Week 4 Contracts - Contract law notes PDF

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Donovan v. RRL Corp. Citation. 27 P.3d 702 (2001) Brief Fact Summary. Defendant advertised the sale of a used car in a local newspaper, which made a typographical error, listing the sale price well below what Defendant intended. Plaintiff sued Defendant after Defendant refused Plaintiff’s attempt to buy the car at the advertised price. The trial court ruled in favor of Defendant. The court of appeals reversed and held that a valid contract had been formed. Synopsis of Rule of Law. In order to get out of a contract, a defendant who has made a unilateral mistake of fact must show: 1) the mistake was a fundamental assumption of the agreement; 2) the mistake materially effects the value of the agreement; 3) the defendant did not assume the risk of the mistake; and 4) it would be substantively unconscionable to enforce the contract in light of the mistake. Facts. Donovan (Plaintiff) is suing RRL Corp. (Defendant) for breach of contract. Defendant advertised the sale of a used car in a local newspaper. Unfortunately, the newspaper made a typographical error, listing the sale price well below what Defendant intended. Plaintiff attempted to buy the car based on representations in the advertisement but was rejected by Defendant. The municipal court found for Defendant, holding that a contract could not be formed because of the mistake in the advertisement. The court of appeals reversed based on a statute of the Vehicle Code making it illegal for a dealership to refuse to sell a car at the advertised price. Further, the court of appeals held that a valid contract had been formed between the parties. The advertisement was an offer and plaintiff accepted the offer when attempting to purchase the car. Issue. Whether one party is required to fulfill a contract when he made a good faith mistake regarding a material fact of the agreement and the contract would result in a substantial loss to that party.

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Held. No. The court of appeals’ ruling is reversed. In order to get out of a contract, a defendant who has made a unilateral mistake of fact must show: 1) the mistake was a fundamental assumption of the agreement; 2) the mistake materially effects the value of the agreement; 3) the defendant did not assume the risk of the mistake; and 4) it would be substantively unconscionable to enforce the contract in light of the mistake. Discussion. While a contract had been formed by the parties, it is unenforceable if it fulfills every element of the § 153(a) of the Restatement Second of Contracts; the unconscionability doctrine. Defendant here made a mistake about the advertised price. Price is a fundamental assumption of a contract in addition to materially impacting the value of that contract. Further, it is unreasonable to place the risk upon Defendant. The mistake was made in good faith and consumers cannot realistically expect absolute accuracy in every price listed in advertisements. Imposing such a high standard of accuracy upon automobile dealers would amount to strict liability for even the slightest mistake. In the context of modern transactions, strict liability is an unreasonable standard to put upon businesses. Lastly, due to the loss that would be suffered by Defendant for its minor mistake, it would be unconscionable to enforce this contract. Defendant would lose more than $9,000 while Plaintiff would reap a $12,000 advantage. This amounts to substantive unconscionability because Defendant would be unduly penalized and Plaintiff would be rewarded simply for taking advantage of Defendant’s vulnerability. Accordingly, Defendant is allowed to rescind the contract.

International Filter Co. v. Conroe Gin, Ice & Light Co Citation. 277 S.W. 631, 1925 Tex. App. 1383 Brief Fact Summary. Plaintiff produced machinery for water purification and submitted a proposal to sell certain machinery to the defendant who manufactured Ice. The proposal stated that if accepted it would become a contract if approved by an executive officer of the plaintiff’s company. Synopsis of Rule of Law. Form of the offer may require some final approval; however, it does not require notice to the other party of that approval unless the form expressly dictates that requirement. Court will construe meaning from the obvious meaning.

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Facts. The proposal document stated that it “becomes a contract when accepted by the purchaser and approved by an executive officer.” Defendant wrote “accepted” Feb. 10, 1920 and the notation “make shipment for Mar. 10” and sent the proposal back to plaintiff. Plaintiff President wrote “O.K.” and the date and. his name on the document. Issue. Whether the endorsement “O.K.” written on the paper by the President of the company was an “approval by an executive officer” as described in the proposal. Whether Plaintiff was required to give notice to Defendant of the “approval of the executive officer” in order to form the contract as contemplated. Held. The “OK” was an approval by the executive and that the paper then became a contract. The Court did not think it was essential that the approval by the executive be communicated to the defendant. The form of the offer did not show this was a requirement and to require it would be to change the obvious meaning of the language and change the “locus and time prescribed for meeting of the minds” contained in the offer. In any event, the subsequent confirmation letter would have sufficed as notice of the approval even though it was not expressly required. Discussion. The offeror has the power to express the terms and determine the acts which will constitute acceptance. Courts will construe those terms according to their plain meaning. Here, the terms required executive approval but did not require the offered to give notice of the acceptance.

