Contracts Class Notes 11/5/03




It’s the third chapter!  We did remedies, and we did a chapter on what remedies we’ll enforce.


We learned that once upon a time, we would enforce promises merely because they were under seal.  In over half of the country (by population), the seal has been abolished.


In order to decide whether to enforce a promise, we use the doctrine of consideration.  That’s a powerful idea, but it’s not big enough to cover the entire world.  There are some promises without consideration that we’ll enforce.  For example, we’ll enforce promises that induced foreseeable, justifiable reliance.  We have a preference for charitable organizations as promisees, and we’re more likely to enforce promises made to them.


An illusory promise can’t serve as consideration for a solid promise on the other side.  Past consideration isn’t consideration, although once in a great while we want to enforce a promise because of something that happened before that promise was made.


Make an outline!  Get ready for kuh-razy questions on the test!!!  Clovis will give us a practice question later this week, and next week we’ll look at possible answers to that question.


Agreement formation


From a practical perspective, chapters 1 and 3 are more important than chapter 2 in terms of problems that businesspeople have.  The biggest ideas we’ve come across are compensatory damages, protection of the expectation interest, and now when agreements have been made and when they haven’t.


Embry v. Hargadine, McKittrick Dry Goods Co.


Embry is the plaintiff, and he has a year’s employment contract for $2,000 a year running the sample department for McKittrick.  That contract expires on December 15th.  On December 23rd, Embry goes to his boss to try to get his contract renewed for another year.  Notice that Embry’s lawyer has to navigate around the statute of frauds, because we don’t enforce oral contracts not to be performed within a year.  If this oral agreement had been made on December 13th to run until the following December 15th, it would have been in the statute of frauds and would have been unenforceable.  Instead, it is alleged that the new oral contract was formed on December 23rd.  This is a contract to be performed within a year.


When Embry goes to see McKittrick on the 23rd, he says, “You’ve put me off a few times, and now I either want a new contract or I’ll quit.”  What happened next?  McKittrick allegedly told Embry “you’re all right, go get your men out and don’t let that worry you.”  But that’s not the way McKittrick said it happened.  McKittrick claimed that he was all annoyed and basically told him to piss off.


This is a familiar situation in litigation!  One party tells one story and the other party tells another story.  What do we do when that happens?  If the words are in dispute, the question of whether they were used or not is a matter for the jury, or the judge when it’s a bench trial.  You have to decide who to believe and who to disbelieve in terms of what was said.


What questions of fact are there in this case?  There are at least four:


1.     What words came out of McKittrick’s mouth?  Who is more credible?

2.     What meaning did McKittrick attach to those words?

3.     What meaning did Embry attach to them?

4.     Was the meaning that Embry attached to McKittrick’s words reasonable?


Suppose the trial judge tells the jury that they must decide what words are spoken.  The judge will charge them on the basis that if the jury credits the plaintiff’s version, they must do X, while if they credit the defendant’s version, they must do Y.

However, in this case, the instruction that followed from “if you believe what Embry said” was held to be incorrect; this is the error on which the appellate court “hangs its hat”.  Why are the instructions wrong?  Embry has to believe he had a contract, but it doesn’t matter if McKittrick didn’t intend to reemploy him.  Embry’s interpretation of what happened must be reasonable.

It’s highly plausible, on the other hand, that McKittrick didn’t really intend to offer Embry a new contract.  However, that doesn’t matter.  The parties attach two different meanings to the same words.  This court says that we will make a contract in this situation Embry’s understanding of McKittrick’s meaning is reasonable.


Embry represents the approach the law has taken.  Whittier objects.  Whittier says that someone who expresses themselves carelessly shouldn’t create a contract, but rather they should be held liable in tort for carelessly expressing themselves.


What would Embry have done if McKittrick would have been clear?  Would Embry have left and taken a better job?  If so, he may be able to show tort damages based on his reliance on the unclear statement.


Compare this case to Geremia.  Did the credit union promise to pay the Geremias’ premium payments?  They probably didn’t mean to.  However, it is possible and perhaps even probable that the Geremias subjectively and sincerely believed that the communication from the credit union was a promise to pay the premiums.  You could try to argue that the Geremias’ view of the words of the credit union was more reasonable.  Then you could well hold that there was a contract there.


On the other hand, if you treated the situation as a tort, the Geremias would collect the difference between what they would have gotten if the communication had been accurate and what they actually got.  If you treat this case as Professor Whittier would do, it will be harder to litigate, and the Geremias will get diddley (or squiddley).


