteroffer, which the original offeror may then choose to accept or reject. A late acceptance is a form of defective acceptance, and therefore is considered a counteroffer which the original offeror can decide to either accept or reject. Therefore, in order for a contract to exist after receipt of a late acceptance, the original offeror must accept the offeree’s counteroffer. Mustaine’s last offer to Ellefson stated that Mustaine reserved the right to make “further changes pending our finalizing Exhibits A and B and the full execution of the agreement early next week.” Ellefson’s counteroffer signaled his willingness to comply with these terms, including completion by the Mustaine the following week. Therefore, the court found that Mustaine’s mailing of the fully-executed contract the following Thursday was consistent with these terms, and reasonable under the circumstances. The
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16 court found that an enforceable contract was formed on May 20, 2004, prior to Ellefson’s attempted withdrawal. V. Case Scenario Revisted This Case Scenario is based on case of Lucy v. Zehmer , 84 S.E.2d 516 (Va. 1954). The court would likely find this contract enforceable. Intent to contract is judged by whether a reasonable person would conclude that the parties intended to create a contract after considering the words and conduct of the parties as well as the circumstances surrounding the agreement. The undisclosed intention of a party is immaterial. In Lucy v. Zehmer, the court held that where the contract was under discussion for at least forty minutes and appeared to be complete, there could be no intent other than to enter into a binding contract. The court found that it was irrelevant that the Zehmers were secretly not serious in transaction. VI. Sample Answer to Hands-On Drafting Exercise 1. Non-Disclosure. As part of the inducement of this Agreement, the Parties agree that all of the information produced by them, including but not limited to the existence and/or content of this Agreement, is confidential and shall not be disclosed by them to any other individual, entity, or party, except that the Parties may disclose any and all evidence in their possession as they are commanded to do so by court order. 2. Mode of Communication. All notices, demands, requests, and other communications under this Agreement shall be in writing and shall be deemed properly served or delivered if delivered by hand to the party to whose attention it is directed, or when sent, three (3) days after deposit in the U.S. mail, postage prepaid, certified mail, return receipt requested, or one (1) day after deposit with a nationally recognized air carrier providing next day delivery, or if sent via facsimile transmission, when received, addressed as follows: (a) If to: ______________ _______________________ _______________________ (b) If to: ______________ _______________________ _______________________ 3. Non-Competition. Employee agrees that Employee shall not, either as an individual or a corporation, or in any other business form, directly or indirectly, enter into competition with Employer or engage in the same or similar type of business, whether as principal, agent, employee, or straw party within a radius of 2 miles from the address of the Employer’s business for a period of one (1) year from the date of this Contract. VII. Answers to Critical Legal Thinking Cases Case 2.1. Terms of Contract. Hunt v. McIlory Bank & Trust , 616 S.W.2d 759 (Ark. Ct. App. 1981). No, there was not an oral contract for long-term financing. In order to make a contract, there must be a meeting of the minds as to all terms. A court cannot make a contract for the parties. The court found that the total amount of loan proceeds was never decided and that no interest rate or repayment terms were ever agreed upon. There was apparently some discussion as to
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17 long-term financing; however, the parties never agreed on any essential terms. Such terms were left to future determination. In addition, the court stated that there was no way that it could take the general terms discussed between Hunt and the bank and be asked to enforce the contract without supplying the necessary terms essential to the formation of the contract. Accordingly, the trial court’s judgment in favor of the Bank was affirmed. Case 2.2. Implied Terms. Edmond’s of Fresno v. MacDonald Group, Ltd. , 217 Cal. Rptr. 375 (Ct. App. 1985). Edmond’s of Fresno will be successful in limiting the mall, and any subsequent expansion, to not more than two jewelry stores. Under the modern view of contracts, if a contract term is missing and a reasonable term can be implied, the court can supply the missing term. The contract must be interpreted so as to give effect to the mutual intention of the parties at the time of contracting. Furthermore, when the contract is reduced to writing, the intention of the parties should be ascertained from the writing alone, viewing the contract as a whole, and not upon any clause standing alone. The lease at issue here was silent as to any subsequent expansions of the mall. The court held that the lease impliedly incorporated any future development within the designation “Fresno Fashion Fair.” Had MacDonald intended to exclude any future development, it could have explicitly done so in the lease. Moreover, the court applied the rule that in