Contracts
Class Notes
Two
more weeks until the exam!
Back
to hypotheticals related to UCC § 2-305
Suppose that last spring, Oliver Orchard, the
operator of an apple farm agreed to sell his apple crop to a merchant buyer of
fruit and agreed to deliver it on November 1st, price “to be agreed
upon”. Oliver doesn’t deliver, and the
merchant sues for breach. Oliver’s defense
is that there is no enforceable contract.
Can the merchant recover?
Suppose a buyer and a seller, after a lengthy
negotiation, agree to the sale of a famous painting. They agree to delivery in three months, price
“to be agreed upon”. The seller
repudiates. Can the buyer recover for
breach?
Is
it just me, or does
As
far as the first hypo goes, look at UCC § 2-204:
§ 2-204. Formation in General.
(1) A contract for sale of goods may be made in any
manner sufficient to show agreement, including conduct by both parties which
recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract
for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a
contract for sale does not fail for indefiniteness if the parties have intended
to make a contract and there is a reasonably certain basis for giving an
appropriate remedy.
Oliver
and the buyer must intend the deal to be binding and have a reasonably certain
basis for giving an appropriate remedy.
Well, how can you find an appropriate remedy if there’s no price given
in the contract? You can look at the market
price. But what if there’s no contract
at all? We can look at a situation like
this more specifically in UCC § 2-305:
§ 2-305. Open Price Term.
(1) The parties if they so intend can conclude a
contract for sale even though the price is not settled. In such a case the
price is a reasonable price at the time for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties
and they fail to agree; or
(c) the price is to be fixed in terms of some agreed
market or other standard as set or recorded by a third person or agency and it
is not so set or recorded.
(2) A price to be fixed by the seller or by the
buyer means a price for him to fix in good faith.
(3) When a price left to be fixed otherwise than by
agreement of the parties fails to be fixed through fault of one party the other
may at his option treat the contract as cancelled or himself fix a reasonable
price.
(4) Where, however, the parties intend not to be
bound unless the price be fixed or agreed and it is not fixed or agreed there
is no contract. In such a case the buyer must return any goods already received
or if unable so to do must pay their reasonable value at the time of delivery
and the seller must return any portion of the price paid on account.
UCC
§ 2-305 ensures that most open-price arrangements will be enforceable.
On
the other hand, in the second hypothetical, the deal is for a unique piece of
art. The contract will be too vague
since it is “price to be agreed upon”.
It’s
easier to find that the parties intended to make a contract when there is an
established market for the goods they were dealing in. Check out this comment from § 2-305:
4. The section recognizes that there may be cases in
which a particular person's judgment is not chosen merely as a barometer or
index of a fair price but is an essential condition to the parties' intent to
make any contract at all. For example, the case where a known and trusted
expert is to "value" a particular painting for which there is no
market standard differs sharply from the situation where a named expert is to
determine the grade of cotton, and the difference would support a finding that
in the one the parties did not intend to make a binding agreement if that
expert were unavailable whereas in the other they did so intend. Other
circumstances would of course affect the validity of such a finding.
If
you make a contract today with performance six months out at a fixed price, it
guarantees the seller and buyer a certain price and it shifts the risk of the
market. This is a kind of
speculation! It might, in fact, turn out
to be a bad deal for one party. On the
other hand, the contract can be based on the market price at the time specified
for performance.
Did
the parties agree to agree and take the established market price, or did they
agree to agree and figure out the price later?
In a situation where there’s a market, it’s more likely the former. In a situation with a unique good like a
painting, the latter is more likely.
Joseph Martin, Jr.
Delicatessen v. Schumacher
UCC
Article 2 doesn’t not apply here because there is no contract for the sale of
goods. However, at the time of this
case, the UCC had been around in
Why
didn’t the parties sign a ten year lease instead of a five year lease with a five
year renewal option? Maybe the tenant
didn’t want to commit for ten years. Why
didn’t the parties then build in specified rent for the second five year option? Probably because they didn’t know how much
the space would be worth during the following five years. You don’t know what inflation will do in the
second five years, for example, or how the real estate market will be.
The
tenant gets hosed. If the tenant can’t
renew his lease, he’ll have to move somewhere else, and that will hurt
business. The tenant relies on the lease
and would like to renew but can’t get it done.
Would it have been better to treat this in the way that § 2-305 treats
many sale of goods contracts with an open price agreement? That is, why not have the court fix some
reasonable rent?
What
does it mean that the parties are going to agree on the price? Maybe the landlord means that he’ll hold up
the tenant for a higher rent because of the tenant’s reliance on having the
commercial space. The tenant, on the
other hand, perhaps expected to get the same reasonable price any other tenant
would get.
The
Court of Appeals of
Some
people think that the phrase “to be agreed upon” suggests serious negotiations
on price yet to come. On the other hand,
if you’re silent on it, some say this suggests that it’s easier to get
appraisers and plug in a “reasonable rental”.
What
if you added some language saying the rent shall be “fair and reasonable
to both parties”?
How
would you draft a provision like this?
If you want the lease to be enforceable, you probably want to say
something different than “to be agreed upon”.
Maybe you’ll want to specify an appraiser to determine a reasonable
price. There are problems with almost
everything you try.
Students
sometimes make the mistake that every little uncertainty is going to render an
agreement not a contract and unenforceable.
That is a serious mistake. It is
probably impossible for two people to get every detail of an agreement
committed to paper.
§ 33. Certainty
(1) Even though a manifestation of intention is
intended to be understood as an offer, it cannot be accepted so as to form a
contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain
if they provide a basis for determining the existence of a breach and for
giving an appropriate remedy.
