978-1285860381 Chapter 12 Solution Manual Part 1

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Suggested Additional Assignments

Bob and Katrina: Let’s Make a Deal

The chapter opens with a page of dialogue. Bob, a movie director, and Katrina, an actress, believe they

have formed a contract—but what are its terms? Divide students into two groups and have one group

write a brief contract capturing the deal from Bob’s perspective, and the other write a brief contract

capturing the deal from Katrina’s perspective. In class select two representatives from each group to act

as lawyers for Bob and Katrina, respectively. Tell them they are meeting to hammer out the terms of a

deal based on what their clients told them and must try to agree on what those terms are.

Drafting: A Letter of Intent

Businesspeople use letters of intent frequently, although lawyers often urge otherwise. Have students

draft a letter of intent that arguably does—and arguably does not—create a binding deal for some

transaction within the students’ experience such as renting an apartment, buying a car, or booking a

charter flight for spring break. The students should be able to explain the nature of the ambiguity and

how to remedy it.

Chapter Overview

Chapter Theme

A valid offer creates a power in the offeree to create a contract by agreeing to its terms. The law

determines whether a person intended to make an offer by looking objectively at all of the facts and

circumstances in which it is made. The law of offer and acceptance is premised on the common-law

concept of “meeting of the minds,” in which an offeree understands and accepts an offer on the same

terms as the offeror. Vagueness or ambiguity in an offer or acceptance guarantees problems and may lead

to litigation. The executive or consumer who articulates to herself precisely what she wants, and then

bargains clearly for it, is likely to spend more time doing business and less time in court.

Quote of the Day

“It takes two to speak the truth–one to speak and another to hear.” –Henry David Thoreau (1817 1862),

American philosopher.

Meeting of the Minds

Agreements that have a problem in any of the key areas do not amount to valid contracts

Parties can form a contract only if they have a meeting of the minds. For this to happen, one side must

make an offer and the other must make an acceptance.

offer

As the text notes, an offer is an act or statement that proposes definite terms and permits the other party

to create a contract by accepting those terms. Sometimes we forget that by making a valid offer, we give

that power to the other person. Sometimes corporate officers forget the point. Nationwide Mutual

Insurance Company wanted to energize a regional meeting, so it announced a contest for the best

company slogan, to be used at the convention. “Here’s what you could win: His and Hers Mercedes. An

all-expense-paid trip around the world. Additional prizes to be announced. (All prizes subject to

availability.)”

David Mears and 184 other employees entered. Mears’s slogan, “At the Top and Still Climbing,” was

the winner. One company officer told Mears that he had won the two cars, while another one said that the

cars were just a joke. Ultimately, Nationwide informed Mears that the prizes were never meant seriously.

The company did, however, use his slogan for its convention, and banners, booklets, and balloons all

echoed with his phrase.

Mears failed to see the joke, and filed suit in federal court. The jury didn’t laugh, either. They

awarded Mears $60,000, the value of two of the least expensive Mercedes. The trial judge gave a

judgment n.o.v. for Nationwide, ruling that the terms of the agreement were too vague to enforce. On

appeal, however, the Eighth Circuit Court of Appeals agreed with the jury, and reinstated the $60,000

damage award.

Question: Was this a bilateral or unilateral contract?

Question: How can you tell?

Question: Did Nationwide intend this offer to be taken seriously?

Question: If Nationwide didn’t intend it to be taken seriously then why did the jury find that Mears’

accepted it and created a contract?

Answer: There is a difference between subjective intent and objective intent. Subjective intent is

Question: Aren’t the terms of this offer fairly vague?

Question: What is a judgment n.o.v.?

Question: What happened on appeal?

Question: What lesson should we draw from this example?

Statements That Usually Do Not Amount to offers

An invitation to bargain is not an offer. A price quote is generally not an offer. An advertisement is

generally not an offer.