This case gets at the biggest, most important set of ideas in the course, save perhaps for compensatory damages and protecting the expectation interest.


Kabil Developments Corp. v. Mignot


Kabil is a general contractor that has a contract to build some kind of project in the woods, and it needs the services of a helicopter subcontractor to do that.  The Mignots are in the helicopter subcontracting business and they negotiate with Kabil.


Here’s a frequent business problem.  The parties get part of the way towards a deal.  In the view of one party (in this case, the Mignots), they can’t agree and there’s no deal.  On the other hand, the other party (Kabil) thinks that there’s a deal and a contract has been made.


Kabil seeks and recovers the difference between the contract price of the services and the replacement cost.


The dispute is over a bit of testimony by one of the bigwigs of Kabil.  The bigwig subjectively believed there was a deal, and was allowed to say so in court.  The defendant objects that the bigwig’s subjective interpretation is irrelevant.  The court rejects this argument and says it was no error for the trial court to admit the testimony that says that the bigwig thought a contract had been reached.


Is this surprising in light of Embry?  Not exactly.  For Embry to get a contract, it was crucial that he interpret subjectively that he had a contract.  His interpretation also had to be reasonable.  The same thing would be true if you apply the same rules to Kabil: there is no contract for Kabil unless they believed they had a contract, and that that belief is reasonable.


Testimony as to subjective intent and interpretation is relevant insofar as that you believe probably is reflected in your outward behavior.  We don’t want to make a contract in Kabil’s favor unless Kabil really believed they had a contract.


There are two frequently quoted opinions from Judge Hand and Judge Frank.


Hand is extravagant and broad.  He also says that a contract has nothing to do with the intent of the parties, which isn’t really true.  He makes the “twenty bishops” metaphor.  What point is Hand getting at?  He’s getting at the point made in Robbins v. Lynch, where we learn that you can’t escape contractual obligation by crossing your fingers behind your back.  If you sign something that looks like a contract, you’ll be bound by that even if you secretly don’t mean it.


Frank says that there a number of reasons we must consider the subjective intent as well as the objective manifestation of the parties.


Raffles v. Wichelhaus


A buyer agrees to buy 125 bales on cotton to arrive in Liverpool on the ship “Peerless” from Bombay.  The ship arrives and the buyer refuses the cotton.  What kind of remedy would the plaintiff be seeking?  Probably the contract price minus the market price.  The contract price was 17.25 cents per pound, and the market price went lower than the contract price.  The seller wants that loss compensated.


The buyer doesn’t want to pay any damages.  What is the nature of the buyer’s defense?  The buyer says that the goods came in the wrong “Peerless”.


Why does it matter how the cotton gets to England as long as it’s decent cotton?  It isn’t really how it gets to England, but when.  One ship left India in October, while the other left in December.  All in all, this will make about a two and one-half month difference in the arrival of the cotton.


The market for cotton is very active and the price changes frequently.  A change in when the cotton arrives can make a big difference in how much it’s worth.


At the time, cotton was the most important commercial commodity in the world.  It was sort of the equivalent of how petroleum is today.


The court accepts the buyer’s defense.  The buyer will not be held liable.  The buyer argues that there was no meeting of the minds: “We didn’t agree”.  The seller meant the later “Peerless”, while the buyer meant the earlier “Peerless”.  The parties didn’t connect.  They failed to really make an agreement; thus, there is no contract.


The whole idea of the law of contracts is to protect the justifiable expectations of the parties.  By contrast, in Ruffles v. Wichelhaus, the court finds that the parties’ meanings are equally reasonable.  There’s no way to prefer one meaning over the other, and thus they rule that there was no contract.  The factual basis on which this decision was made is that fact that the seller knew only of the later “Peerless”, while the buyer knew only of the earlier one.  That makes the parties equally careful and responsible.


But what if both the buyer and the seller were aware of two different ships named “Peerless” sailing regularly from Bombay?  We could say that both parties were careless because each should have seen that there was some possibility of confusion, and thus clarify which “Peerless” they meant.  In the real case, the parties were equally careful, while in this case they were equally careless.  Therefore, in either case, we’ll say there was no contract.


Restatement § 20 – Effect Of Misunderstanding


(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and

(a) neither party knows or has reason to know the meaning attached by the other; or

(b) each party knows or each party has reason to know the meaning attached by the other.

(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.


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