(3) The fact that one or more terms of a proposed
bargain are left open or uncertain may show that a manifestation of intention
is not intended to be understood as an offer or as an acceptance.
We’re
not going to play games with agreements that parties really meant to make. Don’t get caught up with the general language
of this section and conclude that lots of agreements will be fatally
vague. We’ll fill lots of gaps. If we didn’t, enforceable contract would be
super scarce.
A
hypothetical
Homer
Owner wants a garage built in his backyard.
Betsy Builder comes over to look at Homer’s backyard and think about
what requirements Homer wants. They talk
about a lot of details and Homer takes copious notes. After a couple of hours, Betsy says she can
do the job for $40,000 starting the first of the month, and Homer says “That’s
good” and they shake hands. Then Betsy
says she’ll draw up a formal contract over the weekend. They shake on that too. But then, Homer finds out that Carl
Contractor could do it for $35,000.
Homer tells Betsy to buzz off, and Betsy sues Homer for breach. Will Betsy recover? The parties’ intentions were important. If they both intended to make a contract when
they shook hands, they’ve probably done it.
If neither of them intended to make a contract, and they both intended
that only a formal writing would constitute a contract, then there is no contract
and Betsy doesn’t recover. If Betsy’s
intent was contract and his wasn’t, we have an objective mutual assent
problem. We would ask which intent we
prefer. We must look at the objective
manifestations of intent.
How
does this differ from Billings v. Wilby?
The subcontractor was entitled to damages for lost profits. In
The
hypothetical has a much weaker case for the existence of a contract.
Empro Mfg. Co. v. Ball-Co Mfg., Inc.
These
are negotiations about the sale of a middle-sized business. The sale price will be about $2.5
million. The seller is interested in
selling, the buyer is interested in buying.
Negotiations go along and a letter of intent is prepared by the buyer and
signed by both parties. After that, the
seller decides that the negotiations haven’t panned out the way the seller
wanted them to pan out. The seller says,
“No dice, this is off.” But the buyer
says, “No way! We had a deal! We’re suing you!”
But
the court says that there was no contract here.
Why not? Both sides did
sign a document called a “letter of intent”.
The buyer made it clear in the letter of intent that the deal was
subject to approval by their board of directors and shareholders. The shareholders could disapprove of the deal
for any or no reason. What does that
do? It makes the buyer’s promise
illusory. It seems that there is no consideration
for any promise the seller made, and so the seller is free to walk. It seems the seller got nothing in exchange
for what it promised. But the thing is
that there is consideration for the seller’s promise: $5,000 down. Adequacy of consideration is immaterial, so
this is valid consideration for the seller’s promises.
However,
the court gets out of this by finding that the parties didn’t intend to be
bound to a contract.
What
did the buyer’s lawyer have in mind when they drafted the letter of
intent? Did they think it was binding on
someone? They did a poor job of making
the letter binding on the seller. It
seems that the buyer’s lawyer didn’t have a good understanding of the
situation.
When
you’re trying to make a deal, a good way to do it is to start with something. Sometimes it’s easiest to start with something
and then keep marching along and leave the most difficult thing to the
end. A problem with that is that the
parties may misunderstand each other.
You can only talk about one thing at a time, so you do reach agreements
on some terms. To the parties,
they may seem like binding agreements.
The best understanding is that they are not binding until the last “deal
upsetter” is agreed upon.
What
should you do if you are a lawyer in these circumstances? Make sure you understand where your client is
at every stage of negotiations. To do
so, you must understand that the other side understands where they are. You’ll kind of have to ask the same questions
over and over to keep both sides on the same page and prevent
misunderstanding. Once a deal is made,
you must make sure that everyone understands that too.
It
costs money to engage in negotiations.
The seller must figure out whether it really wants to sell its business;
it has to figure out what price it should get; it has to figure out how
reliable the potential buyer is. How
does it figure that out? It takes time,
and time is money. Also, they take the
advice of lawyers and consultants, who cost money. The other side does the same. Negotiation costs money. If you negotiate but don’t reach a contract,
each party will bear its own negotiating costs, and that’s the way it is. There’s no reliance here because there’s
nothing to rely on.
There
are sizable costs here, but it can be the same thing in a regular situation. A consumer might invest time to try to buy
something they want at the store, but they might find that they’re out of
it. The consumer has lost something, and
the merchant has lost a sale. However,
both parties bear their own costs. It
wouldn’t be fair to shift costs from one party to another. On the other hand, if there was false
advertising or something else that could be considered tortious in the
negotiation process, it could be different.
The
However,
Wheeler gets a remedy based on reliance.
We have learned that reliance can take a solid promise that’s unenforceable
due to lack of consideration and make it enforceable in whole or in part. We have also learned that reliance can take a
promise that is unenforceable on statute of frauds grounds and sometimes make
it enforceable. In connection with this
case and Goodman v. Dicker, you get
situations where reliance can cure other defects in a promise.
If
you want to predict results in the future, there is a better way to look at
this case: White was telling Wheeler what to do. He was urging Wheeler to destroy the
buildings on this tract of land because White was going to come up with
financing. It seems that under the
circumstances it was reasonable for Wheeler to obey White’s instructions. Protecting Wheeler’s loss based on the reliance
interest makes a good deal of sense.
Contrast
this case with the “reliance” in Empro. In that case, the parties spent a bunch of
money trying to make a deal, but the deal fell apart. We will leave those losses where they fell. Is Wheeler
like that? Not quite. In Wheeler,
the reliance really was the reliance.
Wheeler didn’t do it entirely at his own risk; he did it because White
told him to. It was reasonable
for him to do that. But White pulled the
rug out from under him.