What is a counter-offer?
Restatement § 59
● A conditional or qualified acceptance is a counter-offer which rejects the original offer and no contract is made
● Modifications to the terms of a proposal is a counter-offer
How does the UCC differ from Restatement with the mirror image rule?
2-207: No mirror image rule: additional or different terms are an acceptance, not a counteroffer that rejects the initial offer. This must be between merchants and subject to 2-207’s limitations.
● UCC §2-207 only applies when there are 2 merchants
● Warranties ALWAYS “materially” alter the contract under §2-207(2)(b)
What does materially alter mean?
“Materially alters” means results in surprise or hardship if incorporated without express awareness of the other party
What is a patent ambiguity?
Ambiguity which is apparent on its face (a contract saying 4 people each get a car but later on it says there are only 3 cars)
The ambiguity is obvious from the text of the document itself - no need for outside evidence since the writing itself is ambiguous
What is latent ambiguity?
Ambiguity that is not apparent until outside evidence is presented… the writing itself is clear (Peerless ship example)
Why is the mirror image rule the same as the last shot rule?
Under the mirror image rule, the last party to send their form contract had the terms of the deal since their form was a counteroffer and performance by the other party would constitute acceptance of that counteroffer—The Last Shot
How does 2-207 work?
BETWEEN MERCHANTS
* Acceptance of a counteroffer operates as an acceptance even though it states terms additional to or different from those initially offered
* Doesn’t count if acceptance by the offeree is expressly made conditional on agreeing to the additional or different terms
* If the above isn’t applicable, and the goods have already been delivered, conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale even without writing.
Threshold negotiation and closure questions
- Are there missing terms that would provide a basis for determining the existence of a breach and giving an appropriate remedy? If there are, then you don’t have a contract. (Empro, Restatement 33, UCC 2-204)
- If no missing terms, was there an intent to be bound (Fuqua)
- If there are no missing terms and an intent to be bound, there is a contract.
How do you determine if you have a final agreement?
**Is the agreement in contention written or oral? **
1. If written and signed, then proceed.
2. If oral, is a writing required under the statute of frauds? (MYLEGS)
**
Did the agreement have terms to be decided later?
1. If not, and there is unequivocal acceptance, then you have a contract.
2. If there are major terms still undecided, then no contract.
**Does the agreement still say something else needs to happen? (e.g., board approval). **
1. If not, then you have a contract.
2. If yes, are those final steps a condition to the formulation of the agreement? (If yes, no K; If no, you have an agreement and the final step is just memorializing the terms, you have a K).
What is a preliminary oral agreement?
If everything is agreed to orally but a written contract is planned, the written contract is considered a memorial, and even if it has not yet been written and signed, the contract can still be enforceable. What’s important is a meeting of the minds.
What do courts look at to determine whether there was an oral agreement/meeting of the minds?
Oral agreements and the meeting of the minds may be proven by the parties’ acts, by the circumstances, or by the parties’ words
Courts will look at:
* All preliminary negotiations
* All offers/counter-offers
* Expressions of the parties
And ask: was there an expression of complete and definite terms?
What is mutual rescission?
Both parties stop performing the contract, and thus terminate it.
Parties can agree to stop performing or just agree through their actions (Sandoval).
Can letters/memos of intent be binding?
Restatement 27
Yes, if the final contract is just meant to memorialize the terms (nothing left to be done).
What are the questions to ask when evaluating the finality of letters/memos of intent?
- Did the parties intend to enter into a binding agreement when they signed the memo of intent? (look to document, reasonableness, and circumstances (all questions of fact - should go to a jury))
- Are the important terms included and sufficiently clear to create an enforceable and binding contract?
What are case illustrations of preliminary negotiations and whether they’re contracts?
- Sun Printing: Paper agreement where P and D agreed for P to buy paper from D, and that they would agree on the price and duration later on, but that the price later on could not exceed a certain amount based on a competitors market price. D backed out of K. Court said that to constitute a binding contract, the terms of each element of the contract must be sufficiently specific. An agreement to agree where the terms of the contract are not clear and not actually agreed upon is not sufficient to bind a party.
- Sandoval: Board and Sandoval exchanged drafts of a final agreement, but never reached agreement on the language. Sandoval later changed her mind. Court said based on the actions (discussions showing further negotiations, not in writing) there was not intent. Board further says even if there was a contract it was mutualy rescinded because Sandoval kept teaching.
