Alan Scott Rau
Robert F. Windfohr & Anne Burnett Windfohr Professor of Law
The University of Texas at Austin School of Law
The function of the law of Contracts is to make possible, or at least to facilitate, this activity---it is to help private parties in planning for the future by protecting the expectations that arise from the making of bargains. Consider, for example, a simple agreement in which a seller promises to deliver corn to a buyer in six months, and in which the buyer promises to pay $10,000 for the corn on delivery. If when the time comes the seller should fail to deliver the corn, the buyer will have to buy substitute corn in replacement; if the price of corn has risen, the buyer needs a legal remedy---since his expectation was precisely that the agreement would provide protection against just such a rise in the market. The seller, of course, has a comparable interest in being protected against a falling market. Once such a simple deal is recognized, the parties might wish to engage in more sophisticated forms of planning for the future: They might, for example, extend the delivery period to five years; they might make the agreement cover many different installment deliveries under a long-term relationship; they might leave the quantity of corn flexible---for example, making it vary in terms of what the buyer might "require" in feeding his livestock; they might also leave open the price---making it vary according to some formula based on published market quotations. In all of this the parties need a legal framework that will give them a predictable, reliable, stable basis for their private ordering of their affairs.
Private, consensual, agreement has always been with us, of course. But in England and in the United States, it was only in the middle of the 19th century that the courts first began to elaborate, in a systematic way, the doctrines of Contract law that are familiar to us now; and it was only in the middle of the 19th century that commentators first began to produce "treatises" setting out these doctrines for practicing lawyers and law students. The great English cases of this period in which the rules of Contract law were first fixed---cases such as Hadley v. Baxendale [decided in 1854, and dealing with the measurement of damages for breach of contract], Raffles v. Wichelhaus [decided in 1864, and dealing with misunderstandings and the "meeting of the minds"], Dickinson v. Dodds [decided in 1876, and dealing with revocation of offers], and Foakes v. Beer [decided in 1884, and dealing with promises to perform "pre-existing legal duties"]---all these are still familiar by name, and are still read by virtually all American law students to this day.
The fact that Anglo-American contract law is largely a creation of the 19th century has some important implications that continue to affect us. Contract law "reached its zenith in the nineteenth century as the legal underpinning of a dynamic and expanding free enterprise economy"; as the free market developed and grew, contract doctrine became the legal reflection of that market, and came to take on many of its characteristics: "The individualism of our rules of contract law, of which freedom of contract is the most powerful symbol, is closely tied up with the ethics of free enterprise capitalism and the ideals of justice of a mobile society of small enterprisers, individual merchants, and independent craftsmen." And many of the "rules" of contract doctrine, as we will see, dovetail neatly with the assumptions of liberal economics and with the 19th century's laissez faire, free-enterprise economic philosophy.
Now I hardly mean to suggest that Contract law has remained unchanged since that time---where social conditions and expectations change, it will be natural to find the law changing along with them. Our notions of how the economy should be regulated---and in general of what individuals in society owe to one another---have profoundly changed since what has been called "the golden age of the law of contract" in the 19th century. Legal regulation of private conduct in the public interest, and restrictions on what was once thought to be "freedom of contract," have intensified. But when this has occurred, more often than not it has taken the form of legislation that has simply removed whole areas from the domain of "contract": For example, insurance contracts, labor agreements, consumer credit transactions, are all highly regulated areas that are no longer "contract" at all---but separate and distinct fields of law. It remains largely true, then, that the law of Contract "concerns and provides legal support for the residue of economic behavior left unregulated," the free market.
II. Sources of Contract LawContract law is essentially "common law"---that is to say, it is found in the body of many thousands of judicial decisions that have been handed down over the last century by courts faced with similar disputes. At least in theory, what courts have done in these past cases will tend to determine the outcome of later ones. Even if courts do not actually see themselves as bound to follow earlier precedent, they are likely, at the very least, to look to earlier cases as a source of law, from which they can reason inductively to determine the general principles that should govern. Nevertheless it is the nature of a common-law system that it is continually evolving: The law changes unevenly over time, and from one jurisdiction to another, but decisions of courts are often little more than signposts that identify the direction in which future movement can be expected.
By comparison with civil-law jurisdictions, "doctrine" and treatises have played a much smaller role in the development of the law in the United States. What comes closest in the United States, perhaps, is the various "Restatements" of the law. The "Restatements" in different fields---Contracts, Torts, Property, Agency, and so forth---are a curious mixture of summaries of past cases, predictions of future ones, and prescriptive pronouncements by the drafters as to what the most satisfactory result ought to be. They are promulgated by the American Law Institute, a prestigious organization composed of professors, judges, and practicing attorneys, and have been extremely influential, often relied on by courts.
To say that contract law is "common law" is also to say that statutes have played a very limited role. It is critical, however, that the student be familiar with the Uniform Commercial Code. Drafted during the 1940's and 1950's, and promulgated by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, the Code contains a number of separate "articles" dealing with a wide variety of commercial subjects---such as Bank Deposits and Collections, Negotiable Instruments and Letters of Credit, and Security Interests. For our purpose, however, the most important article is Article 2, which governs transactions in the Sale of Goods.
Article 2 of the Uniform Commercial Code (the "UCC") has been enacted---with minor substantive variations---in every state of the United States with the exception of Louisiana (whose legal system, of course, is heavily influenced by the civil-law model). But while the Code may thus be more or less "uniform," it is not really a "code" in the civil-law sense. It does not even purport to address entire subjects that make up "the law of contracts," many of which I will be talking about today. Article 1-103 of the Code makes it explicit that "unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant . . . shall supplement its provisions": Therefore, where no provision of the Code---even when liberally construed---applies to a particular case, it will still be necessary to resort to the general body of contract law principles. And even where the Code does apply, it can only be understood in light of, and against the backdrop of, the pre-existing case law as it has developed over the last century.
Nevertheless, the UCC has been one important source of the law of Contracts. Article 2 of the Code only expressly governs transactions for the sale of goods. However, in many other contexts---for example, contracts involving real estate, construction, franchising relationships, and employment---courts will frequently look to the provisions of the Code and will try to reason from their underlying principles "by analogy," finding the policies embodied in Code provisions to be applicable in these other areas as well. This process is particularly important since the Code not only contains rules applying specifically to transactions in goods (such as rules relating to shipment terms, inspection and the risk of loss), but also provisions susceptible of much wider application (such as its imposition of a duty of "good faith" and its prohibition of "unconscionability").
In addition to the UCC, mention should be made of the United Nations Convention on Contracts for the International Sale of Goods (the CISG, or the "Vienna Convention"), which became effective in the United States in 1988. The CISG is intended to be a uniform text governing international sales transactions: It will apply---instead of the UCC---to contracts for the sale of goods between parties whose places of business are in different countries, at least if both such nations have ratified the Convention.
