Contracts
Class Notes
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?
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.
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.
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.