Contracts Class Notes 11/21/03


Pay attention to the first instruction on the essay question: THINK, ANALYZE, ORGANIZE before writing.  Don’t write the whole time.  Figure out what you’re going to say before you write.  You can bring handouts provided in this class.


Represent the person you’re asked to represent, but identify any hurdles in the way of your client.


Quotations are a bad idea.


Hoffman v. Red Owl Stores, Inc.


The Hoffmans had a bakery.  That’s hard work!  “It’s a miserable way to make a living.”  They decide to get into the grocery business.  They set out to get a franchise from Red Owl, which franchises grocery stores.  They negotiate with a Red Owl employee about getting this franchise.  The negotiations don’t result in a deal.  However, the Hoffmans recover some money on the basis of § 90 and promissory estoppel.  Why do they recover money when no deal was ever concluded?


How does this case differ from Drennan?  Both are reliance cases.  Both are promissory estoppel cases, and in both the plaintiffs succeed in getting relief.


What do we have reliance on in Drennan?  There’s reliance on an offer.  However, in Hoffman, there was never an offer.  They were merely in negotiations.  There were a lot of things they never agreed on.


Red Owl never made an offer!  You need that commitment to be bound to the sought after acceptance, which we won’t find if there are a lot of missing terms.  There are a lot of unsettled terms.


No contract, no offer…but the Hoffmans get the big dough.  What is it that the Hoffmans rely on?  It’s the “repeated assurances” of the Red Owl employee that it will cost $18,000 to open up the franchise.


Compare to Drennan, where one of Traynor’s problems is that there is no express promise to hold the offer open.  Traynor finds an implied subsidiary promise to hold the offer open.


In this case, there was a reliance on instructions.  Red Owl said “$18,000 is enough.”  Then they said “$24,000 is enough.”  Then they said “$26,000 is enough.”  Finally, it was $34,000.  Red Owl also said that the Hoffmans would have a franchise by fall.


What’s the difficulty in relying on Red Owl’s promises?  First off, was it reasonable to rely on Red Owl’s promises?  This is a question of fact that the jury answers “yes”.  But why is it difficult to rely on the promises?  The promises are all conditional!  The promises are in the form of: “This is what will happen if we reach an agreement!”  They never did reach an agreement.


Is it reasonable to rely on these promises in the way the jury said it is?  Clovis says yes.


In most situations where you have failed negotiations, things aren’t going to turn out this way.  In most cases, it wouldn’t be reasonable to rely on conditional promises like this, where they’re promising to do something “if we can agree”.  Why is it reasonable for Hoffman to rely?  Part of the deal is that Red Owl is big and sophisticated while Hoffman is a regular dude.  He’s being told by a sophisticated businessman who to do.  Under the circumstances, it’s reasonable for him to rely on the statements of the Red Owl employee.


In a commercial situation, you’ll have parties that have more equal bargaining power.  In that case, reliance becomes less and less reasonable the more equal the parties are.


You won’t recover on promissory estoppel if somebody says that they’re thinking about making a promise rather than actually making a promise.  If you rely on such a statement, you do it at your own risk.  This will be true in most failed negotiation situations, but not in Hoffman on its facts.


Red Owl keeps telling Hoffman to do stuff, and he keeps doing it.  Under the circumstances, the jury thought it was reasonable for him to follow these instructions and rely on the promises.


Often in § 90 situations, it’s enough to protect the reliance interest and not the expectation interest.


This court says it’s for the court to decide whether and to what extent justice requires enforcement in a § 90 case.  Not every court will put it that way.


There are some jury questions: was there a promise?  Did reliance take place?  Then it’s for the court to decide whether justice requires enforcement.  The court will often find that the reliance interest is what needs to be protected.


What is Hoffman’s reliance interest?  It’s not that great.  He sells a grocery store.  He profitably operates a grocery store for three months and then sells it.  What does he lose in doing that?  If it was profitable while he owned it and sold it for more than he bought it for, was there really a compensable loss?  The court is going to allow him to recover the fair market value of the grocery store minus the price he sold it for.  How come it’s not Hoffman’s fault that he sold it for below market price?  With a better lawyer, Red Owl may have made that argument.


On the other hand, if Red Owl told Hoffman to sell the businesses when he did, it makes a stronger case for getting reliance damages.


The court characterizes a promissory estoppel claim as not being a contract claim.  However, the Restaters don’t take that position: they say when you have a § 90 remedy, it’s a contract remedy, but it’s just a different kind of contract remedy.  Clovis says…if a § 90 claim isn’t a contract claim, what the hell is it?  What would it mean if a § 90 claim isn’t a contract claim?  Would we have to throw the rest of contract law out the window?  That might have radical results.