construing a lease any uncertainties will be resolved strictly against the party who drafted the document. Accordingly, the Appellate Court affirmed the lower court’s holding that the restrictive covenant applies to all of the Fresno Fashion Fair, including any subsequent expansions. Counteroffer Case 2.3. Counteroffer. Glende Motor Co. v. Superior Court , 205 Cal. Rptr. 682 (Ct. App. 1984). No, there has not been a settlement of the lawsuit. A valid acceptance of an offer must be absolute and unqualified. A qualified acceptance that contains terms or conditions materially different from those in the original offer constitutes a counteroffer that terminates the power of the original offeree to accept the offer. In the instant case, the court held that the process of settlement is best served by allowing the law of contracts to control. Thus, the court held that the tenant’s qualified acceptance of the settlement offer, conditioned upon the execution of a new lease, constituted a counteroffer that terminated its ability to accept the settlement offer. The trial court’s denial of the tenant’s motion to compel entry of judgment due to the existence of the settlement was therefore affirmed. Acceptance Case 2.4. Acceptance. J.C. Durick Ins. v. Andrus , 424 A.2d 249 (Vt. 1980). Andrus wins and does not have to pay the premiums on the insurance policy. To constitute a contract there must be a meeting of the minds between the parties, an offer by one, and an acceptance by the other. Generally, silence is not considered acceptance even if the offeror states that it is. The offeror cannot force the offeree to speak or be bound by his silence. The court found that the prior policy was a separate and independent agreement that came to an end by its own terms. It contained no automatic renewal clause and failed to bind the parties in any way
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18 after the expiration of the original policy. None of the communications amounted to an acceptance. In addition, the court held that silence could be considered acceptance where the prior dealings between the parties so indicate or where the recipient retained the benefit of valuable services. The court, however, found that the past dealings of the parties established no course of conduct between the parties and that since the second policy was never in effect, Andrus never retained any benefit. The trial court’s judgment in favor of Durick was therefore reversed. Mailbox Rule Case 2.5. Mailbox Rule. Jenkins v. Tuneup Masters , 235 Cal. Rptr. 214 (Ct. App. 1987). Yes, the notice exercising the option to renew the lease was effective, thereby extending the lease for the next five years. Acceptance of a bilateral contract occurs at the time the offeree dispatches the acceptance by an authorized means of communication. Under this rule, the acceptance is effective when it is dispatched, even if it is lost in transmission. The court found that the lease notice provision required notice to be sent by “registered or certified United States mail.” The court went on to state that the risk of loss of the notice of extension had transferred to the addressee once the notice reached the custody of the U.S. Postal Service, notwithstanding that the notice was not deposited in an officially designated receptacle. In addition, the court held that the tenant’s habit and custom regarding mailing practices was sufficient to affirm the trial court’s holding that the tenant’s renewal notice had been properly mailed under the terms of the lease. Accordingly, in the landlord’s unlawful detainer action, the trial court correctly rendered judgment in favor of the tenant, thereby extending the lease for the next five years. VIII. Answers to Issues in Ethics Cases Case 2.1. Cerdes v. Wright , 408 So. 2d 926 (La. App. 1981). Cerdes will be given a “reasonable time” to complete the house. Where a contract is silent as to time for performance, a “reasonable time” is implied. Such time is to be determined by the circumstances of the case. In this case, the trial court concluded that six months was a reasonable period of time for completion of the project. The court then awarded Wright liquidated damages as stipulated in the contract. The Appellate Court affirmed the holding. Case 2.2. James v. Turilli , 473 S.W.2d 757 (Mo. Ct. App. 1971). Stella James wins, and Turilli must pay her the $10,000 reward money. An offer of a reward is a unilateral contract. To be entitled to collect the reward, the offeree must (1) have knowledge of the reward offer prior to completing the requested act and (2) perform the requested act. Only substantial performance is required; literal performance need not be shown. Stella James pleaded that after hearing defendant’s offer she submitted affidavits of persons in and acquainted with the Jesse James family, each stating facts constituting evidence that Jesse James was in fact killed as alleged in song and legend. The court held that the petition sufficiently pleaded that a reward had been offered and that the plaintiff had complied with its terms. The court also held that an affidavit stating appellant’s sister was the widow of Jesse James and that James had been killed and that he had attended the funeral, viewed the body, and knew it was that of Jesse James, was properly admitted. Accordingly, the Court of Appeals affirmed the lower court’s holding of a directed verdict for the plaintiff.