One thing invitations to bargain and price quotes have in common is that if they were offers, then the

offeror would almost invariably be unable to perform if everyone who received the invitation or price

quote could form a contract by accepting its terms. Suppose a homeowner sends a letter to friends and

neighbors expressing interest in selling his home, an asking price of $200,000, and a closing on a date

three months hence. If two recipients respond by saying “I accept” can the homeowner perform both

agreements? Obviously not, he only has one house to sell. Is he therefore in breach of one of the

agreements? Which one? If invitations to bargain and price quotes are understood in this fashion then

there should be no problem in recognizing why they are not offers.

Placing an item up for auction is not an offer, it is merely a request for an offer. The bids are the

offers. Most auctions are with reserve, meaning that the items for sale have a minimum price. The law

assumes that an auction is with reserve unless the auctioneer clearly states otherwise. The rules are

different in an auction without reserve. Here there is no minimum. Once the first bid is received, the

auctioneer must sell the merchandise to the highest bidder.

Landmark Case: Carlill v Carbolic Smoke Ball Company 1

Facts: In the early 1890s, English citizens greatly feared the Russian Flu. The Carbolic Smoke Ball

Company ran a newspaper ad that contained two key passages:

“£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the

influenza after having used the ball three times daily for two weeks according to the printed

directions supplied with each ball.”

“£1000 is deposited with the Alliance Bank, shewing our sincerity in the matter.”

The product was a ball that contained carbolic acid. Users would inhale vapors from the ball through a

long tube.

Carlill purchased a smoke ball and used as directed for two months. She then caught the flu. She sued,

arguing that, because her response to the ad had created a contract with the company, she was entitled to

£100.

The trial court agreed, awarding Carlill the money. The company appealed.

Issues: Did the advertisement amount to an offer? If so, was the offer accepted?

Excerpts from Lord Justice Lindley’s Decision:

The first observation I will make is that we are dealing with an express promise to pay £100 in certain

events. Read the advertisement how you will, and twist it about as you will, here is a distinct promise

expressed in language which is perfectly unmistakable.

We must first consider whether this was intended to be a promise at all. The deposit is called by the

advertiser as proof of his sincerity in the matter – that is, the sincerity of his promise to pay this £100 in

the event which he has specified. I say there is the promise, as plain as words can make it.

Then it is contended that it is not binding. In the first place, the performance of the conditions is the

acceptance of the offer. Unquestionably, as a general proposition, when an offer is made, it is necessary

that the acceptance should be notified. But is that so in cases of this kind? I think that in a case of this

kind that the person who makes the [offer] shews by his language and from the nature of the transaction

that he does not expect and does not require notice of the acceptance apart from notice of the

performance.

We, therefore, find here all the elements which are necessary to form a binding contract enforceable in

point of law.

It appears to me, therefore, that the defendants must perform their promise, and, if they have been so

unwary as to expose themselves to a great many actions, so much the worse for them. Appeal dismissed.

Carlill lived fifty years more, dying, at the age of 96. Of the flu.

Letters of Intent

Letters of Intent pose a different problem. A letter of intent is between two parties and does not raise the

problem of multiple acceptances discussed above. The concern is that if negotiations break down one

party will treat the letter of intent as a binding agreement and seek its enforcement.

Business people often want letters of intent near the start of negotiations because they serve valuable

business purposes. Letters of intent can indicate areas of agreement and expose open terms, provide

comfort that the distance between the parties’ positions is small enough to warrant the time and expense

of continued negotiations, interest investors to consider providing financing, and serve as the template for

1 1 QB 256 Court of Appeal, 1892

a definitive contract, if and when the parties reach agreement. Lawyers protect clients from the other

side’s undue reliance on the letter of intent as a binding agreement by peppering it with language

disclaiming its creation of legal obligations and expressing its temporary nature—what is often called

“weasel language,” because its purpose is to leave one’s client with a way out of the deal.