Finally, to say that contract law has traditionally been "common law" is also to say that it has traditionally been thought to be the domain of the individual states rather than of the federal (that is, the national) government. The UCC has been enacted individually by the legislatures of the various states, and there has been no attempt to ensure uniformity across the country through federal legislation. A revision of Article 2 of the Code is currently in progress, and is certain to be eventually accepted, in largely the same form, by all the 49 state legislatures that have enacted the current version. Nevertheless it will be many years---at least a decade---before we can expect this process to be completed.
III. What Kinds of Promises Should Be Enforced?Now "no legal system devised by man has ever been reckless enough to make all promises enforceable." One major task of Contract law, therefore, is to separate the sheep from the goats---to distinguish between those promises that we think it undesirable---or simply not worth the trouble---to enforce, from those that we think ought to have the support of the legal system behind them.
1. The Doctrine of ConsiderationA unique feature of Anglo-American Contract law consists of its traditional answer to this question---the doctrine of "consideration." Itself a product of a long and complicated historical development, the core idea of "consideration" is this: Promises worthy of enforcement ought to be part of an bargain, where something is offered by one party as an inducement to obtain something that he desires from the other party in exchange.
So the requirement of consideration should not be a problem in most commercial transactions. Nevertheless, the doctrine still occasionally causes some problems---and this is true even in commercial settings, where "logic" has sometimes seemed to dictate that even some promises made in the course of commercial dealings are not binding because they lack consideration. For example, an offer to enter into a commercial deal could traditionally be "revoked’ at any time by the offeror---even though the offeror had expressly made his offer irrevocable; the "explanation" was that he had not, after all, received any consideration for his promise to hold the offer open. And a promise to pay more for goods or services than one had originally agreed to pay---even where the increase was voluntary and justified by changed circumstances---was traditionally not binding; the "explanation" was that the promisor had received no new consideration but was only receiving what he was already entitled to. Such results are not necessary implications of the bargain requirement, and they represent a highly formalistic, wooden view of the law. Such holdings are, happily, less common today than they were in the past: Where the promise is freely agreed to, there should no longer be any problem in holding an offeror to his promise of irrevocability, or in enforcing a one-sided modification of a pre-existing agreement.
2. Promises to Make GiftsThe principal significance of the doctrine of consideration is, as we have seen, that it makes unenforceable promises to make future gifts. When a promise to make a gift is broken, some courts explained, the promisee is after all "no worse off than he was. He gave nothing for it," and so "has lost nothing by it." And in addition, gift promises are often "lightly made, dictated by generosity, courtesy, or impulse, often by ruinous prodigality." Lacking a mechanism to make gift promises routinely enforceable, Anglo-American law has been spared the necessity of developing---as the civil law has had to do---complex rules for the undoing of gifts after the fact, on such grounds as the donee’s later ingratitude or the donor’s inability to make proper provisions for his heirs.
In early English law---and continuing into this century---it was possible to make promises---even gift promises---binding through a written, signed document "under seal": A document was "sealed" when wax, softened by heat, was attached to the instrument and some personal insignia---often a signet ring---was used to make an impression on it. Use of the seal would make a promise binding by virtue of the formality alone; the ceremony was calculated to have a "cautionary" effect on the promisor---ensuring that the nature and the importance of what he was about to do were present to his mind.
But changing social conditions eventually made the seal an anachronism. "In the United States, the history of the seal has been one of erosion of the formality until it can be met by a printed form." Over the centuries, it came to be recognized that a "seal" could take the form of an impression directly onto the paper of the document, or of a red gummed wafer affixed to it. From there it was an easy step to give effect to the mere printed word, "seal." With the decay of the seal as a meaningful formality, pressure built up to eliminate the legal effects of a device which no longer served any function of preventing a promisor from entering into hasty or inconsiderate action. Today, in most states, statutes have eliminated any distinction between sealed and unsealed documents; even where the seal persists in theory, decisions are few, and there is apparently "no recent instance in which any court in the United States has enforced a gratuitous promise under seal." In contracts for the sale of goods, the Uniform Commercial Code has "wiped out" the seal completely.
With the decline of the seal, there does not appear to be any ready means to assure the enforceability of gift promises---at least where neither party has as yet acted on the promise. However, it is sometimes possible to reach such a result by looking outside the strict borders of "Contract law." and by having recourse to the rules of the law of "Property." Obviously, if a gift has beenexecuted---if, say, a piece of jewelry has been handed over to a donee, creating a completed gift---then the transaction cannot be undone; the donee now has a present property interest in the jewelry, and the law of "Contracts" has nothing to say about this. There are some modern decisions holding that present ownership of property can be transferred merely by the formality of a signed unsealed writing. Alternatively, the traditional institution of a "trust" allows a donor to declare himself the trustee of donated property, and bind himself to hold it for the benefit of the "real" owner, the donee (or "beneficiary"). There is at least a theoretical distinction between such present transfers of "property" interests (even where the donee is to enjoy the fruits only at a later time), and a mere promise to make a future transfer---but human behavior rarely fits neatly into such doctrinal categories, and the line is often difficult to draw with confidence.
3. Reliance as an Alternative Basis of EnforcementIt is often possible to characterize a transaction as a "bargain" even when it takes place on the periphery of the marketplace---or indeed, outside the marketplace completely. If we truly believe, with the liberal economists, that society will ultimately be better off if people are left free to pursue their own interests in their own way, then it follows that certain idiosyncratic uses of wealth have to be tolerated.
In many cases like this, the fact that a promisee has relied on a promise to his detriment would often tend to influence a court in the direction of enforcement. This was often hard to do consistently with well-established doctrine---and so in the past, the promisee’s change of position would often have a covert influence on the result. A court might wish to respond to the equities of the situation---by giving some relief even in the absence of true "consideration"---but might be reluctant to admit openly that it was doing so. During the first half of this century, however, there was an increasing tendency to honestly recognize that reliance on a gratuitous promise was being made the basis of enforcement. The "Restatement of Contracts" first made this explicit by providing, in its famous section 90, that "a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee . . . is binding if injustice can be avoided only by enforcement of the promise." This principle has been baptized "promissory estoppel"---the idea being that since his promise has caused the promisee to change his position, the promisor should be precluded (‘estopped") from denying lack of consideration. Promissory estoppel has now become a well-established and well-understood alternative basis for the enforcement of promises. As we will see, its use has been extended beyond cases of gift and family promises, into even commercial settings.