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19 IX. Terms • Acceptance—Occurs when a buyer or lessee takes any of the following actions after a reasonable opportunity to inspect the goods: (1) signifies to the seller or lessor in words or by conduct that the goods are conforming or that the buyer or lessee will take or retain the goods in spite of their nonconformity; or (2) fails to effectively reject the goods within a reasonable time after their delivery or tender by the seller or lessor. Acceptance also occurs if a buyer acts inconsistently with the seller’s ownership rights in the goods. • Agreement—The manifestation by two or more persons of the substance of a contract. • Auction with reserve—Unless expressly stated otherwise, an auction is an auction with reserve, that is, the seller retains the right to refuse the highest bid and withdraw the goods from sale. • Auction without reserve—An auction in which the seller expressly gives up his or her right to withdraw the goods from sale and must accept the highest bid. • Counteroffer—A response by an offeree which contains terms and conditions different from or in addition to those of the offer. A counteroffer terminates an offer. • Express authorization—A stipulation in the offer that says the acceptance must be by a specified means of acceptance. • Implied authorization—Mode of acceptance that is implied from what is customary in similar transactions, usage of trade, or prior dealings between the parties. • Implied term—A term in a contract which can reasonably be supplied by the courts. • Lapse of time—An offer terminates when a stated time period expires if no time is states, an offer terminates after a reasonable time. • Mailbox rule—A rule that states that an acceptance is effective when it is dispatched, even if it is lost in transmission. • Mirror image rule—States that in order for there to be an acceptance, the offeree must accept the terms as stated in the offer. • Objective theory of contracts—A theory that says the intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties. • Offeree—The party to whom an offer to enter into a contract is made. • Offeror—The party who makes an offer to enter into a contract. • Offer—The manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. • Proper dispatch—An acceptance must be properly addressed, packaged, and posted to fall within the mailbox rule. • Rejection—Express words or conduct by the offeree that rejects an offer. Rejection terminates the offer. • Revocation—Withdrawal of an offer by the offeror terminates the offer. • Reward—To collect a reward, the offeree must (1) have knowledge of the reward offer prior to completing the requested act and (2) perform the requested act. • Supervening illegality—The enactment of a statute or regulation or court decision that makes the object of an offer illegal. This terminates the offer.