Most courts will plug in the ordinary laws of contracts when they’re dealing with § 90.


§ 87(2) says that we’ll make an offer irrevocable to the extent that justice requires.  That may include an expectation recovery, such as in the general-sub bidding situation of Drennan.


Conduct Concluding a Bargain


§ 36. Methods Of Termination Of The Power Of Acceptance


(1) An offeree's power of acceptance may be terminated by

(a) rejection or counter-offer by the offeree, or

(b) lapse of time, or

(c) revocation by the offeror, or

(d) death or incapacity of the offeror or offeree.

(2) In addition, an offeree's power of acceptance is terminated by the non- occurrence of any condition of acceptance under the terms of the offer.


We’ve talked about the fact that offers may lapse after a reasonable amount of time.  We’ve also talked about how the offeror is the master of the offer and has the power to revoke offers pretty much whenever they want, with some exceptions.  Also, death or insanity terminates the offeree’s power of acceptance, even without notice (Jordan v. Dobbins, Davis v. Jacoby).


Now we’re going to look at § 36(1)(a).


Say we have a written offer by V to sell Greenacre to P for $500,000.  V says he’ll hold the offer open for 30 days.  Let’s assume that there’s neither consideration nor any substitute for consideration with respect to V’s promise to hold the offer open for 30 days.  It’s a standard revocable offer.  On day 10, P says to V, “I have no interest in Greenacre.”  The offeror says something like, “Damn.”  On day 25, still within the 30 days, the offeree says to the offeror in writing, “I’ve changed my mind and I want to accept your original offer.”  Will we have a contract here?  The answer is no.  That won’t make a contract.


Why not?  Because what the offeree did on day 10 amounted to a rejection, and a rejection by the offeree terminates the power of acceptance.


§ 38. Rejection


(1) An offeree's power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention.

(2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.


The offeree’s statement on day 10 is certainly a rejection.  Once the offeree has rejected, the offeree can’t turn around and accept.  Why is that so?  Check out this comment:


a. The probability of reliance. The legal consequences of a rejection rest on its probable effect on the offeror. An offeror commonly takes steps to prepare for performance in the event that the offer is accepted. If the offeree states in effect that he declines to accept the offer, it is highly probable that the offeror will change his plans in reliance on the statement. The reliance is likely to take such negative forms as failure to prepare or failure to send a notice of revocation, and hence is likely to be difficult or impossible to prove. To protect the offeror in such reliance, the power of acceptance is terminated without proof of reliance. This rule also protects the offeree in accordance with his manifested intention that his subsequent conduct is not to be understood as an acceptance.


An offeror’s reliance on an offeree’s rejection is very likely to take negative forms.  Upon the receipt of a rejection, the offeror is going to not do stuff he would have otherwise done.  If you get a rejection, you stop preparing for acceptance.  People’s negative reliance on rejections should be protected.


The rule is that because the offeror will probably rely, and reliance will be hard to prove, we will allow rejection to terminate the power of acceptance without proof of reliance.


Livingstone v. Evans


Here we have multiple offeror-offeree communications (this is popular on the bar exam).  When you have something like this, put the communications in chronological order.  It’s easy to do in this case.  This opinion recites what happened in chronological order.


1.     The defendant writes out an offer to sell the land for $1,800.  That’s an offer.

2.     The plaintiff gets that offer and replies: “Send lowest cash price.  Will give $1600 cash.”  What’s that?  It’s a counteroffer.  What’s a counteroffer?

§ 39. Counter-Offers

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree's power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

Implicit in a counteroffer is the idea that you didn’t like the offer as originally presented.  The idea that a rejection terminates the offeree’s power of acceptance is very strong.  The idea that a counteroffer terminates the offeree’s power of acceptance is somewhat less strong, because the message of rejection is implicit, not explicit.

3.     There’s a second counteroffer.  It’s not described that way by the court, but that’s what it is.  “Can’t reduce price.”  The court says that implicit in this is a renewal of the previously dead offer to sell for $1,800.

4.     The plaintiff writes back and accepts that offer.  You can’t do that unless the original offer is remade implicitly.


Get a grip on the idea that a rejection ends an offeree’s power to accept because of the probable effect on the offeror.  It’s almost the same thing with a counteroffer.


A “mere inquiry” ain’t a rejection and it ain’t a counteroffer.


What do we do with a deviant acceptance (accepting at different terms)?  We frequently treat it as a counteroffer.


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