- Fuqua: P asked D to merge. They negotiate and prepare memo to be sent to press stating they’ll make definitive agreements, and conditioned obligation on reaching definitive agreement. D declines to go forward w/ deal. Agreement to agree is upheld, even though it expressly indicated intent not to be contractually bound. Parole evidence is admissible in determining whether the parties had a meeting of the minds.
- Empro: P and D negotiated for goods. After initial negotiations, P sent D a LOI, with clear language that P was not bound by the letter. Parties couldn’t agree about part of the deal that related to security interest in the land. D backed out of deal. P sued for breach of contract and trial court dismissed, saying the LOI was not a binding agreement, just an agreement to agree. Distinct from Fuqua because there was a major term that was still being negotiated, no meeting of the minds on that. Court also doesn’t like that P covered themselves but then sued D for backing out.
- Butler: P and D created a LOI to negotiate that included a provision to negotiate in good faith. No subsequent agreement was reached and P alleged that D breached the LOI. Court held that an agreement to negotiate is a binding contract (it had 2 willing parties, manifestation of a mutual assent to be bound, and consideration re forgoing acting in bad faith).
Where in the restatement does it talk about preliminary negotiations?
Restatement 27
Agreements to Agree vs. Contracts to Negotiate
- Agreements to Agree: Where any of the essential elements of a promise are reserved for the future agreement of both parties, no legal obligations arise until such future agreement is made.
- Agreements with Open Terms: Agreements with open terms to be decided as stipulated in the agreement and are enforceable
- Agreement to Negotiate: Majority rule: enforceable and must now negotiate in good faith. There is a breach if they didn’t at least try to negotiate. Both parties promise and forgo acting in bad faith as consideration. (Most states).
Does the implied covenant of good faith extend to contract negotiation?
No. The implied covenant of good faith is only present when there is some specific contractual obligation.
* Parties can voluntarily enter into an agreement to negotiate in good faith (usually done by letter of intent)
* Other times good faith is required in negotiations: 1. Preexisting agreement to negotiate modifications in good faith 2. When an agreement vests discretionary power in one party 3. Promissory estoppel/promissory fraud
What are case illustrations of good faith in contract formation?
- Racine: Plaintiff had a forty-year contract with defendant to operate concession stand at a state park and began negotiating to expand its operations. The contract allowed for mutual modification. Defendant declined to enter into the amended contract and Plaintiff sued. Court held that there was no obligation to deal fairly or in good faith absent an existing contract, this was just a negotiation. Allowing modification in the contract did not create a duty to modify – if there was a duty to modify then they would have needed to negotiate that modification in good faith. Distinct from Butler because in Butler there was an agreement to negotiate in good faith supported by consideration.
- New England: P submitted a bid to work on a project for D. P was told that the bids would be kept secret and assessed after all the bids had come in. D never intended to go with P’s bid, was planning to go with another subcontractor all along, and shared P’s bid with the sub they were going to go with. Court found for P under promissory estoppel because P relied on D’s promise not to disclose their bid to their detriment - reliance damages.
What is the way to deal with 2-207
Knock Out Rule (Majority View). Each party’s “different” terms serve as “objections” under 2-207 and get knocked out. Only expressly-agreed upon terms remain in the contract, and the terms that get knocked out (typically warranties) are supplied by UCC as implied warranties.
Note: there are other interpretations
What are illustrations of the knock-out rule?
Gardner-Zemke: P was awarded a large contract from the DOE and subcontraced it to D. Both went forward with the transaction without resolving discrepancies between the purchase order and the acknowledgment form. D’s “acknowledgment” form changed the warranty, and said that theirs governed and that P’s silence was acceptance. Item broke and D refused to fix unless P would give them extra money. D argues that its terms should apply because its acceptance was “expressly made conditional on assent to its terms.” Court rejected and said last shot party must indicate unequivocally through its actions that it will not proceed with the contract until it was assured by the other party that its terms were agreed to – puts the burden on the offeree to demonstrate subjective assent on the part of the offeror to the changed terms. Court applies knock-out rule and says the conflicting warranty sections cancel out and applies UCC default warranties.
How do different cases approach box-top situations?
- Step-Saver: If box top comes after formation, then the additional terms are knocked out of the contract because they would materially alter it.
- Carnival Rule: For non-merchants the box-top/second “Form” would apply on top of the agreement and acts as a counteroffer
- Gateway Rule: The opposite of step-saver, the contract really forms once the box-top arrives and the buyers don’t return the good – Johnson disagrees