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20 X. Sample Answer to Portfolio Exercise EMPLOYMENT AGREEMENT This Agreement entered into this __________ day of __________, 20 ___, between All You Can Eat Ice Cream Buffet, Inc. located at 1234 Bancroft Street, Toledo, Ohio 43606 (hereinafter referred to as “Employer”) and Jay Schlags residing at 5678 Bancroft Street, Toledo, Ohio 43606 (hereinafter referred to as “Employee”). WITNESSETH: WHEREAS, Employee has recently been hired as sales associate of Employer in consideration of his agreeing to enter into this Employment Agreement with Employer, and WHEREAS, Employee will of necessity during his employment, become well acquainted with Employer’s customers, sources of supply, other employees, and all other facets of Employer’s business. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, and particularly in consideration of Employer’s employing Employee, and continuing to employ him in the same capacity, it is mutually covenanted and agreed between the parties as follows: 1. Employer employs Employee as sales associate for a period of one (1) year, commencing July 1st, 2019, and ending June 30 th , 2020, unless his employment is sooner terminated by either party. 2. Employee shall devote his entire business time, attention and skill, reasonable vacations and unforeseen illnesses excepted, to developing and increasing the business of Employer in the sale of its products and shall perform his duties to the best of his ability, and in a reasonably efficient and satisfactory manner. 3. Employee for all services to be rendered to Employer, shall be paid so long as he shall be employed a fixed salary of Sixty-Five Thousand Dollars ($65,000.00) per year, payable in equal consecutive semimonthly installments. 4. Non-Disclosure. As part of the inducement of this Agreement, the Parties agree that all of the information produced by Employee, including but not limited to the existence and/or content of this Agreement, is confidential and shall not be disclosed by Employee to any other individual, entity, or party, except that the Parties may disclose any and all evidence in their possession as they are commanded to do so by court order. 5. Employee agrees that Employee shall not, either as an individual or a corporation, or in any other business form, directly or indirectly, enter into competition with Employer or engage in the same or similar type of business, whether as principal, agent, employee, or straw party within a radius of 2 miles from the address of the Employer’s business for a period of one (1) year from the date of this Contract. 6. Employee agrees upon termination of employment by Employer to forthwith surrender all records and data of every nature, kind, and description in his possession, or under his control, prepared by Employer or him during the course of his employment. 7. The validity, construction and enforceability of this agreement shall be determined exclusively by the laws of the State of _____________. 8. This agreement supersedes all prior oral and/or written agreements and understandings between the parties and constitutes the entire contract between them and may not be altered,
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21 amended, or revoked except by written instrument signed by both parties and executed in accordance herewith. 9. If any of the covenants or conditions of this agreement should be found to be unenforceable in a Court of law, then this agreement is severable and all remaining covenants and conditions shall be enforceable by said Court. 10. This Agreement shall inure to and be binding upon the parties hereto, their respective executors, administrators, heirs, successors and assigns. 11. All notices, demands, requests, and other communications under this Agreement shall be in writing and shall be deemed properly served or delivered if delivered by hand to the party to whose attention it is directed, or when sent, three (3) days after deposit in the U.S. mail, postage prepaid, certified mail, return receipt requested, or one (1) day after deposit with a nationally recognized air carrier providing next day delivery, or if sent via facsimile transmission, when received, addressed as follows: (a) If to All You Can Eat Ice Cream Buffet, Inc.: Attention: Emma Smith, President 1234 Bancroft Street Toledo, Ohio 43606 419/123-4567 (facsimile) (b) If to Jay Schlags: 5678 Bancroft Street Toledo, Ohio 43606 419/765-4321 (facsimile) IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Agreement as of the date first written above. EMPLOYER EMPLOYEE All You Can Eat Ice Cream Buffet, Inc., an Ohio corporation By: ____________________________ ____________________________ Its: Jay Schlags
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22 Chapter 3 Consideration and Equity The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed. Justice Cardozo I. Teacher-to-Teacher Dialogue This chapter is focused on the second of the four basic elements of contract—consideration. Of these first two elements, we have found that students have far more difficulty with the concept of consideration. Because this concept can be so frustrating, we spend some time going over the history of this element and try to give as many practical illustrations as possible. Consideration is the second of the four elements of contract. Identifying consideration in a contract sounds easier than it really is. When consideration is missing, the result is not necessarily an absence of contract. Perhaps a historical footnote on the issue may be of value. Consideration is that element of a contract that is designed to show the underlying inducement to enter into the contract. It is meant to place value on the contract in order