Ever-Tite Roofing Corp. v. Green Citation. 22 Ill.83 So. 2d 449 (La. Ct. App. 1955) Brief Fact Summary. The Plaintiff-Appellant, Ever-Tite Roofing Corp. (Plaintiff), contracted with Defendant-Appellee, Green (Defendant), to renovate his home. When Plaintiff arrived at the job there was another company doing the work. Synopsis of Rule of Law. An offer proposed may be withdrawn before its acceptance and no

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obligation is incurred thereby. The power to accept is limited by the terms of the contract or at the end of a reasonable time.

Facts. The Defendant signed a document for the purpose of re-roofing their residence. The document included the work to be done and the price to be paid in monthly installments. The document was also signed by Plaintiff’s sales agent who was unauthorized to accept the contract on behalf of the Plaintiff. The document contained a provision that read “this agreement shall become binding only upon written acceptance hereof, by the principal or authorized officer of the Contractor or upon commencing performance of the work. This contract is not subject to cancellation.” Plaintiff performed a timely credit report and immediately following approval, the Plaintiff engaged workmen and loaded trucks and materials and proceeded to Defendant’s house to do the work. When Plaintiff arrived he found another company in the performance of the work Plaintiff had already contracted to do. Defendant told Plaintiff the other company signed a contract to do the work two days before. Defendant forbade the Plaintiff from doing the work. Defendant made no attempt to contact Plaintiff before this date. Defendant knew it would take several days because of the necessity to acquire financing. The Plaintiff proceeded with due diligence to this end. Issue. Was letting the contractor know when he showed up to do the job adequate notice of withdrawal? Had the offer expired? Held. No. Reversed. No. Because no time was specified within which the offer had to be accepted, then reasonable time must be allowed. No. Because the offer was accepted when Plaintiff began loading of the trucks and transporting men and materials to the Defendant’s residence. An offer proposed may be withdrawn before its acceptance and no obligation is incurred thereby. The power to create a contact by acceptance of an offer terminates at the time specified in the offer, or, if not time is specified, at the end of reasonable time. What constitutes a reasonable time is a question of fact. It depends on the nature of the contract proposed, the usages of business and other circumstances of the case which the offeree at the time of his acceptance either knows or has reason to know. Discussion. Here, the court is being generous in allowing the work to commence upon the 4

loading of the truck. The court is not clear about what type of work will be deemed acceptance and in what situations.

Davis v. Jacoby Citation. 1 Cal.2d 370 (Supreme Court of California, 1934) Brief Fact Summary. Frank and Caro Davis (Plaintiffs) appealed from a judgment refusing to grant specific performance of an alleged contract by Caro’s uncle, Mr.Whitehead, to make a will under which Caro would “inherit everything.” Synopsis of Rule of Law. A unilateral contract is one in which no promisor receives a promise as consideration for his promise. A bilateral contract is one in which there are mutual promises between the parties to the contract, each party being a promisor and a promisee. Under the Restatement, there is a presumption that offers are to enter a bilateral contract. Facts. Caro was the niece of Mr. and Mrs. Whitehead, and she and her husband had a very close relationship with them. Mr. and Mrs. Whitehead were elderly and infirmed, and Mr. Whitehead sought assistance from Frank and Caro to leave their home in Windsor, Canada and come to California. In a letter dated April 12, 1931, which was construed as a definite offer, Whitehead asked them to “come out here and be with me and look after [his] affairs,” and if they agreed, Caro would “inherit everything.” In a return letter, Mr. Davis unequivocally stated that he and Mrs. Davis accepted the proposition, and that they would both leave Windsor to go to him on April 25th. On April 22nd, Mr. and Mrs. Davis were engaged in closing out their business affairs and home and making arrangements to leave when Mr. Whitehead committed suicide. Mr. and Mrs. Davis immediately went to California, and stayed by Mrs. Davis’ side until she passed away on May 30th. After Mrs. Whitehead’s death, it was discovered that she had left everything to her husband, and Mr. Whitehead had left everything to his nephews, the respondents. This action was commenced on the theory that Mr. Whitehead entered into a contractual obligation to make a 5