A set of "default" rules is aimed at duplicating what the parties probably intended---and what they would have expressly incorporated into the contract had they taken the time and trouble to negotiate on the subject; it thereby saves them the time and trouble of doing so. If the parties to a contract had the time and the foresight to negotiate and express every element that could conceivably matter to their relationship---and had imagined any possible contingency, and any possible question that might arise---there would be little need for any "rules" of Contract at all. The UCC is rich with these implied terms: They tell us, for example, that a merchant seller is deemed to guarantee the title to, or the quality of, the goods he sells, and they also tell us how and when the goods are to be delivered, and how and when the price is to be paid, and who bears the risk of loss or damage to the goods.
And at the same time, the Code makes it clear that in accordance with "the principle of freedom of contract," its provisions may with rare exceptions be "varied by agreement": The parties may choose to "opt out" of these rules. It is true that some obligations---such as the continuing obligation on the parties to act in "good faith"---cannot in theory by disclaimed, but even there "the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable."
V. The Process of Contract Formation1. The Mechanism of "Offer" and "Acceptance"When private parties are contemplating an exchange of goods or services that will be of benefit to them, there is probably a wide range of possible solutions---say, a wide range of possible prices---that would be minimally acceptable to each of them. So, as in an Oriental bazaar, they are likely to spend a certain amount of time devoted to the tedious process of haggling. At some stage of the process, each party reaches the conclusion that any advantages from additional bargaining are too small to justify further struggle: At that point, they are ready to make a deal. The "rules" of contract formation are aimed at (1) distinguishing this moment of agreement---the culmination of the process---from all the bargaining activity that has gone before, and (2) protecting the agreement arrived at from any effort by either party to change his mind---and to start the bargaining process up again, either with the same adversary or with someone else.
The formation of an enforceable contract has traditionally relied on a familiar, two-step model with which everyone living in a capitalist society is instinctively, intuitively familiar. Under this model, contracts are formed by an "offer" by one party---the "offeror"---which is "accepted" by the other---the "offeree"; the offer can be "revoked" until it has been accepted, but once accepted, the deal has been sealed. The acceptance, usually in the form of a return promise, not only concludes the process of contract formation but also serves as "consideration" going to the promisor.
2. OffersAn offer is a proposal to enter into a transaction: To be characterized as an "offer," a proposal must authorize the offeree to believe that he is being given the power to conclude the deal by signifying his own acceptance.
This definition requires us to formulate a strategy as to how we should interpret what people say. The problem of interpreting what is alleged to be an "offer" is really the same problem as that of interpreting any term in a contract, or interpreting any manifestation of a party’s intention. For example, what if the speaker later claims that he in no way intended to make an offer---but that he was in fact joking? We may believe him now when he says this. But such a claim cannot be decisive---he cannot be allowed to avoid liability if at the time, the listener took him seriously and believed that an offer was being made. So a true "meeting of the minds"---in the sense of a subjective, internal agreement between the two parties---is not at all necessary to the formation of a contract: The so-called "objective theory" of contracts proposes that "a contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties"; "the standard by which his conduct is judged is not internal, but external." The question is whether a reasonable person in the position of the offeree would believe that he is being given the power to conclude the deal by accepting; if he does---if he has no reason to believe the contrary---then the speaker should be bound. Whatever his internal state of mind, the speaker carelessly misled the listener into believing that an offer was being made.
So, in the offer and acceptance mechanism, some communications should reasonably be taken as proposals to enter into a deal, but others should be interpreted instead as mere invitations to begin the process of bargaining and negotiation---perhaps, for example, the seller wants to drum up interest on the part of potential buyers, to see what his property is worth on the market without committing himself in advance. The key principle of interpretation is that a court is free to look at all the relevant circumstances surrounding the transaction. And one important guide to the reasonableness of interpretation is what the common usage and understanding would be in the particular trade: A usage of trade that has "such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed," will be the "framework of common understanding" that will "furnish the background and give particular meaning to the language used."
Multiple or mass mailings, circulars, and advertisements are not usually interpreted as "offers": The apparent reason is that if large numbers of readers or recipients were to try to "accept," the result would be that the sender would be bound to large numbers of people---they would all have a contract right against the "offeror"---even though he might not have enough stock to supply them all. Since this presumably could not have been the sender’s intention, the conclusion is that no recipient has the power of acceptance. Shoppers are presumed to understand that by the time they get ready to buy, the advertised goods may or may not be available. (It might of course be possible for a court to read into any mass mailing or advertisement the possible limitation that it is open only to those who respond while the seller still has goods available---in other words, to construe it as including a term of "subject to prior sale," or "first come, first served." If a mass mailing or advertisement actually says this, it would make more sense to characterize it as an offer, since the fear of multiple liability is not present. But courts have not adopted this as a general principle of interpretation).
3. Termination of OffersA contract is formed when the offeree exercises his "power of acceptance." But until that time, there is as yet no bargain; until that time, then, the "power of acceptance" granted by the offeror may be terminated. Termination of the offer may occur in a number of ways:
a. Lapse of Time
The offeror may in his offer have specified a time limit---"this offer is effective only until a certain date." Even if he does not specify such a limit, the offer will be open only for a "reasonable time." After that time, the offeror is entitled to think that the offeree is not interested---and can thus consider that he is now free to deal with someone else.
What is a "reasonable time" will, once again, depend on all the circumstances surrounding the transaction: "In general, the question is what time would be thought satisfactory to the offeror by a reasonable man in the position of the offeree." Where the property being sold is subject to rapid fluctuation in value, the time for acceptance will necessarily be brief---"not only because the offeror does not ordinarily intend to assume an extended risk without compensation but also because he does not intend to give the offeree an extended opportunity for speculation at [his] expense."
b. Revocation by the OfferorEven before the expiration of a "reasonable time," the offeree can lose his power of acceptance when the offeror "revokes" his offer: Revocation occurs when the offeror lets the offeree know that the deal is off, and that he wishes to free himself from any outstanding offers and return to the market. It is clear that the offeror cannot escape contract liability merely by changing his mind in private, or by selling the property to someone else: An offer can only effectively be "revoked’ when the offeror’s change of mind is communicated to the offeree. Again, remember the "objective theory" of contracts mentioned above: Until he actually learns of the revocation, the offeree is entitled to believe that the offer is still open, and that he has the power to conclude a deal by communicating his acceptance to the offeror.
The general view of Anglo-American law is that offers are generally "revocable" by the offeror at any time before the offeree has made an effective acceptance. This is of course true when the offer itself specifies that it may be withdrawn at any time; it is also true when the offer is silent on the subject of revocability. Indeed it has traditionally been held that until acceptance takes place, an offer may be freely revoked even though the offer by its terms purports to be irrevocable until some stated time. This was thought to be a consequence of the doctrine of consideration: Without some consideration going to the offeror, his promise not to revoke could not be binding.