to assure evidence of a bond between the parties. In the Middle Ages, contracts between members of the privileged classes did not require consideration because a man’s word was his bond. A noble’s family seal evidenced that bond. The seal was affixed to the contract by way of pressing the signatorius annulus (signet ring) against melted wax onto the contract. Not everyone was a member of nobility, but they all wanted their contracts to be binding. Thus the concept of looking to bargained-for value in place of the seal evolved into the modern day law of contracts. Today only a few states will accept seals as a substitute for consideration. Waxed seals have become an anachronism best used for love letters, and the most common modern use of seals is the embossed seal of a notary public, whose job it is to act as a legal witness to the administration of an oath. Consideration today is made up of two subcomponents: detriment and bargain theory. Detriment represents the value of the contract, i.e., the glue that brought the parties to the table in the first place. It is actually a very practical requirement. Without value being put at issue, a court looking at the situation may simply say the matter is moot. Detriment is usually divided into two main categories: affirmative detriment where a person promises to do something he or she has no obligation to do but for the contract and negative detriment where a person abstains from doing something he or she has a legal right to do but for the contract. The second subcomponent of consideration is found in the bargain theory. The bargain theory is designed to isolate and identify the value used as consideration. Consideration bargained for in one contract cannot be used to support another unless it falls into one of the recognized exceptions listed in this chapter. What if you have examined an agreement for consideration and found it lacking? You may still have a contractual result based on either the equitable doctrine of promissory estoppel or on specific statutory grounds that allow for a consideration waiver or substitute. Promissory estoppel literally means that a promise made, even though not supported by consideration, will not be allowed to be withdrawn, because of the harm that would befall the other party. The second major category of consideration exceptions from contracts is found in statutory provisions based on public policy. For example, the U.S. Bankruptcy Code allows for court-approved reaffirmation of debts that have already been discharged. Another example is found in many state statutes that provide protection to eleemosynary (charitable) organizations making pledges as enforceable contracts even though the donors may not be getting any consideration in return for
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23 their gifts. II. Chapter Objectives • Define consideration . • Identify when there is inadequacy of consideration. • Analyze whether contracts are lacking in consideration. • Explain the doctrines of preexisting duty and past consideration. • Apply the doctrine of promissory estoppel. • List and describe special business contracts, including output contracts, requirements contracts, and best-efforts contracts. • Define accord and satisfaction in settling a disputed claim. III. Key Question Checklist • Is consideration present in the contract at hand? Are the elements of consideration met? Bargained for affirmative and/or negative detriment? • Can you arrive at a contractual result by way of a recognized substitute for consideration, e.g., promissory estoppel or a statutory substitute for consideration? IV. Text Materials Section 1: Consideration Consideration is something of value given in exchange for a promise. It may be tangible or intangible. There is a rebuttable presumption that written contracts are supported by consideration. Requirements of Consideration —Consideration requires that something of legal value be given. This includes situations in which the promise suffers a legal detriment or the promisor receives a legal benefit. The consideration must also be a bargained-for exchange, instead of a gratuitous promise. Case 3.1: Ferguson v. Carnes, 125 So.3d 841, 2013 Fla. App. Lexis 5361 (2013). Facts: Thomas Ferguson and Theresa Carnes were brother and sister and the only living children of a wealthy mother. The mother frequently threatened to disinherit both siblings. Ferguson and Carnes entered an oral agreement to afford each other assurance against disinheritance. The oral agreement provided that if one of them were disinherited, they would divide evenly between them whatever property either received from their mother’s estate. The mother died with a will that named Carnes as her sole beneficiary and disinherited Ferguson. When Carnes refused to divide her inheritance with Ferguson, he sued his sister for breach of contract. Carnes alleged that the oral promise was unenforceable because it lacked consideration. The circuit court held that there was no consideration and granted Carnes summary judgment. Ferguson appealed. Issue: Was the oral promise supported by consideration? Decision: The court of appeal held that the oral agreement did not lack consideration, reversed the decision of the circuit court, and remanded the case for further proceedings. Reason: A promise, no matter how slight, can constitute sufficient consideration so long as a party agrees to do something that they are not bound to do. The oral agreement between Ferguson and Carnes did not lack consideration. Essentially, the terms of the
