Contracts Class Notes 11/6/03


Raffles v. Wichelhaus


The buyer rejects cotton because the buyer expected the cotton to arrive two and half months earlier on a different ship named “Peerless”.  What was the real reason for the rejection?  When people get out of a contract, they try to do so by concluding that the other party is in breach or that there never was a contract.  You can be certain that the buyer wouldn’t have made a fuss if he was getting the cotton on favorable terms.  If the market price had been higher than the 17.5 cent contract price when the cotton arrived, the buyer would have bought it and not sued.  We conclude that the market price must have been lower than the contract price.  That’s why the buyer is suing, and that’s why they didn’t perform.


What else is going on?  The Civil War.  Cotton wasn’t being shipped out from the United States.  England was the biggest cotton consumer, then the United States industrial North, then France.  The Union imposed a blockade on Southern ports to keep cotton from getting out.  The Confederacy embargoed cotton, and generally the cotton planters didn’t ship any out.  The point was to put pressure on the British and French to recognize the Confederacy and maybe come into the war on their side.  All this greatly decreased the exports and thus of course raised the price.  There was “The Great Cotton Famine” in England.  There was lots of unemployment and riots and starving and all that bad stuff.  Mill operators did everything they could to encourage the production of cotton in places like India and Egypt.  Cotton growing in India and Egypt has benefited from the Civil War ever since.  It was The Most Important Commodity In The World!  British merchants were the most sophisticated, and they were interested in the progress of the Civil War.  If the war ends in a hurry, prices of cotton will fall.  Confederate success would end the war quickly, while if they lose, the war will take longer.  Thus, the cotton on the later “Peerless” probably arrived around February or March 1863 – this war close to the low point for the North.  Lots of people were predicting that the South was going to be successful enough to get the British and French to recognize them and join their side and then make the Union give up.


The buyer in this case probably figured he wouldn’t pay for the cotton, because even if he has to pay damages, he’ll be able to buy cotton much, much cheaper later.  People are always making decisions on the basis of these kinds of predictions.  These decisions, in turn, influence market prices.  But this buyer made a big mistake because Gettysburg happened in July 1863, and then it was all downhill for the Confederacy after that.  It took a while to end the war and cotton prices stayed higher than the price in the contract in this case.[1]


What if the plaintiff in Raffles had known about both ships, but the defendant knew only about the first ship?  In that case, we’ll almost certainly make a contract on the defendant’s terms.  The seller hasn’t fulfilled the contract; therefore the seller would be in breach.  Consider this in terms of the Restatement.


Also compare this to Embry.  If there is no subject of mutual assent, that is, if the minds “miss” each other, we won’t find a contract.  That’s the basis upon which this case was decided.  Neither side was at fault; there was just a failure of communication.  We will come to the same result if both parties knew there were two different “Peerlesses”.  If they had thought about it in that case, they could have clarified.  We would find that they’re both careless and both at fault.  But whether neither of them knew or both of them knew, there’s no basis to favor one over the other.  The way to declare a tie, in some sense, is to declare that there’s no contract.


§ 201. Whose Meaning Prevails


(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

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

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

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.


If the defendant only knew about one ship, and the plaintiff knew about both, then the defendant is not at fault, but the plaintiff is.  There was asymmetrical information.  Thus, we will infer the careful party’s meaning.  In this case, that means the contract takes on the defendant’s meaning.  Whoever has less information gets the benefit of interpretation.


Notice that Restatement § 201 is more or less a repetition of § 20.  § 20 deals with formation, and § 201 deals with interpretation.  They cover more or less the same ground.


What § 201 says is that if the parties communicate effectively, we make the deal on that basis.  You can make a deal on the basis of subjective mutual assent.  For example, a man and a woman pass each other on the street.  Each one is interested[2] in the other, but they don’t talk to each other.  Clovis says that’s a tragedy, but it’s not a contract.


On the other hand, if the two parties intended different meanings, we’ll interpret it in favor of the party that had less information.


If you can’t make a contract under § 201(1) or § 201(2), and the parties’ minds didn’t meet, we’ll find failure of mutual assent, no agreement, and no deal.


Note that this means that if you use words in such a way as to act like you’re making a deal, and another party takes your words to mean that you’re making a deal, you’ve made a deal, even if you “crossed your fingers behind your back”.  Parties’ subjective intentions are almost never precisely alike.  We are constrained to look at the objective manifestations of the parties.


If we use objective mutual intent, it saves a lot of time.  We just look at the writing and take it to reflect what the people said.  This can let us decide more cases on the basis of summary judgment.  We can handle more cases without a full trial.  When you use subjective intentions, you more often have to look at whether people are credible and thus go to trial and do lots of testimony and stuff.


New York Trust Co. v. Island Oil & Transport Corp.


Non-Mexicans weren’t allowed to drill for oil within 50 miles of the Mexican coastline.  Island tried to fool Mexico by organizing some subsidiaries that it owned and ran, though they pretended that the subsidiaries were Mexican.  Part of this fraud on the Mexican authorities involved maintaining books that showed sales of oil from the subsidiaries to the parent and promises to pay from the parent to the subsidiary.  Both the parent and the subsidiary thought of these transactions and basically a big joke.