One way to make offers irrevocable has always been for the offeree to "purchase" an option. If, for example, the offeror has promised to leave his offer open for some specified period in exchange for $1000, an offeree who has paid or promised the $1000 will have acquired the right to buy the land later: He may choose to accept the offer even though the offeror may in the meantime have changed his mind. This is a classic "option contract," an additional, subsidiary contract binding in its own right. The presence of consideration has made the promise of irrevocability binding, and until the promised period is over, the offeree may effectively accept even if the offeror attempts to revoke.
In many cases, though, the seller of property is perfectly willing to make a so-called "firm offer"---that is, a commitment to hold his offer open for a limited period---even if he has not sold an "option" or as yet gone through any process of bargaining at all. He may wish to do this simply because he may think that his chances of ultimately selling the property are increased if the buyer has a limited time to appraise the property, make investigations, conduct testing, line up financing, and so forth, all without being exposed to the danger of having the rug pulled out from under him by a revocation. A prospective buyer may be unwilling to take these costly steps unless the owner commits himself to an option under which the buyer, while not obligated to buy, has a limited period of safety before making up his mind.
Recognizing that such an arrangement is "an appropriate preliminary step in the conclusion of a socially useful transaction," some courts will now hold that a promise by a seller to hold his seller open for a short period of time is enforceable even in the absence of real consideration. This will particularly be true if the seller has made this promise in a signed writing---which at least gives some assurance that the promise was made, not lightly but only with some care and after some reflection. The UCC now also eliminates the requirement of consideration for "firm offers": Under the Code, if an offer to hold an offer open is made in a signed writing, it is not revocable for lack of consideration during the time stated or for a reasonable time not to exceed three months; this is true whether the offeror is a buyer or a seller, as long as he has the status of a "merchant."
Finally, as we have seen earlier, there may be alternative reasons to enforce promises in addition to the presence of "bargained-for consideration"; it is now generally understood that reliance and change of position by a promisee can provide a sufficient basis for enforcement even in the absence of consideration. In recent years this principle has been broadened out from the setting of gifts and family arrangements, and extended into the realm of commercial transactions. So, for example, if an offeree who has been assured that an offer will remain open has acted in reliance on that assurance, here too the offeror may be "estopped" from trying to revoke.
Under the traditional law of offer and acceptance, the Subcontractor was free to revoke----the General Contractor had not yet "accepted," and until he does so, the Subcontractor’s bid could not be binding. But this of course would be very unfair to the General Contractor, who in "locking himself in" to his own bid acted in reliance on the Subcontractor’s figures. So courts now tend to hold that an "option contract" has been created by the General Contractor’s reliance. There is only an actual contract of sale when the General Contractor communicates his acceptance to the General Contractor---but the General Contractor is given an opportunity to do this if he wishes, and can ignore any attempted revocation.
Such cases are striking for a number of reasons. First of all, note that in this case the Subcontractor did not actually make an express promise not to revoke his bid: The court’s holding was that in this type of situation, the Subcontractor "had reason . . . to expect [the General Contractor] to rely on its bid"--- the nature of the bidding process made such reliance inevitable. Therefore, it followed that a promise not to revoke would be "reasonably inferable in fact." If the Subcontractor wanted to make it plain that his offer was revocable, the burden was on him to make it clear that this was the case. In addition, note that the effect of finding an "option" here is always one-sided: The party who has relied---the General Contractor---is protected and able to enforce the Subcontractor’s bid, but until he has actually "accepted" the bid, he is not obligated to do so: He can try to find another subcontractor who may be willing to do the work even more cheaply.
A similar case is where the buyer responds that "I want the car but that price is too high; I will only pay $9000 for it." This is likely to be construed as a "counter offer"---that is, a substitute offer from the buyer. The seller is entitled to think that the negotiations are over. If he meets someone else who is willing to pay $10,000 immediately, the seller should be free to accept it---he can’t be expected to risk losing that profitable deal in order to contact the offeree again. So, if the offeree later tries to "accept" the $10,000 offer, it is too late; the counter-offer, like the rejection, brings all negotiations to an end and destroys the effectiveness of the offer,
Different responses may be construed somewhat differently. The buyer, for example, may respond, "I don't know---won’t you take $9000?" "A mere inquiry regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer, is ordinarily not a counter-offer." If the court is willing to interpret the buyer’s response as a "mere inquiry," it follows that (a) the seller cannot "accept" the $9000 price and bind the buyer; the buyer, after all,. has not made a (counter-)offer of his own that gives any power of acceptance to the seller, but (b) the buyer may later choose to accept the original $10,000 offer, since that offer has not terminated.
The traditional common-law view was that an acceptance had to be the "mirror image" of the offer, mirroring exactly the terms of the offer. If the offeree’s response varied in any way---if for example it found the price acceptable but added additional or different terms relating to delivery, security, warranties, or a dispute resolution mechanism---it would still be treated as a counter offer and thus a rejection. This is generally sensible, since all the terms of a transaction are probably interconnected; any change in terms may add to the costs or increase the risks of the offeror, and the offeror is entitled to assume that he is not bound until his conditions---and only his conditions---have been accepted in their entirety by the offeree. However, the traditional "mirror image" rule does not work as well where the offeree’s additional terms are minor or immaterial; nor does it make much sense where a contract is formed by an exchange of standard pre-printed form that are in practice rarely read. The UCC has attempted to devise a special solution for the exchange of forms, and I will deal with this a little later.
It frequently happens that because of the operation of these rules, the writings of the parties---the "offer" and the response---do not technically form a contract, but nevertheless the parties go ahead and act. Say, for example, that the buyer makes an offer, and the seller’s response, because it contains deviant terms, is not construed as an acceptance but as a counter-offer. Nevertheless the seller proceeds to ship the goods, and the buyer accepts and uses them; only later does a dispute arise over the quality of the goods or over some other terms (for example, does a dispute have to be submitted to arbitration?) The common-law analysis here is that when the buyer accepted and used the goods, he indicated his agreement to the seller's counter-offer;since he has accepted the seller’s counter-offer, the seller’s terms govern. As we will see, the UCC has created a special rule here for contracts for the sale of goods, but the result would still remain valid for other-common-law cases not governed by the Code.
If an offer takes the form of an irrevocable option, then a rejection or a counter-offer will not terminate the power of acceptance. One possible explanation for this rule is that it is a presumption of the probable intent of the parties. (It seems unlikely that an offeree who has managed to obtain an option would give away this right for nothing; by making a counter-offer he is probably still "just negotiating.") However, if the offeror relies on an explicit indication by the offeree that he is not interested---if the offeror has, for example, made an alternative deal with a third party---the offeree’s power to accept the offer, even within the original option period, will have ended.
