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14 Unit 2 Contracts and the UCC

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 Definiteness

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.

Additional Case: Baer v Chase8

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

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,

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?

Answer: The issue in this case is not Chase’s intent but the definiteness of the offer.

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?

8 392 F.3d 609 Third Circuit Court of Appeals, 2004

Chapter 9 Introduction to Contracts 15

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?

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

Case: Nadel v. Tom Cat Bakery9

Facts: A Tom Cat Bakery delivery van struck Elizabeth Nadel as she crossed a street. Having suffered

significant injuries, Nadel filed suit. Before the trial began, the attorney representing the bakery’s owner

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

9 2009 N.Y. Misc. LEXIS 5105 SUPREME COURT OF NEW YORK, NEW YORK COUNTY, 2009

16 Unit 2 Contracts and the UCC

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 was an offer from defendant. During the above-quoted

Question: What does the court say is the fatal flaw in Plaintiff’s argument?

Question: What else does the court find faulty in Plaintiff’s case?

Termination by Rejection

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

original offer.

Acceptance

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

Mirror Image Rule

UCC and the Battle of Forms

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

Additional Case: Bayway Refining Co. v. Tosco Corp.10

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

10 215 F.3d 219 (Second Circuit Court of Appeals 2000)

Chapter 9 Introduction to Contracts 17

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,

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?

Answer: Naturally, the seller, Bayway.

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

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?

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.

Question: Additional terms become part of the contract between the parties except in three cases.

What are they?

18 Unit 2 Contracts and the UCC

Question: Which is at issue here?

Question: The court holds that OMT has the burden of proof. What does that mean?

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

When downloading or installing software, consumers often encounter a screen requesting them to check

their agreement to the terms of the contract. Most consumers click without having read any of the terms,

yet courts have ruled that such agreements are indeed binding.

Additional Case: Specht v. Netscape Communications Corporation11

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

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

Question: What is Netscape asking the court to do?

11 306 F.3d 17 Second Circuit Court of Appeals, 2002

Chapter 9 Introduction to Contracts 19

Question: Why does Netscape want to deny plaintiffs their day in court?

Question: What do plaintiffs say?

Answer: They say that they didn’t agree to arbitrate disputes because they didn’t see Netscape’s

Question: Where were the arbitration provisions?

Question: If they were on a separate page how did Netscape expect users to see them?

Question: What does that mean—“inquiry notice?”

Answer: It is the concept that a reasonably-prudent software downloader would have known to

inquire further into the existence of license terms.

Question: What did the court think of Netscape’s argument?

obvious because it didn’t contain an immediately visible notice of the existence of license terms.

Question: In other words . . .

Answer: It means the plaintiffs never accepted Netscape’s terms of use.

Question: What should Netscape have done differently?

Answer: This 2002 decision was instrumental in leading web sites to redesign the ways in which

Consideration

There are three rules of consideration:

1. Both parties must get something of measureable value from the contract..

What is Value?

As we have seen, an essential part of consideration is that both parties must get something of value. That

item of value can be either an “act”(doing something not required by law) or a “forbearance” (an

agreement to NOT do something that is otherwise allowed by law.)

A Bargain and an Exchange

Consideration does not require counteroffers. Students may equate “bargained–for” with “haggled–over.”

A simple example can demonstrate the meaning of “bargained–for” in this context: Curt offers to mow

Pedro’s lawn once a week for $50 beginning May 1 and ending November 1. Pedro accepts. Where is

the bargained-for exchange? Curt promised to mow Pedro’s lawn to induce Pedro to promise in return to

20 Unit 2 Contracts and the UCC

Distraught over his disappearance Wilson’s family had offered a $25,000 reward for information leading

to his whereabouts. When Trieste found the body and notified police he did not know about Wilson’s

disappearance or the offer of reward money. Looking at these facts strictly as a matter of contract law, is

Wilson’s family obligated to pay Trieste the reward? 12

Question: What kind of contract did the reward offer seek to form—bilateral or unilateral?

Question: Trieste’s information led to discovery of Wilson’s body. What is the family’s

argument that it has no obligation to pay the reward?

Question: What is Trieste’s response to this consideration argument?