But now the subsidiaries have fallen into other owners’ hands.  Those new owners want to get into the parent’s pocket.  Judge Hand will have none of it.  Hand says that the books were a sham.  Nobody who understood the situation could understand the promises to pay as intended to be anything more than a sham.  When you have a sham, it doesn’t do anybody any good to enforce this arrangement.


If the buyers of the shares of the subsidiaries didn’t know that there had been a sham transaction when they, in good faith, bought the shares in good faith reliance on the fact that they could collect debts from the parent, then the parent is going to have to pay.  It appears from the facts that it was a well-enough known fact that Island’s books were a sham that the buyers did not innocently and unknowingly rely on those books.


Here’s a simpler way to look at it.  Let’s say a father promises his daughter $1,000,000 to get married.  The daughter says that she doesn’t want to get married, but she would like the $1,000,000.  The daughter decides to recruit someone to marry her in order to defraud Dad of the $1,000,000.  Do they get the million dollars out of Dad?  It’s not clear, but if either person seeks an annulment, they should get it because the whole marriage was a sham.  We should treat it as a “non-marriage contract”, just as we treat the sham that occurred in New York Trust as a sham contract.  What’s the doctrine?


§ 21. Intention To Be Legally Bound


Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may[3] prevent the formation of a contract.


Say you have two backwoodsmen who don’t know anything about the legal system and never have a single thought about being legally bound.  They don’t even know that there are courts.  They make a bargain to trade a gold nugget for a stand of timber.  Their ignorance is irrelevant.  When do we not have a contract?  There’s no contract only when both parties formed a positive intent not to be legally bound.


Some friends are having fun!  “How much will you take for that crappy watch?”  The other guy says, “$300!”  The first guy says “Alright!”  He takes out his checkbook and writes a check for $300 in exchange for the watch.  There is no contract here!  Jokes are not contract!  Here, there weren’t out to make a deal, but rather to make a joke.  When both of them get the joke, it’s no problem.  It’s trickier when one of them gets the joke, but one of them takes the agreement seriously.  If both meanings are equally justifiable, then there’s no contract.  But if the joker should have realized that the non-joker would take the joke seriously, the contract will be held against the joker.  If you’re going to joke, make sure the other party gets the message!


Say Clovis invites the class to his house for beer and brats.  When we arrive, he hides and for some reason we have to go elsewhere to eat.  We’re disappointed.  We bring a class action lawsuit against Clovis.  But we won’t succeed!  The remedy for broken social engagements is not in the courthouse.  When people have social engagements, we presume that the parties’ intentions were not to be legally bound.


So if a guest who promised to show up doesn’t come to a party, there’s no legal obligation broken.  However, if a caterer who was hired by the host doesn’t show up, they could get sued for breach of contract.


Shams, jokes, and social engagements include a positive intent on both sides not to be legally bound.  They don’t form contracts.


Mother says to Junior, her 14-year-old son, I’m going to give you an allowance of $20 per week.  Junior behaves like a jerk after a few weeks, Mom cuts off the allowance, and Junior sues.  Junior will not recover.  This kind of close family relationship is construed to include the intention not to be legally bound.  C.f. Balfour v. Balfour.


What about disclaimers in tiny print in handbooks and stuff like that?  What if they decide to shut down the law school?  Do we have any recourse?


The law school catalog can say all sorts of wonderful things, then at the end they can say that it’s all subject to change.


McDonald v. Mobil Coal Producing, Inc.


In employment cases in Wyoming, the court thinks that a disclaimer in an employment manual or employee handbook must be conspicuous.  Not every court would agree with that.


The only real decision in this case is that there’s no summary judgment for the employer.  It seems clear that the disclaimer in the welcome note is not conspicuous.  However, McDonald signed something that’s a lot clearer on the application.  If that notice is immediately above the signature line he’s going to sign, it might well be conspicuous.




But what does conspicuous mean?  According to UCC § 1-201, it says: “‘Conspicuous’, with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.”  It goes on to say:


Whether a term is "conspicuous" or not is a decision for the court. Conspicuous terms include the following:


(A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and

(B) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.


In a really big document, you might need to flag in particular ways that which you want to be conspicuous.  For example, a printed heading in capital letters is conspicuous.  If you use larger type or a different color within the body of text, that makes it conspicuous too.  So if you want something to be conspicuous, make it obvious.


The Wyoming Supreme Court cites a guideline that the New Jersey Supreme Court came up with.  All you have to do is include in a very prominent place in the document a statement that says that there is no promise contained in the manual and everything can be changed.


From a political perspective, your HR department might not like making something conspicuous that is unpleasant.  Ohio State, in the bulletin, want to show you what a wonderful place the school is and they hide the disclaimer in the back.  Could you sue Ohio State if they cut the curriculum and made it worse?  Probably not, because as college graduates who are experienced with institutions of higher learning, we know these institutions will do things that disappoint us.


You might have a case if Ohio State said they were going to shut down the law school in the middle of the year.


Why did McDonald come out one way while Keri came out the other way?


Back to Class Notes

[1] “That’s just a historical footnote.  It will be on the exam.  Otherwise, you don’t have to worry about it.”

[2] You know what I mean.

[3] Clovis says we can go ahead and read “may” as “does”.