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24 oral agreement delineated mutual promises. The consideration lies in the fact that each gave up the possibility of inheriting more than the other in return for insuring that neither would be disinherited in whole or part. Case 3.2: Alden v. Presley , 637 S.W.2d 862 (Tenn. 1982). Facts: Elvis Presley was engaged to Cindy Alden. He bestowed numerous gifts on the Alden family, and when Cindy’s mother sought a divorce, Presley promised to pay off the mortgage loan on the Alden home, which Mrs. Alden was to receive in the divorce settlement. Presley died before fulfilling his promises. Alden sued to enforce the promise. The trial court decided for Presley, which affirmed on appeal. Alden further appealed the decision. Issue: Is Presley’s promise enforceable? Decision: No. Reason: Presley made a promise of a gift because his promise was not supported by consideration. There was neither actual nor constructive delivery of the gift. Therefore, the gift was incomplete, and the promise is unenforceable. Case 3.3: Cooper v. Smith , 800 N.E.2d 372 (Ohio Ct. App. 2003). Facts: Cooper was hospitalized as a result of serious injuries. Smith, who was married at the time, visited him frequently at the hospital and the two became involved in a romantic relationship, culminating in a proposal of marriage from Cooper and a divorce for the Smiths. Upon his release from the hospital, Cooper moved in with Smith and her mother. He bought gifts for Smith, paid off her auto, and made improvements to the house. When the money ran out, Smith and Cooper were still not married. They had a disagreement and Cooper moved out; Smith returned the engagement ring. Cooper sued to recover the value of all the gifts and improvements. Issue: Can Cooper recover the gifts or the value of the gifts? Decision: No. Reasoning: The Court held that these were irrevocable gifts, with the exception of the returned engagement ring, and he could not recover their value simply because his ardors had cooled. When Is Consideration Inadequate? - A Rubens was sold to someone for $10 and the court overturned the sale. The court found that both parties were aware of the value of the painting, and that the exchange was made to prevent the seller’s wife, who he was divorcing, from achieving any financial benefit from the sale. Generally courts do not inquire into the adequacy of consideration unless it “shocks the conscience of the court.” Section 2: Contracts Lacking Consideration Illegal Consideration— Contracts cannot be supported by a promise to perform or refrain from doing an illegal act. These contracts are void. Illusory Promises— If one or more parties to a contract can opt not to perform their obligations, the contract lacks consideration, and is considered illusory contracts. Moral Obligations— Promises made due to moral obligations are generally not enforceable as moral consideration is not a legal consideration.
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25 Preexisting Duty— If the person that promises to perform an act was already under a duty to perform it, the promise lacks consideration. Past Consideration— Promises for prior actions are not supportable as consideration. Case 3.4: In re Wirth , 789 N.Y.S.2d 69 (App. Div. 2005). Facts: Wirth signed a Pledge Agreement that stated that in consideration of his interest in education, and “intending to be legally bound,” he irrevocably pledged and promised to pay Drexel University the sum of $150,000. The Pledge Agreement provided that an endowed scholarship would be created in Wirth’s name. Wirth died two months after signing the pledge, but before any money had been paid to Drexel. When the estate of Wirth refused to honor the pledge, Drexel sued the estate to collect the $150,000. The estate alleged that the pledge was unenforceable because of lack of consideration. The surrogate court denied Drexel’s motion for summary judgment and dismissed Drexel’s claim against the estate. Drexel appealed. Issue: Was the Pledge Agreement supported by consideration and therefore enforceable against the estate of Wirth? Decision: Yes. Reasoning: The Pledge Agreement, executed by representatives of Drexel, provided that the pledged sum “shall be used by” Drexel to create an endowed scholarship fund in the decedent’s name. The Pledge Agreement further stated: “I acknowledge that Drexel’s promise to use the amount pledged by me shall constitute full and adequate consideration for this pledge.” In the court’s view, pursuant to the terms of the Pledge Agreement, Drexel provided sufficient consideration by expressly accepting the terms of the Pledge Agreement and by promising to establish the scholarship fund in the decedent’s name. The fact that the decedent died before the initial gift was transferred into a special account set up by Drexel and therefore the scholarship fund was not yet implemented, did not negate the sufficiency of the promise as consideration to set up the fund. Special Business Contracts— The courts have tolerated a greater degree of uncertainty in business output, requirements, and best-efforts contracts. Section 3: Settlement of Claims The compromise agreement used to voluntarily settle disputed contracts is called an accord. If the accord is performed, it is called a satisfaction. The settlement is called an accord and satisfaction or a compromise. Section 4: Equity Equity is resorted to when monetary damages are not sufficient or are not a proper remedy. Equity Saves Contracting Party— This explores a situation in which the court applied equitable remedies to protect the interests of lessees. The United Nations Convention on Contracts for the International Sale of Goods— The CISG applies to contracts for the international sales of goods. The buyer and seller must have their places of business in different countries. The United States, as well as many other countries, has ratified the CISG.
