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Additional Case: Bayway Rening Co. v. Tosco Corp.1
Facts: Bayway Refining and Oxygenated Marketing and Trading A.G. (OMT) were both in the
business of buying and selling petroleum products. Bayway agreed to sell OMT 60,000 barrels of
gasoline, and OMT faxed a confirmation letter stating that it represented the full understanding of the
parties. The next day, Bayway faxed its own confirmation letter, which stated that the document
canceled and superseded any other correspondence. Bayway’s fax incorporated by reference Bayway’s
own “General Terms and Conditions.” Those general terms were not sent with the fax, but were
available for OMT to examine if it wished. One of those terms stated that the buyer would be
responsible for any federal taxes.
OMT, which never objected to the “general terms,” received the gasoline but refused to reimburse
Bayway for the federal taxes, which amounted to $464,035. Bayway sued. OMT claimed that the tax
clause materially altered the contract and, under section 2-207, never became part of the agreement.
The District Court gave summary judgment for Bayway, and OMT appealed
Issue: Was the tax clause a material alteration of the contract?
Holding: Judgment for Bayway affirmed. Under UCC §2-207(2)(b) the party opposing the inclusion
of additional terms shoulders the burden of proving they were a material alteration of the contract,
which is an alteration that would result in surprise or hardship if incorporated without express
awareness by the other party. To carry the burden of showing surprise, a party must establish that
under the circumstances, it cannot be presumed that a reasonable merchant would have consented to
the additional term. OMT’s executives testified they were amazed by the “contract by ambush” and
“sleight-of-hand proposal,” but OMT introduced no evidence to show that a reasonable petroleum
merchant would be surprised by the Tax Clause. Two industry experts offered unchallenged testimony
that it is customary for the buyer to pay all the taxes resulting from a petroleum transaction. An
additional term creates hardship when it creates or allocates an open-ended and prolonged liability.
That is not the case here.
Question: What is the disputed clause?
Question: Which party proposed this term?
Question: When did OMT first see the tax clause?
Question: But Bayway sent a fax confirming the agreement. Didn’t that fax contain the tax
clause?
Question: What does “incorporate by reference” mean?
Answer: It means that one party can propose contract terms without even showing the other side
all the terms proposed. The proposal could be for the sale or purchase of goods. As long as the
Question: You mean that OMT can supposedly agree to terms it never saw?
Question: Isn’t that crazy?
Answer: No. These parties are both sophisticated merchants, dealing in an expensive commodity.
Question: Doesn’t the mirror image rule preclude a contract here?
1 215 F.3d 219 (Second Circuit Court of Appeals 2000)
Answer: No. This contract is governed by the UCC because it is for the sale of goods. Under
Question: Under 2-207, the offeree might include additional terms or different terms. What is the
distinction between those terms?
Question: Which are we dealing with here, different or additional terms?
Answer: Additional terms.
Answer: When 1) the offer insisted on its own terms; 2) the additional terms materially alter the
Question: Which is at issue here?
Question: The court holds that OMT has the burden of proof. What does that mean?
Answer: It is OMT’s burden to show that the tax clause was a material alteration; it is not
Question: What must OMT demonstrate to prove material alteration?
Question: How does OMT fare in proving surprise and hardship?
Answer: Poorly. The court holds there is no surprise, even though OMT’s executive claimed
Clickwraps and Shrinkwraps
Case: Specht v. Netscape Communications Corporation2
Facts: The plaintiffs sued Netscape, claiming that its SmartDownload software illegally captured
private information about files they downloaded from the Internet. Plaintiffs downloaded the
SmartDownload software from a page on Netscape’s web that promoted the program’s benefits and, at
the bottom, bore a button labeled “download.” If, instead of downloading, they had scrolled further
down the page, they would have seen a hyperlinked invitation to “review and agree to the terms of the
Netscape SmartDownload software license agreement.” Clicking through the hyperlinks would have
led plaintiffs to the license agreement governing the software’s terms of use. Among the license terms
was an agreement to settle any dispute through arbitration rather than through a lawsuit. The plaintiffs
never read the license terms. In response to their suit Netscape moved the district court to stay the
proceedings and compel arbitration. The District Court denied Netscape’s motion, ruling that the
plaintiffs had not agreed to the terms of the license.