Answer: He doesn’t have one based on contract law—if he never knew of the offer, how can he

Landmark Case: Hamer v. Sidway13

Facts: William Story wanted his nephew to grow up healthy and prosperous. In 1869, he promised the

15-year-old boy $5,000 if the lad would refrain from drinking liquor, using tobacco, swearing and playing

cards or billiards for money, until his twenty-first birthday. The nephew had a legal right to do those

Issue: Did the nephew give consideration for the uncle’s promise?

Holding: Judgment for plaintiff affirmed. The nephew gave valid consideration by refraining from doing

things he was legally entitled to do. The estate argued that there was no consideration because the

nephew benefited from avoiding the proscribed actions, but the court was unpersuaded: “Courts will not

ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or

is of any substantial value to anyone. It is enough that something is promised, done, forborne, or suffered

by the party to whom the promise is made as consideration for the promise made to him.”

Question: Before we discuss the contracts issue, can you explain how Hamer wound up as the

plaintiff?

Question: Why did the uncle’s estate deny payment to Hamer?

Answer: The estate argued that the nephew gave nothing to the uncle in exchange for the uncle’s

Question: How did the estate characterize this transaction?

Question: What was Hamer’s argument?

Answer: Hamer argued that the nephew did give something to the uncle in exchange for the uncle’s

12 Adapted from Contract Smontract: Mom Refuses to Pay Informant Reward Money, American Lawyer Media,

July 18, 2000.

13 124 N.Y. 538, 27 N.E. 256, 1891 N.Y. LEXIS 1396 New York Court of Appeals, 1891

Chapter 9 Introduction to Contracts 21

Question: The uncle received no benefit from the nephew’s promise. Why does the court hold that

the nephew gave consideration?

Question: The nephew gave up activities that were bad for his health. What detriment did he suffer?

Answer: “Detriment” here does not mean that the nephew experienced adverse consequences. One

Question: Which of these concepts applies here?

Question: Still, how is the nephew’s detriment a benefit to the uncle?

Answer: It is not a benefit in any economic sense, but that does not matter. What matters is that the

Question: Would a similar exchange of promises today between an adult and 15-year-old also result

in a contract?

Answer: No. In the U.S. persons under the age of 18 cannot purchase tobacco products and persons

Multiple Choice Questions

1. A sitcom actor, exhausted after his 10-hour workweek, agrees to buy a briefcase full of cocaine from

Lewis for $12,000. John and the actor have a ______________ contract.

(a) valid

(b) unenforceable

(d) void

2. Linda goes to an electronics store and buys an HDTV. Lauren hires a company to clean her swimming

pool once a week. The ____________ governs Linda’s contract with the store, and the __________

governs Lauren’s contract with the cleaning company.

(a) common law; common law

(b) common law; UCC

(d) UCC; UCC

3. Consider the following scenarios:

I. Madison says to a group of students, “I’ll pay $35 to the first one of you who shows up at my

house and mows my lawn.”

22 Unit 2 Contracts and the UCC

II. Lea posts a flyer around town that reads, “Reward: $500 for information about the person

who keyed my truck last Saturday night in the Wag-a-Bag parking lot. Call Lea at 555-

5309.”

Which of these proposes a unilateral contract?

(a) I only

(b) II only

(d) None of the above

4. 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.

5. 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.

which is a rejection of Rebecca’s offer. She has no obligation to him.

Essay Questions

1. In the bleachers…

“You’re a prince, George!” Mike exclaimed. “Who else would give me a ticket to the big game?”

“No one, Mike, no one.”

“Let me offer my thanks. I’ll buy you a beer!”

“Ah,” George said. “A large beer would hit the spot right now.”

“Small. Let me buy you a small beer.”

“Ah, well, good enough.”

Mike stood and took his wallet from his pocket. He was distressed to find a very small number of

bills inside. “There’s bad news, George!” he said.

“What’s that?”

“I, ah, I can’t buy you the beer, George.”

Chapter 9 Introduction to Contracts 23

George considered that for a moment.

“I’ll tell you what, Mike,” he said. “If you march to the concession stand right this minute and get me

my beer, I won’t punch you in the face.”

“It’s a deal!” Mike said.

Discuss the consideration issues raised by this exchange.