4. Methods of AcceptanceThe most common method by which an offeree will accept an offer is by making a return promise: A seller's offer to sell goods can be accepted by the buyer's return promise to take and pay for the goods. The contract that is formed here is called "bilateral," because there is an enforceable promise on each side, by each party.
An acceptance by promise is of course usually verbal, but it doesn't necessarily have to be: Any behavior that communicates to the offeror a willingness to form a contract may be adequate. For example, services may be rendered, or goods may be shipped, to an offeree, and the offeree may take the benefit of them---in circumstances when he knows that they are not gifts, but that payment is expected, and it would be easy and not burdensome simply to reject them. Such behavior will naturally give rise to the implication of a promise to pay the offered price. (I have already mentioned an example of this principle when discussing the shipment of goods following a seller's "counter-offer"). Or again, the parties may have engaged in a prior course of dealing where, over many past transactions, the offeree would follow the practice of notifying the offeror if he did not intend to accept the offer: In such cases, the offeror may be justified in taking the offeree'ssilence to be an acceptance.
It has traditionally been assumed that there exist other kinds of contracts, in which the offeror does not wish to be bound by a return promise from the offeree: He may feel that a return promise from the offeree is worthless, or the circumstances may make it unreasonable for him to expect a firm commitment from the offeree; in this kind of contract, the offeror does not intend to bind himself in advance of the offeree's actual performance. "I have had enough of your promises in the past and want no promise from you, but if you will put my sugar-house machinery in good repair I will pay you $1000 for the job." The offeree, therefore, can only "accept" such offers by "performance"; since there is a promise on only one side here, these are often referred to as "unilateral" contracts.
At one time formalistic and rigid "logic" suggested that since "acceptance" of offers for unilateral contracts could only take place if performance was complete, the offeror could revoke his offer at any time before complete performance---even if the offeree had in the meantime changed his position by beginning work, such as by starting to put the machinery in good repair! But the obvious unfairness to the offeree from such a result has led to a different rule: It is now clear that where the offeree "begins the invited performance," the offeror may no longer revoke. An "option contract" is created; the offeree is not bound to complete performance---since this is a "unilateral" contract---but the offeror is bound to pay once the offeree completes performance in accordance with the offer.
The offeror is "the master of his offer": He can stipulate for any means or method of acceptance that he wishes, and no contract is formed unless the offeree complies with that stipulation. But in most cases, of course, the offeror doesn't particularly care about the method of acceptance---and is likely to be completely indifferent as to whether acceptance takes the form of words of promise, or of acts of performance. Therefore the current tendency is to presume that an offer "invites acceptance in any manner and by any medium reasonable in the circumstances"---unless the offer "unambiguously" indicates otherwise. The offeree may "choose" to accept "either by promising to perform what the offer requests or by rendering the performance"; if a buyer orders goods, for example, the seller may "accept" either by a prompt shipment or by a prompt promise to ship. Given this presumption, the case of a true "unilateral" contract is becoming increasingly rare---limited in practice to somewhat unusual settings like offers of rewards or of prizes in a contest, made to a large number of people but to be accepted by only one.
In the usual case where the offeror is content to allow the offeree to accept either by promise or by performance, it is still necessary that both parties be protected. If the offeree makes a return promise, then of course both parties are bound. If the offeree purports to accept by the beginning of performance, the offeror may no longer revoke---and in addition, it is presumed that such an acceptance "operates as a promise to render complete performance." Unless an option contract was clearly contemplated by the offeror, then, the offeree is expected to be bound as well as the offeror.
5. Contracts by Correspondence:
A common problem in the formative period of Contract law was posed by agreements that were not concluded face-to-face, but at a distance, through the post: What if communications from the offeror and the offeree were to cross in the mail, or what if one of the parties were to change his mind before the arrival of a letter? Despite technological revolutions that have seen the development of electronic means of virtually instantaneous communication, such problems continue to recur today.
Again, the starting point is that most offers are assumed to be revocable by the offeror. When can the offeree who wishes to accept be confident that the deal has been concluded; at what point can he assume that he is free of any risk of revocation?
The traditional Anglo-American answer is the so-called "mailbox rule": An acceptance is effective when it is mailed or otherwise "put out of the offeree's possession." The apparent policy here is that the offeree needs a dependable basis for understanding whether or not he has a deal, and a dependable basis on which to arrange his behavior. For example, a seller may have received three offers to purchase his property, and the deadline for deciding among them is imminent. In the very act of accepting one of these offers, he is necessarily passing up alternative possibilities; he may be losing the possibility of dealing with the other buyers if this deal falls through. An offeree who has mailed an acceptance---but who has received no notice that the offeror may have changed his mind---will have immediately formed certain expectations about having a deal; these expectations may cause him to rely in all sorts of other ways, such as preparing to perform. The "mailbox rule" has the further advantage of allowing and indeed encouraging the offeree to proceed with such preparations immediately, rather than incurring the "dead time" of having to wait and see whether his acceptance has reached the offeror before revocation.
It also follows from the "mailbox rule" that where an acceptance is seriously delayed in the mail---or indeed, if it is lost and never received by the offeror at all---the offeror is nevertheless bound to a contract. Of course, the offeror---as the "master of his offer"---is always free to vary the mailbox rule by stipulating that an acceptance must actually be received by a certain time. Where receiving notice of acceptance is essential to enable the offeror to perform his own obligations, a court will be more likely to interpret an offer as containing a requirement of receipt.
Some concrete examples follow. Assume the following sequence of events:
(1) Offer Mailed and Received
(2) Revocation Mailed by Offeror
(3) Acceptance Mailed by Offeree
(4) Revocation Received by Offeree
(5) Acceptance Received by Offeror:A contract will have been formed here: The offeror's revocation is only effective when the offeree learns of it, but the offeree's acceptance is effective earlier, when it was mailed.
It is interesting that in some civil-law jurisdictions, the same policies are advanced by very different means. Under German law, for example, an acceptance is only effective when it is received. But since offers are presumed to be irrevocable, the offeree is equally protected against the offeror's changes of mind and is equally given an immediate and dependable basis for his actions. The rationale of the mailbox rule does not apply as strongly to cases where the offer was originally irrevocable, since in such cases the offeree was never exposed to the risk of revocation in the first place; in the United States, also---although there is little support in the decided cases for such a result---the Restatement of Contracts provides that the mailbox rule does not apply to option contracts.