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26 Section 4: Promissory Estoppel The doctrine of detrimental reliance protects people from the injustice of the promisor revoking their promise. This doctrine, also called promissory estoppel, requires that a promisor make a promise that they should have reasonably expected the promisee to rely upon. The promise must have relied upon that promise and would suffer an injustice if the promise was not enforced. V. Case Scenario Revisited Case This Case Scenario is based on case of Penley v. Penley , 332 S.E.2d 51 (N.C. 1985). Consideration existed in Jan and Dean’s agreement. To be enforceable, a contract must be supported by consideration. Consideration is broadly defined as something of legal value, including money, property, the provision of services, or the forbearance of a right. Under the modern law of contracts, a contract is supported by consideration if either (1) the promisee suffers a legal detriment, or (2) the promisor receives a legal benefit. In the Penley , the husband and wife mutually agreed to accept division of the shares and to continue to operate a KFC franchise as before. This was followed by the transfer of jointly owned property to a newly formed corporation. The court held that this constituted adequate consideration to support a promise on the part of each of the parties to split the shares in the incorporated business between them. The wife suffered a legal detriment by giving up half of the shares of the company, while the husband suffered a legal detriment when he closed his tire business to run the KFC. Generally, there is a presumption that, absent a contract or special agreement to the contrary, services rendered by one spouse in the other’s business are gratuitously performed. In Penley, the wife argued, and the lower court found, that the husband’s interest in the franchise evolved from his status as a husband. In reversing the lower court’s holding, the Supreme Court of North Carolina determined that there was sufficient evidence to find a contract or special agreement to the contrary and that such contract or agreement was supported by adequate consideration. VI. Sample Answer to Hands-On Drafting Exercise COMPROMISE AGREEMENT This Agreement entered into this __________ day of __________, 20 ___, between All You Can Eat Ice Cream Buffet, Inc. located at 1234 Bancroft Street, Toledo, Ohio 43606 and ____________ located at ______________. WITNESSETH: WHEREAS, a dispute has arisen between All You Can Eat Ice Cream Buffet, Inc. and --------- concerning the non-payment of an invoice dated July 1, 2019 in the amount of Five Thousand Dollars (hereinafter “Invoice”), and WHEREAS, the parties desire to settle their dispute rather than engage in litigation. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, it is mutually covenanted and agreed between the parties as follows: 1. ___________ shall, on or before August 1, 2019, pay by certified check to the order of All You Can Eat Ice Cream Buffet, Inc. the sum of Three Thousand Five Hundred Dollars
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27 ($3,500.00) in full satisfaction of the Invoice. Said check shall be mailed to the attention of Emma Smith, President at 1234 Bancroft Street Toledo, Ohio 43606. 2. Non-Disclosure. As part of the inducement of this Agreement, the Parties agree that all of the terms of their settlement is confidential and shall not be disclosed to any other individual, entity, or party without a court order to do so. 3. The validity, construction and enforceability of this agreement shall be determined exclusively by the laws of the State of Ohio. 4. This agreement supersedes all prior oral and/or written agreements and understandings between the parties and constitutes the entire contract between them and may not be altered, amended, or revoked except by written instrument signed by both parties and executed in accordance herewith. 5. If any of the covenants or conditions of this agreement should be found to be unenforceable in a Court of law, then this agreement is severable and all remaining covenants and conditions shall be enforceable by said Court. 