Answer: Mike’s initial promise to buy the beer is a gratuitous promise. He did receive a ticket from

2. Interactive Data Corp. hired Daniel Foley as an assistant product manager at a starting salary of

$18,500. Over the next six years Interactive steadily promoted Foley until he became Los Angeles

branch manager at a salary of $56,116. Interactive’s officers repeatedly told Foley that he would have

his job as long as his performance was adequate. In addition, Interactive distributed an employee

handbook that specified “termination guidelines,” including a mandatory seven-step pre-termination

procedure. Two years later Foley learned that his recently hired supervisor, Robert Kuhne, was under

investigation by the FBI for embezzlement at his previous job. Foley reported this to Interactive

officers. Shortly thereafter, Interactive fired Foley. He sued, claiming that Interactive could only fire

him for good cause, after the seven-step procedure. What kind of a claim is he making? Should he

succeed?

Answer: Foley is arguing that he has an implied contract with Interactive based on the informal

3. You Be the Judge: WRITING PROBLEM. John Stevens owned a dilapidated apartment

that he rented to James and Cora Chesney for a low rent. The Chesneys began to remodel and

rehabilitate the unit. Over a four-year period, they installed two new bathrooms, carpeted the floors,

installed new septic and heating systems, and rewired, replumbed, and painted. Stevens periodically

stopped by and saw the work in progress. The Chesneys transformed the unit into a respectable

apartment. Three years after their work was done, Stevens served the Chesneys with an eviction

notice. The Chesneys counterclaimed, seeking the value of the work they had done. Are they entitled

to it? Argument for Stevens: Mr. Stevens is willing to pay the Chesneys exactly the amount he

agreed to pay: nothing. The parties never contracted for the Chesneys to fix up the apartment. In fact,

they never even discussed such an agreement. The Chesneys are making the absurd argument that

anyone who chooses to perform certain work, without ever discussing it with another party, can finish

the job and then charge it to the other person. If the Chesneys expected to get paid, obviously they

should have said so. If the court were to allow this claim, it would be inviting other tenants to make

improvements and then bill the landlord. The law has never been so foolish. Argument for the

Chesneys: The law of quasi-contract was crafted for cases exactly like this. The Chesneys have given

an enormous benefit to Stevens by transforming the apartment and enabling him to rent it at greater

profit for many years to come. Stevens saw the work being done and understood that the Chesneys

expected some compensation for these major renovations. If Stevens never intended to pay the fair

value of the work, he should have stopped the couple from doing the work or notified them that there

24 Unit 2 Contracts and the UCC

would be no compensation. It would be unjust to allow the landlord to seize the value of the work,

evict the tenants who did it, and pay nothing.

Answer: Yes, they are entitled to the value of their work, said the court in Chesney v. Stevens, 435

4. 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

5. The Dukes leased land from Lillian Whatley. Toward the end of their lease, they sent Ms. Whatley a

new contract, renewing the lease for three years and giving themselves the option to buy the land at

any time during the lease for $50,000. Ms. Whatley crossed out the clause giving them an option to

buy. She added a sentence at the bottom, saying, “Should I, Lillian Whatley, decide to sell at end

[sic] of three years, I will give the Dukes the first chance to buy.” Then she signed the lease, which

the Dukes accepted in the changed form. They continued to pay the rent until Ms. Whatley sold the

land to another couple for $35,000. The Dukes sued. Are the Dukes entitled to the land at $50,000?

At $35,000?

Answer: The Dukes win nothing. They offered a contract with an option clause but Ms. Whatley

Discussion Questions

1. Have you ever made an agreement that mattered to you, only to have the other person refuse to follow

through on the deal? Looking at the list of elements in the chapter, did your agreement amount to a

contract? If not, which element did it lack?

2. Consider promissory estoppel and quasi-contracts. Do you like the fact that these doctrines exist?

Should courts have “wiggle room” to enforce deals that fail to meet formal contract requirements. Or,

should the rule be, “If it’s not an actual contract, too bad. No deal.”

Chapter 9 Introduction to Contracts 25

3. Is it sensible to have two different sets of contract rules – one for sales of goods and another for

everything else? Would it be better to have a single set of rules for all contracts?

4. Return to the opening scenario. Fran, Ricky, Carla, and Dave each made an agreement with John.

None is valid under contract law. For the sake of fairness, should any of them be legally enforceable?

If so, which?

5. 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?