will, Mr. and Mrs. Davis fully performed their side of the agreement, and specific performance should be granted upon the equitable principle that “equity regards as done that which ought to be done.” The trial found that the letter of April 12th was an offer to enter into a unilateral contract that could only be accepted by performance and not a promise to perform, that Mr. Whitehead’s suicide revoked the offer and the purported acceptance was of no legal effect. Issue. Was Mr. Whitehead’s letter an offer to enter into a unilateral contract? Held. No. Judgment reversed; rehearing denied. · The offer of April 12th was to enter a bilateral contract. The parties were very close, and Mr. Whitehead knew from his past relationship that if they gave their promise to perform he could rely upon them. · Further, the contract required Mr. and Mrs. Davis to perform services for both Mr. and Mrs. Whitehead, so if he died first some services would have to be performed after his death. Therefore, the offer could not have been for a unilateral contract. · Mr. and Mrs. Davis fully performed their part of the contract; and where damages are insufficient specific performance will be granted. Dissent. None Concurrence. None Discussion. · It would have been contrary to the presumption of bilateral contracts and common sense to construe the April 12th letter as a unilateral offer.

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· Mr. and Mrs. Davis also sold their business and home in reliance on the offer, so it would have been inequitable to deny them rights under the contract.

Allied Steel and Conveyors, Inc. v. Ford Motor Co Citation. 277 F.2d 907, 1960 U.S. App. 4598 Brief Fact Summary. Allied employee performing installation on Ford’s premises was injured due to the negligence of Ford employees. Allied had executed a purchase order that contained and indemnity form making Allied liable for Ford’s negligence in connection with Allied’s work. The work commenced and the injury occurred months before the indemnity provision was acknowledged. Synopsis of Rule of Law. If a form of acceptance is plainly worded in suggestive language, then the offeree may accept in another manner, such as commencement of performance and be bound by the offer’s stated terms.

Facts. First purchase order contained indemnity provision which narrowly applied to damages caused by the Negligence of Allied’s employees. It attached a broader indemnity form page which would make Allied also responsible for the negligence of Ford employees in connection with the work. This page was marked VOID. Amendment 2 to Purchase order contained same provision and attached same additional indemnity form which this time was not marked VOID. But also contained the additional language that “acceptance should be executed on acknowledgement copy which should be returned to the buyer.” Employee was injured several months before the acknowledgement copy of the second purchase order was executed, but was in the course of performing work related to the second purchase order. Issue. Whether Allied is liable under the broader indemnity provision even though it did not execute the acknowledgement copy until several months after the employee sustained his injury. Held. Ford’s amendment gave a suggested mode of acceptance which did not preclude Allied’s acceptance by another method. Allied accepted when Allied undertook performance of the work called for by the amendment with the “consent and acquiescence” of Ford. Also, it was well settled that “part performance” would complete the contract. Discussion. Allied accepted by commencing work and could not claim that it had not accepted 7

the terms in contradiction of that act of acceptance. There was also a settled rule that part performance would complete a contract.