Here is another possible sequence of events:
(1) Offer Mailed and Received
(2) Acceptance Mailed by Offeree
(3) Offeree Changes His Mind, and Sends Telegram of Rejection (4) Telegram of Rejection Received by Offeror
(5) Acceptance Received by OfferorA contract should also be formed here, at least to the extent of binding the offeree. It cannot be assumed that the offeror intended to allow the offeree to speculate at his expense. If the offeree isnot bound, he would be able to mail a letter of acceptance and then---assuming it takes three or four days for the letter to arrive--wait and see what happens to the market, which may be fluctuating rapidly. Suppose the offeree is a buyer, and that the offer was to sell him goods for $100. If the market price for the goods remains at $100 or goes higher, the buyer can simply let his letter take its course---since he has put the acceptance in the "mailbox," he is protected against revocation; however, if the market price declines below $100---so that he can buy more cheaply somewhere else---he would wish to send an overtaking rejection.
However, it does not follow from this that the offeror too must be bound to a contract. Since the offeror has received the rejection first---and may have no reason at all to suspect that an acceptance has been mailed---he may have assumed that he was free to deal with someone else, and may indeed have done so. If he has reasonably relied in this way on the offeree's rejection, the offeror should be protected against liability---even though the offeree might change his mind once again and attempt to invoke the mailbox rule in order to enforce a contract. The real question, in short, is not the abstract question----"does a contract exist?"--but the more concrete question whether "this particular plaintiff can get what he is suing for from this particular defendant in these circumstances?"
The American Bar Association has developed a "Model Electronic Data Interchange Trading Partner Agreement" dealing with the increasingly common use of "e-mail" for the transmission of contract documents between businesses that deal regularly with each other. Section 2.1 of this Model Agreement provides that "no document shall give rise to any obligation, until accessible to the receiving party at such party's Receipt Computer." On the face of it, this looks like a reversal by contract of the mailbox rule. It seems obvious, though, that in new technologies like this which are "substantially instantaneous," the question posed by the mailbox rule---whether a revocation can be effective during the period it takes for an acceptance to be communicated---is not likely to arise. In such cases the governing principles should be the same as they are when the parties are actually in each other's physical presence.
6. "Battle of the Forms" in Contracts for the Sale of GoodsWhile the law of contracts in England and the United States is largely a creation of the 19th century, the pressures of the modern world have placed considerable tension on what is increasingly seeming to be an archaic structure. In no area, perhaps, has this been clearer than in the case of the standard-form contract.
The use of printed forms provides obvious benefits to businesses in the form of increased efficiency: They simplify decision-making, since only a limited number of blanks need to be filled in to describe any specific transaction and it is unnecessary to consider or address other terms; they permit a business to seek to establish favorable, standardized terms on which they will buy or sell goods; they limit the discretion of lower-level personnel; and they enable large, bureaucratic businesses to systematically keep track of their transactions through the use of multiple copies of each form.
So a buyer---say, an automobile manufacturer---may wish to buy a standard component from one of several suppliers. A purchasing agent for the buyer may telephone or write several sellers to ascertain prices and product availability. Based on this information, the buyer selects a seller, and sends a purchase order on its own standard, pre-printed, form. The front of the form may set forth the component, the number of units, the price, the delivery date, and possibly other specially negotiated terms as well. The back may be titled "Conditions"---and may be printed on gray paper in only slightly darker gray small print. These "Conditions" contain the buyer's standard purchase terms, carefully crafted long in advance by the buyer's attorney to maximize the buyer's legal position in the event a problem arises. When the seller receives this purchase order, the seller's clerical staff will check the terms on the front and, if they're acceptable, an "acknowledgment" may be sent to the buyer on the seller's own standard form. The front will contain blanks that will reflect the information about the order taken from the buyer's purchase order form; the back contains printed "Conditions" crafted by the seller's attorney to maximize the seller's legal position in the event a problem arises. Typically, purchasing and sales agents are instructed to use their own forms exclusively and not to sign or acknowledge the existence of the other party's forms. But of course, the probability that all the standardized terms will be identical is precisely zero. This is the famous "battle of the forms."
Now at common law, as I have said, the "mirror image" rule would preclude the finding of a contract on these facts. Yet despite the failure of the forms to coincide, there is little doubt that the parties thought that they had reached a binding agreement: With agreement on the main, "dickered" (i.e., negotiated) terms, the "proposed deal . . . in commercial understanding has in fact been closed." The law cannot be blind to the reality that business people rarely read the standard language on purchase forms and acknowledgments---it would in fact be inefficient to expect them to do so---and yet they may be relying on the existence of a contract despite the clashing language in these forms. Where one party is trying to back out before performance, this is most likely due to afterthoughts caused by changes in the market, rather than to any disagreement over terms. And in most cases, the goods will be shipped, and accepted, and used, before any dispute at all arises.
So in the first instance, the law should reflect the understanding of the parties that they had entered into an enforceable agreement. The second, and more difficult, question, is what are the termsof this enforceable agreement? Since the forms are by hypothesis unread, is there a danger that one of the parties will be subject to unfair surprise, by being bound to a term to which it did not consent? It is useless to ask "just what terms the parties intended" to govern their transaction, since there was apparently no such intent. The parties were content to leave their rights uncertain; greater uncertainty could only have come with negotiations, the costs of which clearly would have exceeded the cost of leaving things open to the possibility---a remote possibility---of later dispute.
The Uniform Commercial Code devised a response to this problem that has been much criticized. It is indeed not without its flaws, yet it is both a comprehensive and an elegant solution:
- Under article 2-207 of the Code, if the second form is a "definite and seasonable expression of acceptance," it will be treated as an acceptance of the offer contained in the first form. The term "definite and seasonable expression of acceptance" is presumably intended to restrict the reach of this section to cases fitting squarely within its rationale--- "proposed deals which in commercial understanding have in fact been closed." Discrepancies on the face of the forms relating, for example, to such subjects as price or quantity, cannot of course allow a contract to be concluded. But a second form may be an "acceptance" even though its terms are different---and even though they are different in "material" ways. If the second form is not to be an acceptance, the offeree must expressly say so---must expressly make his acceptance "conditional on [the offeror's] assent to the additional or different terms."
- If the second form is an "acceptance," it is of course an acceptance of the terms proposed by the offeror. The different or additional terms it contains are treated as proposals to add to the contract. Different or additional terms that are "material"---that is, that are surprising, unusual, or particularly burdensome---simply disappear, and are eliminated. (An example would be a seller's clause that disclaims the standard implied warranty that accompanies sales of goods). Similarly, any different or additional terms to which the offeror may object are also eliminated. If both parties have the status of "merchants," then different or additional terms that are not material, and not objected to, become part of the contract.