Issue: Had the plaintiffs agreed to arbitrate their claims?
Holding: Denial of Netscape’s motion to compel arbitration affirmed. Netscape argued that plaintiffs
must be held to a standard of reasonable prudence and that, because notice of the existence of
SmartDownload license terms was on the next scrollable screen, plaintiffs were on “inquiry notice” of
those terms. The court disagreed with the proposition that a reasonably prudent offeree in plaintiffs’
position would necessarily have known or learned of the existence of the SmartDownload license
agreement prior to downloading the software. Plaintiffs did not have constructive notice of its terms.
The court agreed that the concept of inquiry notice applies generally to contracts formed online, but not
in this case. Plaintiffs were responding to an offer that did not carry an immediately visible notice of
the existence of license terms or require unambiguous manifestation of assent to those terms. The
2 306 F.3d 17 Second Circuit Court of Appeals, 2002
placement of the “download” button above the portion of the screen bearing the invitation to view the
license terms did not put plaintiffs on inquiry notice of the existence of the license.
Question: What is Netscape asking the court to do?
Question: Why does Netscape want to deny plaintiffs their day in court?
Question: What do plaintiffs say?
Question: Where were the arbitration provisions?
Question: If they were on a separate page how did Netscape expect users to see them?
Answer: Netscape argued that the plaintiffs had “inquiry notice” of the terms because a portion of
Question: What does that mean—”inquiry notice?”
Question: What did the court think of Netscape’s argument?
Question: In other words . . .
Question: What does that mean in contract law terms?
Question: What should Netscape have done differently?
Answer: This 2002 decision was instrumental in leading web sites to redesign the ways in which
Ethics
Imagine browsing for an airline ticket online, only to discover that the first class fare from New
York to India is $1, round trip. Would you rush to purchase it? Airlines regularly make
programming mistakes resulting in mispriced online fares. Brian Kelly found a United Airlines
first class ticket from New York to Hong Kong—which usually costs about $11,000– for $43
and immediately bought it on the company’s online ticketing system. Kelly, who runs a website
for frequent flyers, advised his readers to take advantage of the glitch before United discovered
it. And many did.
Are these “mistake fares”—which are obviously “too good to be true”—enforceable as
contracts? Is there a valid offer and acceptance? Ethically speaking, would you take advantage
of this deal? Why or why not?
Communication of Acceptance
The offeree must communicate his acceptance for it to be effective. The questions that typically arise
concern the method, the manner, and the time of acceptance.
Method and Manner of Acceptance
The “method” refers to whether acceptance is done in person or by mail, telephone, email, or fax. The
“manner” refers to whether the offeree accepts by promising, by making a down payment, by
performing, and so forth. If an offer demands acceptance in a particular method or manner, the
offeree must follow those requirements. If the offer does not specify a type of acceptance, the
offeree may accept in any reasonable manner and method.
Time of Acceptance: The Mailbox Rule
An acceptance is generally effective upon dispatch, meaning the moment it is out of the offeree’s
control. Terminations, on the other hand, are effective when received.
Case: Soldau v. Organon, Inc.3
Facts: Organon fired John Soldau, then sent him a letter offering to pay him double the normal
severance pay, provided Soldau would sign a full release for any claims he might have against the
company. Soldau signed the release and deposited it in the nearest post office. When he returned
home, Soldau discovered a check from Organon for the double severance pay. He returned to the post
office and obtained from the clerk the release that he had posted; cashed Organon’s check; and finally
filed a suit, alleging that his firing was age discrimination. The federal district court gave summary
judgment for Organon, ruling that Soldau’s acceptance of the proposed release was effective when he
mailed it, creating a contract. He appealed.
Issue: Did Soldau create a contract by mailing the release?
Holding: Judgment for Organon affirmed. Under the mailbox rule, acceptance is effective upon
dispatch. When Soldau deposited the signed release in the mail he accepted Organon’s offer and his
subsequent withdrawal had no effect.
Question: What did Soldau do that was wrong?
Answer: Soldau wanted to have his cake and eat it, too—his deal with Organon was that he could
Question: How did the court rule in favor of Organon?
