978-1285860381 Chapter 12 Solution Manual Part 2

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Additional Case: Bayway Rening 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canceled and superseded any other correspondence.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.

(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.

(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

(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.

(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.”

(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?