Carlill v. Carbolic Smoke Ball Co. Citation. 1 Q.B. 256 (Court of Appeal 1893) Brief Fact Summary. The Plaintiff, believing Defendant’s advertisement that its product would prevent influenza, bought a Carbolic Smoke Ball and used it as directed from November 20, 1891 until January 17, 1892, when she caught the flu. Plaintiff brought suit to recover the 100£, which the Court found her entitled to recover. Defendant appealed. Synopsis of Rule of Law. This case considers whether an advertising gimmick (i.e. the promise to pay 100£ to anyone contracting influenza while using the Carbolic Smoke Ball) can be considered an express contractual promise to pay. Facts. The Defendant, the Carbolic Smoke Ball Company of London (Defendant), placed an advertisement in several newspapers on November 13, 1891, stating that its product, “The Carbolic Smoke Ball”, when used three times daily, for two weeks, would prevent colds and influenza. The makers of the smoke ball additionally offered a 100£ reward to anyone who caught influenza using their product, guaranteeing this reward by stating in their advertisement that they had deposited 1000£ in the bank as a show of their sincerity. The Plaintiff, Lilli Carlill (Plaintiff), bought a smoke ball and used it as directed. Several weeks after she began using the smoke ball, Plaintiff caught the flu. Issue. Lindley, L.J., on behalf of the Court of Appeals, notes that the main issue at hand is whether the language in Defendant’s advertisement, regarding the 100£ reward was meant to be an express promise or, rather, a sales puff, which had no meaning whatsoever. Held. Defendant’s Appeal was dismissed, Plaintiff was entitled to recover 100£. The Court acknowledges that in the case of vague advertisements, language regarding payment of a reward is generally a puff, which carries no enforceability. In this case, however, Defendant noted the deposit of £1000 in their advertisement, as a show of their sincerity. Because Defendant did this, the Court found their offer to reward to be a promise, backed by their own sincerity. Concurrence. In the concurrences of Bowen L.J. and A.L. Smith, L.J., the notion of contractual consideration also becomes an issue of relevance. Both of these Judges note that while the Defendant could argue lack of consideration, Plaintiff, in buying the Carbolic Smoke Ball and 8

using it as directed, provided adequate consideration through the inconvenience she experienced by using the product. Discussion. This case stands for the proposition that while sales puffery in advertisements is generally not intended to create a contract with potential product buyers, in this case it did because the Defendant elevated their language to the level of a promise, by relying on their own sincerity.

Corinthian Pharmaceutical Systems, Inc. v. Lederle Laboratories Citation. 724 F. Supp. 605, 1989 U.S. Dist. 13058 Brief Fact Summary. Defendant was a drug manufacturer that periodically issued price lists to customers like Plaintiff who purchased vaccines and distributed them the physicians. The price list stated that orders were subject to acceptance by Defendant and that orders would be priced according to price in effect at the time of shipment. Synopsis of Rule of Law. Where a seller notifies the buyer that the shipment is only an accommodation to the buyer, the seller will not be found to have accepted the terms of the buyer’s offer. An accommodation is an arrangement made as favor to the buyer.

Facts. Defendant announced a price of vaccine would increase to $171 per vial to its sales people on May 19, 1986 effective May, 20 1986. Plaintiff received knowledge of the price increase prior to the announcement to customers which was dated May 20, 1986. Plaintiff immediately ordered 1000 vials in response and on each order and in confirmation of the order stated that it would receive the vaccine at a price of $64 per vial. Defendant shipped 50 vials at the $64 price on June 3 and informed that the balance would be shipped at $171 per vial on June 16. Issue. Whether Defendant agreed to sell Plaintiff 1000 vials at the $64 price by acceptance of the offer by sending the first 50 vials. Held. The transaction was a sale of goods which would be governed by Article 2 of the UCC. Under the code, acceptance need not mirror the offer and shipping conforming goods is acceptance, but there is no acceptance by shipping non-conforming goods when the seller seasonably notifies the buyer that the shipment is only offered as an accommodation. The letter accompanying the shipment told the buyer that this partial shipment at a lower price was an 9

exception and that the remainder must be at a higher price. Furthermore, the invoice also required the buyer to assent to those terms. Discussion. The UCC rules allowed that a non-conforming shipment would not be acceptance if accompanied by proper notice if it was an exception or accommodation. It was non-conforming since they sent 50 and not 1000 vials. The letter clearly informed Plaintiff that this was a special favor and that the rest would be at the new high price. GIBBS v. AMERICAN SAVINGS LOAN ASSOCIATION FACTS In August 1984, James and Barbara Gibbs (Gibbs) submitted an offer for $180,000 to American Savings to purchase a house in Woodland Hills which American Savings had taken back through foreclosure. American Savings, through its employee, Dorothy Folkman, agreed that the Gibbs could move into the subject property and rent it until the close of escrow. No action was taken on this offer. On March 27, 1985, pursuant to a request by Ms. Folkman, the Gibbs submitted a new offer because American Savings could not find their original offer. The purchase price was again $180,000. On the morning of June 6, 1985, the Gibbs received a counteroffer from American Savings containing several additi...