- If the second form is not an acceptance---perhaps because it expressly says so---then of course, no contract has been formed by the exchange of writings alone. If, however, the parties engage in conduct that recognizes the existence of a contract---perhaps by shipping and accepting the goods---then a contract will of course be recognized. In that situation priority is given to neither form; the terms of the contract will consist of (a) those terms on which the two forms happen to agree, plus (b) any supplementary, "gap-filling" default rules supplied elsewhere in the Code.
The solution adopted by the CISG (the "Vienna Convention" on Contracts for the International Sale of Goods) is quite different from that of the UCC---but the Convention scheme, in many ways a compromise between common-law and civil-law notions, can hardly be considered any sort of improvement over the Code. On the contrary.
- Article 19 of the Convention makes an exception only for terms that do not "materially alter" the offer: If the second form contains only such minor variants, a contract is nevertheless considered to have been concluded, and the minor variants are incorporated into the deal unless the first party objects. But if the second form contains variations that are material, then no deal has been concluded at all. By "material," again, we usually mean something like surprising, and unusual, and burdensome---but the Convention makes it clear that anything at all that can possibly matter (including the quality of goods, the place and time of delivery, and the "settlement of disputes" [including arbitration] will be considered "material." Also, if the offeror objects even to the immaterial terms in the second form, the result is that no contract has been formed. In both of those cases (i.e., the addition of material terms, and the objection to any terms by the offeror) the Uniform Commercial Code in the United States would find that a contract had been formed.
· The Convention seems to make no provision at all for the situation where no contract has been formed in a "battle of the forms," but where the parties begin to act as if there were, by shipping and using the goods. Is the implication that the seller, merely by shipping the goods, has necessarily accepted and acceded to the buyer's form? Or that the buyer, by accepting and using the goods, has necessarily "accepted" and acceded to the seller's form? This is apparently the case, since the Convention seems to adopt an "offer-acceptance" paradigm requiring a court to pinpoint the exact moment that a contract is formed: Under the Convention, "a contract is concluded at the moment when an acceptance of an offer becomes effective";in addition, "conduct * * * indicating assent to an offer" ---presumably including the shipping or accepting of goods---may constitute an acceptance. This would be a most unfortunate result, and strikes an American lawyer as particularly retrograde---since it reproduces a common-law result long in effect prior to the enactment of the Uniform Commercial Code. Such a rule would unwisely privilege one particular form---the "last" one sent---and would seem to artificially impose on the parties a structure that does not correspond in any way to their expectations.
Therefore, under both the American Code rule, and under the Convention rule, the parties continue to have an incentive to engage in "strategic behavior"---not to negotiate terms openly, but to bombard the other party with forms hoping to be able to fire "the first shot" (under the Code) or the "last shot" (under the Convention). But "when the parties to the contract send their forms blindly, and after no, or only cursory, examination of the bargained terms file the forms they receive, it makes little sense to give one an advantage over the other with respect to unbargained terms simply because he filed the first [or the last!] form." A truly satisfactory solution for this common problem seems to have escaped the drafters of codes and conventions. And yet one would think that this is one of the most fundamental of contract-law questions, one to which every business client would expect an answer. One can expect that the search for an answer will continue.
In this respect I should mention, finally, the approach taken by the proposed and pending revision to the Uniform Commercial Code. The current proposed draft involves an approach that is both more simple and more focused than any of the existing alternatives.
Under this revision, the parties may "manifest assent" to an agreement represented by a standard form either expressly, or by conduct. Now, as an initial matter, consider the case where one party has agreed in this way to a standard-form contract prepared by the other: Assume, for example, that the buyer orally orders goods; the seller ships the goods accompanied by a standard form disclaiming any warranties of quality; the buyer receives the standard form, and without objection accepts and uses the goods. In such a case, the party agreeing to the form is bound to all the terms of that form---except, however, for terms that the party who prepared the form knew or had reason to know would cause the other party to reject the contract if they were brought to his attention. Such terms are not included in the contract. So the recipient of a form has a "duty to read" even a standard-form contract---except for terms that one party tries unfairly to "sneak into" a contract, taking advantage of his knowledge that the other party will not read it.
Now for the true "battle of the forms" problem: What if both parties have prepared standard forms, and in some instances these forms are conflicting---the terms in one form "add to or vary" terms of the other? In such a case, a will only be bound to such terms that "he had notice of, from trade usage, prior course of dealing [that is, from prior transactions between the parties] or course of performance [that is, the behavior of one party in performing the contract that is accepted or acquiesced in by the other without objection]." The "contract in fact" will then consist only of (1) the terms on which the parties have expressly agreed in their standard forms, (2) any supplementary terms incorporated as "gap fillers" or default rules under the Code, and (3) the terms of which the parties had knowledge or reason to know, such as by trade usage.
The choice of any rule should be made with an eye to its functional effects---that is, its practical effects on the conduct of the parties---and this proposal would seem to have some desirable effects: It provides an incentive for those who wish to incorporate terms important to them, to insure that the other party is aware of those terms and agrees to them: As Richard Speidel, the Reporter for the Code revisions has noted, such changes "place a premium on negotiation and informed consent, rather than upon strategic behavior." And by doing so, the proposed revision also eliminates the risk of unfair surprise---a risk under current conditions for a party who cannot be expected to sit down and read all the lengthy terms of a form before proceeding to fill a routine order. At the same time, under this revision, identifying one particular form as the "offer," and the other as the "acceptance"---and thus the whole traditional law of offer and acceptance built upon this model---is increasingly becoming an irrelevant exercise.
The "battle of the forms" I have been discussing arises when a written offer is sent by one party, and where the other responds with a second form containing different terms. A different, but analogous, problem sometimes arises when the offeree responds, not in writing, but with actual performance. For example, a buyer may order goods of a certain quality and the seller---without promising anything---sends a different, and inferior, grade of goods. At common law (and presumably under the CISG) the seller's shipment would be treated as a counter-offer: And if the buyeraccepts and uses these inferior goods, he is deemed to have assented to the seller's counter-offer--thereby agreeing to a contract for these inferior goods! The UCC, on the other hand, treats this case in a way very similar to the way in which it deals with the battle of the forms: Under the Code, the seller's shipment operates as an acceptance, and it is an acceptance---and not a counter-offer---even though it is a deviant shipment of different goods. Here too the seller may, if he wishes, expressly indicate that he is making a counter offer---he may "notify the buyer that the shipment is offered only as an accommodation." But if he does not say so expressly, he is presumed to have accepted the buyer's offer. And since his shipment does not conform to the offer, it is simultaneously both an acceptance and a breach, leaving him open for liability for breach of contract.