Additional Case: Cochran v. Norkunas2

Facts: Eileen Norkunas owned a home in Baltimore, Maryland. The Groves and the Cochrans expressed

an interest in buying the house. The two couples drafted a handwritten letter, stating:

Letter of Intent

We, Rebecca Cochran, Robert Cochran, Hope Grove and Robert Grove, Buyers-offer to buy 835

McHenry Street, Baltimore, Md. 21230 for $162,000. Payment by $5,000 check, this date and

$157,000 by certified or cashiers funds no later than April 17, 2004.

A standard form Maryland Realtors contract will be delivered to Seller within 48 hours. Seller to

pay only ½ normal transfer taxes and a 3% commission to Long & Foster. All other costs of closing

to be paid by buyers.

The contract will contain a financing requirement for buyers, but buyers will guarantee closing

and not invoke the financing contingency.

We will delete the standard home inspection contingency.

They buyers and their broker signed the Letter. Norkunas accepted the buyers’ check for $5,000 but never

deposited it. A few days later, the agent sent Norkunas a package of documents including a “Residential

Contract for Sale.” Norkunas signed the contract but never returned it to the buyers. A week later,

Norkunas informed the buyers that she would not sell the property and took the property off the market.

The buyers sued claiming the letter of intent entitled then to the house. The trial court gave

summary judgment for the buyers, but an intermediary appellate court reversed holding that the letter of

intent was not binding. The buyers appealed.

Issue: Did the letter of intent create a binding agreement?

Holding: No, judgment of the intermediary court affirmed. The court found that the letter of intent did

not indicate that the parties would be bound by it but was an agreement to make an agreement. Moreover,

Norkunas did not manifest an acceptance of any offer, especially since she did not return the documents

sent to her.

According to the court a letter of intent is a preliminary agreement. Although some letters of

intent are signed with the belief that they are letters of commitment and, assuming this belief is shared by

the parties, the letter is a memorial of a contract. In other cases, the parties may not intend to be bound

until a further writing is completed.

Here, the buyers argue that the letter of intent is an enforceable contract because it was formed by

offer and acceptance, supported by consideration, contained all definite and material terms, and was

signed by the parties. Norkunas claims that the letter of intent was not an enforceable contract because it

was not intended to be the parties’ final expression of their agreement, the promised “Residential Contract

for Sale” was to be their final expression.

The court concluded that a reasonable person would have understood the letter of intent to mean

that a formal contract offer was to follow the letter of intent. The letter states that a “standard form

Maryland Realtors Contract will be delivered to Seller within 48 hours.” Thus the language in the letter

of intent is indicative of intent to memorialize the property sale through a final standard form contract.

The clear language of the letter demonstrates that the parties did not intend the letter to constitute a

binding agreement for the purchase and sale of Norkunas’ property.

2 398 Md.1, 919 A.2d 700, Court of Appeals of Maryland, 2007.

Question: The parties agreed to a letter of intent with the purchase price, payment terms, and

contingency clauses. Why wasn’t that enough to create a binding agreement?

Answer: The letter of intent left also stated that a contract would follow in the future. The court

Question: Why did they go to the trouble of writing and signing a letter of intent if it had no legal

effect?

Answer: The letter of intent captured the state of their negotiations, showing where the parties

agreed. In complex negotiations such as one for the purchase of real estate, it is critical to keep track

Question: You say the letter of intent is often important for business people. Do lawyers like to use

them, too?

Answer: Lawyers use them for the same reasons, to narrow down the field of open issues and keep

Question: How do lawyers deal with those concerns?

Problems with De+niteness

It is not enough that the offeror indicates that she intends to enter into an agreement. The terms of

the offer must also be definite.