Question: But Soldau got the letter back—doesn’t that mean the mailbox rule doesn’t apply?
Multiple Choice Questions
1. Rebecca, in Honolulu, faxes a job offer to Spike, in Pittsburgh, saying, “We can pay you $55,000
per year, starting June 1.” Spike faxes a reply, saying, “Thank you! I accept your generous offer,
though I will also need $3,000 in relocation money. See you June 1. Can’t wait!” On June 1 Spike
arrives, to find that his position is filled by Gus. He sues Rebecca.
(a) Spike wins $55,000.
(b) Spike wins $58,000.
(c) Spike wins $3,000.
(d) Spike wins restitution.
(e) Spike wins nothing.
3 860 F.2d 355, 1988 U.S. App. LEXIS 14757 United States Court of Appeals for the Ninth Circuit, 1988
2. Arturo hires Kate to work in his new sporting goods store. “Look,” he explains, “I can only pay
you $9.00 an hour. But if business is good a year from now, and you’re still here, I’m sure I can
pay you a healthy bonus.” Four months later Arturo terminates Kate. She sues.
(a) Kate will win her job back, plus the year’s pay and the bonus.
(b) Kate will win the year’s pay and the bonus.
(c) Kate will win only the bonus.
(d) Kate will win only her job back.
(e) Kate will win nothing.
Answer: E. Kate will win nothing. The only thing Arturo obligated himself to do was to pay
3. Manny offers to sell Gina his TV for $100 on January 1. On January 2, Gina writes out a letter of
acceptance. On January 3, Gina drops the letter in a mailbox. On January 4, a postal worker gets
the letter out of the mailbox and takes it to the post office. On January 5, the letter arrives in
Manny’s mailbox. When (if ever) was a contract formed?
(a) January 2
(b) January 3
(c) January 4
(d) January 5
(e) None of the above – a contract has not been formed.
4. Frank, an accountant, says to Missy, “I’ll sell you my laptop for $100.” Missy asks, “Will you give
me until tomorrow to make up my mind?” “Sure,” Frank replies. Which of the following is true?
(a) Frank cannot revoke his offer, no matter what.
(b) Frank cannot revoke his offer only if Missy pays him to keep the offer open until tomorrow.
(c) Frank can revoke his offer no matter what, because he is not a merchant.
(d) Frank can revoke his offer no matter what, because he did not promise Missy anything in
writing.
5. Which of the following amounts to an offer?
(a) Ed says to Carmen, “I offer to sell you my pen for $1.”
(b) Ed says to Carmen, “I’ll sell you my pen for $1.”
(c) Ed writes, “I’ll sell you my pen for $1,” and gives the note to Carmen.
(d) All of the above
(e) A and C only.
Case Questions
1. The town of Sanford, Maine, decided to auction off a lot it owned. The town advertised that it
would accept bids through the mail, up to a specified date. Arthur and Arline Chevalier mailed in a
bid that turned out to be the highest. When the town refused to sell them the lot, they sued.
Result?
Answer: No contract, no sale. An auction is with reserve unless stated otherwise. The ad was
silent on the subject, so this auction was with reserve. That means that all of the bids, including
2. The Tufte family leased a 260-acre farm from the Travelers Insurance Co. Toward the end of the
lease, Travelers mailed the Tuftes an option to renew the lease. The option arrived at the Tuftes’
house on March 30, and gave them until April 14 to accept. On April 13, the Tuftes signed and
mailed their acceptance, which Travelers received on April 19. Travelers claimed there was no
lease and attempted to evict the Tuftes from the farm. May they stay?
Answer: Yes, they may. Using the mail to accept is reasonable, since Travelers chose that medium
3. Consolidated Edison Co. of New York (Con Ed) sought bids from General Electric Co. (GE) and
others to supply it with two huge transformers. Con Ed required that the bids be held open for 90
days. GE submitted a written bid and included a clause holding the bid open for 90 days. During
that period, Con Ed accepted GE’s bid, but GE refused to honor it. Is there a contract?
