978-0078023859 Chapter 8 Solution Manual Part 1

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Chapter 08 – Contract Formation

8-1

Chapter 8

Contract Formation

Learning Objectives

The purpose of this chapter and the next is to introduce students to that body of law known as

contracts, which underlies the buying and selling agreements of the private enterprise system.

The chapter emphasizes a broad, overall coverage of contract law. Special attention is devoted to

the vocabulary and concepts of classification and formation of contracts. Recognizing when

particular forms of contracts are required is also discussed. These topics permit students to

comprehend how many of the other subjects discussed in this book are based, at some level, on

contract law.

References

 Benson, P., The Theory of Contract Law: New Essays. Cambridge University Press (2001).

 Calamari, J. and J. Perillo, Calamari and Perillo’s Hornbook on Contracts. Thomson West

(2003).

 Epstein, R.A., Contract: Freedom and Restraint. Garland Publishers, 2000.

 Gilmore, Grant, The Death of Contract. Ohio State University Press (1995).

 Gordley, J., Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment.

Oxford University Press (2006).

 Matthew, H., Contract Law and Morality. Greenwood Press (1999).

 Slawson, W.D., Binding Promises: The Last 20th Century Reformation of Contract Law.

Princeton University Press, 1996.

 Treitel, G.H., Some Landmarks of Twentieth Century Contract Law. Clarendon (2002).

Teaching Outline

I. Basic Concept

A. Contract Law in Private Enterprise (LO 8-1)

Emphasize:

 That contract law enables people to make agreements legally enforceable.

 Why contract law is more important to a private enterprise economy than it is to a state-

controlled economy.

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Additional Matter for Discussion:

 Use Sidebar 8.1 on the confidentiality agreement to illustrate how contracts can be used

 That perhaps the most important example of state-based legislation impacting contract

law is the Uniform Commercial Code (UCC). Article 2 of the UCC covers the sale of

goods.

II. Contractual Classifications and Terminology (LO 8-2)

A. Bilateral and Unilateral Contracts

committed to perform.

Additional Matter for Discussion:

 Figure 8.1 describes a bilateral contract.

 Figure 8.2 describes a unilateral contract.

B. Express and Implied-in-Fact Contracts

Case for Discussion:

1. Razdan v. General Motors Corporation, 2000 U.S. App. LEXIS 21446 (7th Cir. 2000).

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Hari Razdan goes to work as an hourly employee in anticipation of being hired full-time

at a salary of $72,800 with benefits. After working for $35 per hour for 6 months,

Razdan is offered a full-time position at $63,600 with full benefits. He refused this offer

but continued to work on an hourly basis until he was terminated 2 years later. Razdan

sues G.M. claiming there was an implied-in-fact contract for full-time employment at

$72,800 per year and that G.M. breached this contract.

Issue: Did an implied-in–fact contract exist for Razdan’s full-time employment?

C. Implied-in-Law or Quasi-Contracts

Emphasize:

 That when one party is unjustly enriched at the expense of another, the law may imply a

duty on the first party to pay the second even though there is no contract between the

two parties.

 That the doctrine that requires this result is based on an implied-in-law contract. Since

there really is no actual contractual agreement, the phrase quasi-contract is also used.

D. Contractual Enforcement Terminology

Emphasize:

 The following terms:

o Enforceable contract

o Unenforceable contract

Additional Matter for Discussion:

 How the study of the essential elements of contracts (sections 8-12 of the text) links to

the terminology presented in this section.

E. Contractual Performance Terminology

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Emphasize:

 The following terms:

o Executed contracts

o Executory contracts

 How these terms relate to other terms, such as bilateral and unilateral contracts.

Additional Matter for Discussion

 How the study of the performance of valid, enforceable contracts (chapter 9) is linked to

the terms presented in this section.

III. Contract Formation (LO 8-3)

A. Offer to Contract

Emphasize:

 The term offer and explain the terms offeror and offeree.

Definite Terms

Emphasize:

 The doctrine of indefiniteness. Note that most advertisements, catalog, and web page

price quotes are considered too indefinite to form the basis for a contract unless they

are specific about the quantity of goods being offered, as well as the intended offeree.

 That under the UCC, contracts for the sale of goods can leave open nonquantity terms

to be decided at a future time (§2-305). Note that this rule applies only to sales of

goods.

 See Sidebar 8.4 on is there a definite offer.

1. Newman v. Schiff, 778 F.2d 460 (8th Cir. 1985).

The defendant made an offer on CBS News Nightwatch that he would give $100,000 to

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

which had terminated at the show’s end.

2. Grove v. Charbonneau Buick–Pontiac, Inc., 240 N.W.2d 853 (1976).

The defendant’s car dealer offered to give a new car to anyone who hit a hole-in-one in

the eighth hole of a local golf tournament. The local golf course had only nine holes, so

each hole was played twice from a different tee. On the 17th tee (second time the

plaintiff played hole number 8) he hit a hole-in-one. When the defendant refused to give

the plaintiff a new car, claiming that the plaintiff had hit his hole-in-one on the 17th

hole rather than on the 8th hole, the plaintiff sued.