Case: Baer v Chase3

Facts: David Chase was a television writer-producer with many credits, including a detective series

called The Rockford Files. He became interested in a new program, set in New Jersey, about a “mob boss

in therapy,” a concept he eventually developed into The Sopranos. Robert Baer, a prosecutor in New

Jersey interested in writing for television, met Chase and pitched his own idea for a television series about

the New Jersey mafia. Baer didn’t know that Chase was pursuing a similar idea. Baer arranged meetings

for Chase with local detectives and prosecutors, who provided Chase with information about their

experiences with organized crime and showed him various New Jersey locations. Baer also met with

Tony Spirito, who gave Chase colorful background information about the local mafia. After returning to

Los Angeles Chase wrote and sent Baer a draft for The Sopranos’ pilot, which Baer commented on. After

The Sopranos became a hit show Baer sued Chase, alleging that on three separate occasions Chase had

agreed that if the program succeeded, Chase would “take care of” Baer, and would “remunerate Baer in a

manner commensurate to the true value of his services.” The District Court dismissed the case, holding

that the alleged promises were too vague to be enforced. Baer appealed.

Issue: Was Chase’s promise definite enough to be enforced?

Holding: Judgment for Chase affirmed. New Jersey law deems the amount of compensation an essential

term of any contract. A contract lacking a definite price may still be enforceable if the parties specify a

practicable method by which they can determine the amount. In the absence of an agreement as to the

manner or method of determining compensation the purported agreement is invalid. A definite duration

for the contract is also essential under New Jersey law. New Jersey law does not support Baer’s argument

that “submission-of-idea” cases create an exception to these rules. There is no proof the parties agreed on

how, how much, where, or for what period Chase would compensate Baer, the value of Baer’s services,

3 392 F.3d 609 Third Circuit Court of Appeals, 2004

how the “success” of The Sopranos would be measured, how profits were defined, or the duration of the

contract.

Question: Chase said he would “take care of” Baer and pay him “in a manner commensurate with

the true value of his services.” Don’t those statements show Chase’s intent to compensate Baer?

Question: Then why does the court rule in favor of Chase and let him avoid payment?

Question: There are methods to determine what fair compensation would be. The trial court could

hear evidence about what others who’ve made similar creative contributions to television shows are

paid, or hear expert testimony from people in the business about the customary payment for services

similar to Baer’s. Why doesn’t the court try to arrive at a method of fair compensation?

Question: Why?

Answer: Because to separate enforceable promises from unenforceable promises, contract law

Question: How does the court arrive at its decision?

Question: Does that mean the parties must specify a dollar amount in the contract for its terms to be

definite?

Answer: Not necessarily, as long as the parties do specify a method by which compensation can be

Question: So Chase and Baer could have agreed, say, that Baer would be compensated in an amount

equal to the average paid for screenwriting services for the pilots of the three most popular HBO

television serials within the previous two years?

You Be The Judge: Gabriel v. Albany College of Pharmacy and

Health Services-Vermont Campus4

Facts: Matthew Gabriel was a student in Professor Pumo’s immunology class. Professor Pumo’s syllabus

outlined course requirements and stated that “plagiarism will not be tolerated.” After grading the first

assignment, Professor Pumo realized that many papers had sentences copied from other sources without

citations. Instead of reporting everyone for plagiarism, Professor Pumo said she would give students a

“free pass” on one copied sentence. But Gabriel’s paper contained many plagiarized sentences, so he

received a failing grade for the assignment.

Gabriel sued the professor for breach of contract. He argued that the syllabus was a contract and that the

“free pass” policy broke it—because that term was not part of their original agreement. According to

Gabriel, since the professor breached the contract, he was no longer obligated to refrain from plagiarizing,

and so should not be punished.

You Be the Judge: Was the professor’s syllabus an offer whose acceptance formed an enforceable

contract?

4 2013 WL 4456690 (D. Vt.2013).

Argument for Gabriel: A syllabus is a contract. On the first day of class, the professor presents the

syllabus as an offer and students agree by staying in the course. Who has not chosen a class because of its

particular workload or assignments? The terms in the syllabus are promises upon which students rely.

Professor Pumo unilaterally changed the written “rules of the game.” Once she broke her promise, there

was no longer a “deal.” Students should not be held to her arbitrary rules.