Answer: Yes. GE made a “firm offer,” governed by UCC §2-205. When a merchant signs a
4. Niels owned three adjoining parcels of land in Arizona. Hannah wanted to buy one. Over dinner,
the two sketched and signed this agreement: “Binding Contract: Niels agrees to sell one of his three
Arizona lots to Hannah. Within 14 days, the parties will meet on the land, decide which lot Hannah
is buying, and settle on a price. If they cannot agree on a price, they will decide a fair method of
doing so. Both parties agree to be bound by this contract.” Later, Niels refused to sell any land, and
Hannah sued. What will happen?
Answer: Do not be fooled by wording such as “Binding Contract.” Focus on the legal issues: Was
there a meeting of the minds? Niels and Hannah thought they had a contract—but courts make an
5. When a Tom Cat Bakery delivery van struck Elizabeth Nadel, she suffered significant injuries,
Nadel filed suit. Before the trial, Tom Cat’s attorney offered a $100,000 settlement, which Nadel
refused. While the jury was deliberating, the bakery’s lawyer again offered Nadel the $100,000
settlement. She decided to think about it during lunch. Later that day, the jury sent a note to the
judge. The bakery owner told her lawyer that if the note indicated the jury had reached a verdict,
he should revoke the settlement offer. Back in the courtroom, the bakery’s lawyer said, “If the note
is a verdict, my client wants to take the verdict.” Nadel’s lawyer then said, “My client will take the
settlement.” The trial court judge allowed the forewoman to read the verdict, which awarded Nadel
—nothing. Did Nadel’s lawyer accept the settlement offer in time?
Answer: Excerpts from Judge Figueroa’s Decision: Plaintiff’s motion to enforce “the settlement”
has generated considerable debate between the parties. Plaintiff asserts that the defendant is bound
to a settlement. Plaintiff’s problem is that there was no “agreement” to speak of. To be sure, there
Discussion Questions
1. Each time employees at BizCorp enter their work computers, the following alert appears: “You are
attempting to access the BizCorp network. By logging in, you agree to BizCorp’s Computer Usage
Policy and certify that your use of this computer is strictly for business purposes. Any activities
conducted on this system may be monitored for any reason at the discretion of BizCorp” Once an
employee has logged in, have the parties formed a valid contract? Discuss.
Answer: U.S. courts uphold these notices as valid consent for employee monitoring. Students might
2. Case law tells us that a course syllabus is not a binding contract—but how about your school’s
honor code? Under what conditions could an honor code be a contract?
Answer: In the Gabriel case, the student contended that the academic honor code was also a
contract. The court dismissed his claims on other grounds, but the question remains. On one hand,
3. The day after Thanksgiving, known as Black Friday, is the biggest shopping day of the year. One
major retailer advertised a “Black Friday only” laptop for $150. On Thanksgiving night, hundreds
of people waited for the store to open to take advantage of the laptop deal—only to learn that the
store only had two units for sale at the discounted price. Did the retailer breach its contract with
the hundreds of consumers who sought the deal? What obligation, if any, does the retailer have to
its consumers?
Answer: These cases resulted in numerous complaints to the FTC. Students might note that after
4. Someone offers to sell you a concert ticket for $50, and you reply, “I’ll give you $40,” The seller
refuses to sell at the lower price, and you say, “OK, OK, I’ll pay you $50.” Clearly, no contract
has been formed, because you made a counteroffer. If the seller has changed her mind and no
longer wants to sell for $50, she doesn’t have to. But is this fair? If it is all part of the same
conversation, should you be able to accept the $50 offer and get the ticket?
5. If you click an “I agree” box, odds are that its terms are binding on you, even if the box contains
dozens or even hundreds of lines of dense text. Is this fair? Should the law change to limit the
enforceability of clickwraps?
6. Courts stick to objective (reasonable person) standards when evaluating offers and acceptances.
Juries are not asked to “get inside someone’s head”, they are instructed to determine what a
reasonable person would think of offerors’ and offerees’ statements. Is this practice reasonable?
Would it be better if the law directly considered whether people wanted to make contracts?
7. ETHICS In Baer v. Chase, was it fair for Chase to use Baer’s services without compensation? Did
Baer really expect to get paid, or was he simply hoping that his work would land him a job?