6. This Agreement shall inure to and be binding upon the parties hereto, their respective executors, administrators, heirs, successors and assigns. IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Agreement as of the date first written above. All You Can Eat Ice Cream Buffet, Inc., __________________ an Ohio corporation By: ____________________________ By:___________________________ Its: Its: VII. Answers to Critical Legal Thinking Cases Case 3.1: Forbearance to Sue. Frasier v. Carter , 432 P.2d 32 (Idaho 1968). Lena wins because the contract was supported by valid consideration. Waiver of, or forbearance to exercise, a right that is not utterly groundless is sufficient consideration to support a contract made in reliance thereon. In this case, the court found that Carter’s promise to pay was supported by Lena’s forbearance from prosecuting an action against him for his interest in her husband’s estate. The Idaho Supreme Court affirmed the District Court’s judgment awarding Lena $19,358.62 plus interest at a rate of 6 percent. Case 3.2: Past Consideration. Whitmire v. Watkins , 267 S.E.2d 6 (Ga. 1980). No, A.J. Whitmire does not receive the property. Generally, past consideration will not support a subsequent promise. In the case at bar, A.J. had performed the services that he argues constituted his consideration from the period between 1923 until 1944. The Supreme Court of Georgia held that where the only consideration for the 1944 promise was past consideration, there was no enforceable contract requiring transfer of the property. The directed verdict in favor of the defendant and denying specific performance was affirmed.
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28 Case 3.3: Preexisting Duty. Robert Chuckrow Constr. Co. v. Gough , 159 S.E.2d 469 (Ga. Ct. App. 1968). No, Gough cannot recover the cost to reerect the thirty-two fallen trusses. An agreement on the part of one to do what he is already legally bound to do is not sufficient consideration for the promise of another. In this case, Gough assumed no obligation or duty that he was not bound to perform under the terms of the original contract. Under both agreements Gough agreed to erect and properly place the same number of trusses. Accordingly, Gough is not entitled to any sum not contemplated by the original contract. Case 3.4: Promissory Estoppel. Aronowicz v. Nalley’s, Inc. , 106 Cal. Rptr. 424 (Ct. App. 1972). Yes, plaintiffs win. Pursuant to Section 90 of the Restatement of Contracts, a promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. Reliance is the substitute for a bargained for consideration. This doctrine relates only to action or forbearance on the part of a promisee. Nalley’s argues that the two individuals were only incidental beneficiaries of the contract with Major and thus have no cause of action other than that of a donee or creditor third party beneficiary. Recognizing that the “morals of the marketplace” periodically change and that today stricter standards of good faith and fair dealings are imposed, the authors of the Restatement have proposed the following modification of Section 90: “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” If a promise is made to one party for the benefit of another, it is often foreseeable that the beneficiary will rely on the promise. Enforcement of the promise in such cases rests on the same basis and depends on the same factors as in the cases of reliance by the promisee. In this case, the defendant knew that the individual plaintiffs were leaving their previous employment and investing substantial amounts to enable them to perform under the terms of the agreement. Moreover, the defendant watched such efforts, encouraged them, approved the results, and went so far as to commence to secure orders for the products manufactured by the corporate plaintiff and to be distributed by the defendant. Accordingly, the doctrine of promissory estoppel is applicable and supplies the absence of a consideration for the promise. The judgment in favor of the plaintiffs is affirmed. Case 3.5: Gift Promise. Alden v. Presley , 637 S.W.2d 862, 1982 Tenn. Lexis 340 (Supreme Court of Tennessee). Presley’s promise to pay the mortgage is not enforceable. This case involves an action by the plaintiff (Jo Laverne Alden) against the estate of Elvis Presley to enforce a gratuitous promise to pay off the mortgage on plaintiff's home made by decedent (Elvis Presley) but not consummated prior to his death. The Supreme Court of Tennessee found that decedent did not make a gift of the money necessary to pay off the mortgage as there was no actual or constructive delivery and that plaintiff failed, as a matter of law, to prove detrimental reliance and a loss suffered as a result of detrimental reliance- essential elements of promissory estoppel.
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