Held: Charbonneau’s offer to give the new car as a prize was accepted by the making of

3. O’Keefe v. Lee Calan Imports, Inc., 262 N.E.2d 758 (1970).

Plaintiff saw an automobile advertised in the Chicago Sun-Times for $1,095. When the

plaintiff went to the defendant’s place of business and attempted to buy the car for that

price, he was notified that the price was an error and that the defendant would not honor

the advertised price. The plaintiff sued, arguing that the advertised price was an offer

that he had accepted.

B. Acceptance of Offer

Emphasize:

 How unilateral and bilateral contracts are accepted.

Mirror Image Rule

Emphasize:

 That for an acceptance to create a binding contract, standard contract laws requires

that the acceptance must “mirror” the offer, that is, must match it exactly.

UCC Battle of the Forms

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Emphasize:

 How the UCC has changed the mirror image rule.

Silence Not Acceptance

Emphasize:

 How course of dealing and conduct can imply acceptance and thus provide

exceptions to the rule that silence is not acceptance.

Mailbox Rule

Emphasize:

 The deposited acceptance rule is also called the mailbox rule.

 Sidebar 8.5 highlights the relevance of the mailbox rule in modern business

transactions.

Additional Case for Discussion:

1. Sharp Electronics Corporation v. Deutsche Financial Services Corporation, 216 F.3d

388 (4th Cir. 2000).

Sharp Electronics sold merchandise to Montgomery Ward. Deutsche Financial loaned

money to Montgomery Ward by paying Sharp for the merchandise shipped after

approving the invoice faxed by Sharp. Essentially Deutsche Financial agreed to pay for

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nature, Deutsche Financial can and did state the limitation of its financial commitment.

Promise to Make a Gift

Emphasize:

 The different situations when promises may be enforceable even though no

consideration is present.

1. Esquire Radio & Electronics, Inv. C. Montgomery Ward & Co., 804 F.2d 787 (2d.Cir.

1986).

Esquire Radio & Electronics (Esquire) helped develop and import consumer electronics

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arrangement continued for many years, the buy-back terms were never expressly set

forth. On several occasions, Esquire became concerned about its large inventories of

spare parts. Each time Esquire was assured that Ward would buy the parts, and Ward

urged Esquire to inventory even more. In 1984, Ward terminated its relationship with

Esquire and refused to buy Esquire’s existing spare-parts inventory. Esquire sued.

Issue: Must Ward pay for the spare parts that Esquire has in inventory?

accumulate spare parts by promising that the parts would be repurchased. Esquire

reasonably and foreseeably relied on such promises and was injured.

2. Widmer v. Gibble Oil Co., 421 S.W.2d 886 (1967).

When the plaintiff oil company attempted to collect the $67.80 balance on the

defendant’s credit card account, the defendant sent a check to the company for $9.01

and marked the check “full payment of all accounts to date.” The plaintiff cashed the

check. The defendant maintained that there had been an accord and satisfaction.

owed for a liquidated debt cannot be an accord and satisfaction.

D. Capacity of Parties to Contract

Emphasize:

 That the term capacity refers to a person’s ability to be bound by a contract.

 That courts have traditionally held three classes of persons to lack capacity to be bound

by contractual promises: minors, intoxicated persons, and mentally incompetent

persons.

Minors

Emphasize:

 How a minor may disaffirm or ratify a contract.

Intoxicated and Mentally Incompetent Persons

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Emphasize:

 That except when a court has judged an adult to be mentally incompetent, that adult

does not lose capacity to contract simply because of intoxication or mental

impairment.

 That a contract is voidable by the intoxicated or mentally impaired person.

Cases for Discussion:

1. Libby, McNeil & Libby v. United Steelworkers, 809 F.2d 1432 (9th Cir. 1987).

Libby, McNeil & Libby (Libby) sought a judgment declaring that the collective

bargaining agreement it had with the United Steelworkers did not obligate it to pay

certain pension benefits. Libby contended that it had never agreed to pay the benefits,

and if it had, it had done so by mistake. The magistrate found that Libby had agreed to

include in its agreement whatever pension benefits American Can Co. provided in its

plan, which included the contested ones.

Held: A unilateral mistake will excuse Libby from the contract only if the Union knew

2. Discuss the implications of the experienced 13-year-old baseball card collector who

bought a Nolan Ryan rookie card from an inexperienced sales clerk for $12. The shop

owner sought to rescind the sale on the basis that the card was a $1,200 card that had

been mistakenly marked $12. Eventually, the parties agreed to auction the card for

charity. It brought $5,000.

3. Leenawee County Bd. of Health v. Messerly, 295 N.W.2d 903 (1980).

Seller intended to sell and buyers intended to buy rental income property. In fact the

property had no value either as income property or single-family residence due to its

condemnation by the county health department as unfit for habitation. The buyer sued

for rescission.

E. Lawful Purpose

Emphasize: