Contracts
Class Notes
Review
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!!!
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.
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.
A
buyer agrees to buy 125 bales on cotton to arrive in
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
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
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.