Argument for Professor: Professors do not intend to make an offer when they hand out a syllabus—

much less be legally bound! The syllabus merely an announcement that provides general information

about course requirements, grading policies, and behavior guidelines. Reasonable people do not expect a

syllabus to be enforceable in court. It was not a contract—Professor Pumo had the right to change the

class rules, make additional assignments, or even kick Gabriel out at any time. Even if the syllabus were a

contract, the phrase “plagiarism will not be tolerated” is too indefinite to be a valid offer. Gabriel is not

immune from the plagiarism rules.

Holding: The court held that since reasonable people do not view a syllabus as a legally binding

promise, there was no contract. It is customary that professors will change the timing and assignments of

a course. Gabriel’s argument did not succeed.

Question: Was the determination of this case governed by common law or the UCC? Why?

Question: What is the issue with the statement on the syllabus that “plagiarism will not be tolerated?”

The UCC and Open Terms

Usually, UCC provisions are not significantly different from common law rules. But on occasion, the

UCC modifies the common law rule in some major way. We have just seen that, under the common law,

the terms of an offer must be definite. But under the UCC, many indefinite contracts are allowed to stand.

Gap Filler Provisions

Even if a UCC contract lacks a specific method for determining missing terms, the Code itself contains

gap-filler provisions, which are rules for supplying missing terms.

In general, if the parties do not settle on a price, the Code establishes that the goods will be sold

for a reasonable price. This will usually be the market value or a price established by a neutral

expert or agency. (UCC §2-305.)

An output contract obligates the seller to sell all of his output to the buyer, who agrees to accept

it. For example, a cotton grower might agree to sell all of his next crop to a textile firm. A

requirements contract obligates a buyer to obtain all of his needed goods from the seller. Output

and requirements contracts are by definition incomplete, since the exact quantity of the goods is

unspecified. The Code requires that in carrying out such contracts, both parties act in good faith.

Neither party may suddenly demand a quantity of goods (or offer a quantity of goods) that is

disproportionate to their past dealings or their reasonable estimates. (UCC §2-306.)

Termination of offers

Offers may be terminated by revocation, rejection, expiration or by operation of law.

Termination by Revocation

There is asymmetry in the rules for when an offeror’s revocation of an offer is effective and when an

offeree’s acceptance of an offer is effective: the former is effective when the offeree receives it, the latter

is effective when it is out of the offeree’s control. These rules are not intuitive, require special emphasis,

and provide excellent fodder for exam questions.

Some offers cannot be revoked… at least for a stated period. Option contracts allow the interested

purchaser to buy the right to have the offer held open for a time. Firm offers are those that the offeror

has promised to not revoke for a particular time.

Making Contracts Temporarily Irrevocable

Some offers cannot be revoked, at least for a time. A firm offer is one that by its own terms will be held

open for a given period. With an option contract, an interested purchaser buys the right to have the offer

held open. The offeror may not revoke an offer during the option period.

Termination by Rejection

Rejection may be clearly stated, and immediately terminates the offer. A counteroffer also terminates the

original offer.

Termination by Expiration

An offeror may set a time limit on an offer; if she does not, the offer expires after a “reasonable time.”

Termination by Operation of Law

An offer terminates if the offeror dies or becomes mentally incapacitated, or if the subject matter of the

offer is destroyed.

Acceptance

The offeree must communicate acceptance for it to be valid. Silence is NOT golden!

UCC and the Battle of Forms

Under common law, acceptance must be precisely the same terms as the offer (the mirror image rule).

Under the UCC, merchants using different preprinted forms have a way to reach agreement. This is

known as “the battle of the forms.”

The battle of forms provisions of UCC §2-207 provide an excellent illustration of how the UCC alters

common-law rules. While one may choose not to explore these provisions in depth unless and until one

covers the UCC in Unit 3, it is useful to mention §2-207 to contrast with the common law’s mirror-image

rule.