Contracts Class Notes 11/12/03


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 Clovis call on guys a lot more than women?


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 New York for 16 years.  The court could have used the UCC by analogy (like the court does with cases) even though it’s not directly applicable.  That’s not what the majority chose to do here.  How come?  Are goods that different from commercial real estate?  There may be good substitutes for this retail space.  This space may not be unique.


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 New York quotes an oft-repeated bit of language: “A mere agreement to agree is unenforceable.”  As a broad generalization, this is alright.  But it is not true with respect to certain open price agreements.


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 Billings, it was a public job where everything had been written down and both parties had a copy of the writings.  There was nothing left to squabble about.  The subcontractor says that they’ll do the job at a certain price.  There are no “potential deal upsetters left unsettled”.  The surrounding circumstances allow you to find that the parties intended to make a contract, and thus did make a contract.


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.


Wheeler v. White


The Texas courts found the agreement too indefinite to be a contract.  The deal was that White was either going to find a loan for Wheeler or make it himself.  The principal is $70,000 and the interest is not more than six percent for 15 years.  The court finds this to be too indefinite.  The dissent disagreed.  Clovis guesses that even at the time of the case, half of the courts in the country would also disagree.  It’s not hard to figure out what the terms of this contract were going to be, within reasonable limits.  There isn’t a whole lot to fill in to find out what the monthly payments were going to be.  In many places, this would have been definite enough to amount to contract.  However, in Texas at this time, the court finds that this is too indefinite and there’s no contract.


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.


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