7. Open TermsThe model of the commercial transaction that informed the early development of Contract law was the discrete arrangement---a one-time sale with a very limited time horizon. The parties were treated as isolated atoms---that come into momentary contact with each other and then bound off again into space. Contract law undoubtedly evolved with this model in mind---the "offer and acceptance" mechanism seems to reflect it very well. This model does now, however, correspond very well to our current reality. The more typical transaction will occur in the context of a long-term relationship, in which, for example, one party agrees to serve as the exclusive outlet, or the exclusive source of supply, of goods produced or needed by the other. The traditional model thus imposes considerable tensions on our ways of thinking about the law of contracts.
We are all aware that we are unable to predict the future with any great precision. To deal with this uncertainty, business people will require flexibility--they will expect the law to provide a framework that will provide them the assurances they need, but which will at the same time allow them to adjust the terms of their deal over time, as circumstances change and as the future reveals itself. The work of the attorney, in cooperation with the client, is often to devise mechanisms to combine the necessary contractual security with the possibility of adjustment.
When the future needs of a buyer, or the future capacity of a seller, are uncertain, a "requirements" or "output" agreement might be structured to leave this quantity term open. Earlier American cases expressed some doubt about the enforceability of these kinds of arrangements, but it is now well-established that they are both useful and binding----the primary focus of the law has instead been on monitoring and policing these transactions, to ensure that neither party is abusing its position. A buyer who commits himself to take all of his requirements from the seller undertakes, at the very least, to deal exclusively with that supplier, and to give up any right to satisfy his needs by buying elsewhere. But courts will infer that he has assumed other obligations as well: The buyer is required "to conduct his business in good faith and according to commercial standards of fair dealing in the trade" so that his "requirements will approximate a reasonably foreseeable figure." He has no right to order quantities "unreasonably disproportionate" to any "normal or otherwise comparable" "requirements"---for example, he may not, if the market price rises dramatically above the contract price, rapidly expand his orders to exploit the opportunity to resell the seller's goods. On the other hand, the buyer may choose not to buy at all, but only if he can point to a "business reason" for doing so "independent of the terms of the contract"---such as a drop in the demand for his own products,. The buyer may be liable, however, if he ceases to buy simply because he has made a reassessment of the advantages and disadvantages of the contract---this would be a violation of his duty to act in "good faith."
This standard of "good faith" and "commercial reasonableness" is typical of the vagueness and open-ended nature of much modern American Contract law: It can make decisions hard to predict in advance. But since it is so fact-intensive, it does give to the courts the tools they need to reach a sensible result in the particular case at hand. Here is a challenge for the lawyer who operates in a common-law system---the premise of which is that actual content will be infused into broad "standards" of law over time, on a case-by-case basis, through individualized adjudication.
Another common problem is uncertainty about the appropriate contract price. Here, among the available contractual mechanisms, indexation clauses are a familiar example. Sometimes, however, the parties may think it necessary or desirable simply to leave the price term completely open. At an earlier time courts would frequently hold that such an "agreement to agree" was simply a contradiction in terms, and could not possibly give rise to contractual liability. Modern cases can still be found in which such holdings persist, particularly in settings other than the sale of goods: "Courts cannot write a contract which the parties have not made." In contracts for the sale of goods, however---where the market is likely to provide an objective basis for computation---the rule appears to be otherwise. The UCC provides that the parties may conclude a contract of sale even though the price has not been settled: If they leave the price "to be agreed later" and cannot later agree, or if they simply say nothing about price, then the contract price will be "a reasonable price at the time for delivery." The only requirement here is that the parties have intended at the time to conclude a contract of sale: It is possible, of course, that they did not intend to be bound unless and until the price has been fixed or agreed; in such a case there should be no contract. In applying this standard it is often very difficult, of course, to distinguish between "an agreement with an open price term," on the one hand, and "mere preliminary negotiations" on the other; this is, once again, "a question to be determined by the trier of fact."
By contrast with the Uniform Commercial Code, the provisions in the CISG that deal with the open-price contract have aptly been termed "a mess." Article 14 of the Convention requires an offer to be "sufficiently definite," and mandates that such definiteness is met only if the proposal "expressly or implicitly fixes or makes provision for determining" the price. Article 55, on the other hand, later states that "where a contract has been validly concluded," but does not expressly or implicitly fix or make a provision for fixing the price, the parties are considered "to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned."
It is very difficult to know what to make of all this. Some commentators simply believe that the requirement of a price term under article 14 can be satisfied by the gap-filling provisions of article 55. Other commentators reconcile the two by saying that article 14 is merely concerned with the definition of an offer: It functions simply as a means of distinguishing between an offer---which can have legal consequences---and a mere proposal, or invitation, to make an offer---which does not. On this analysis, the parties need not be prevented at a later time from agreeing, together, to bind themselves to an arrangement that leaves the price for later determination. And finally, still other commentators believe that article 14 and article 55 simply contradict each other: This, it has been suggested, is a result of profound differences between the various states with different legal traditions involved in the drafting of the Convention---differences, for example, between common-law and many other industrialized states who wanted "a flexible rule for the determination of price," and developing countries who found the contract price "an essential element that absolutely must be determined" in advance. Article 14 had already been approved when Article 55 was discussed, but a majority could not be found to modify it later.
9. Preliminary NegotiationsThe "offer and acceptance" model no longer represents very accurately---if indeed it ever did---the nature of modern contracting behavior. Large and complex agreements are often "hammered out" over a considerable period of time, through a process of face-to-face negotiation. During the negotiation of such deals it is rarely possible to identify a discrete "offer" or "counter-offer" to be accepted; there is instead a gradual process in which agreements are reached piecemeal, through the exchange of "drafts" to which neither party is as yet fully committed. Each exchange of drafts leaves fewer and fewer issues in disagreement, to the point that only small technical points remain for the parties’ lawyers to discuss separately. When this negotiation process finally reaches a successful conclusion, the contractual commitment will typically be set out in a lengthy set of documents, signed by the parties in multiple copies and exchanged more or less simultaneously at a "closing."
Sometimes, however, this process will not yet have produced a single, complete, and detailed document to which both parties are clearly committed. When the negotiations abort before this document is produced, a number of different legal problems may arise:
a. Intention to be BoundThis is a pattern common in modern commercial life: The parties to a substantial transaction may be in the midst of negotiation---they may be feeling their way along towards final agreement, and becoming increasingly optimistic that such an agreement will eventually be reached. During this negotiation process, many issues will be agreed to on a piecemeal basis---and perhaps even some of the principal "stumbling blocks" to a deal will have been resolved. The remaining issues may be considered too small and unimportant, or too easily settled, to be a cause of serious concern. And so, perhaps, in a burst of enthusiasm and euphoria, the bargainers may reach across the table and shake hands---"We have a deal." They may even sign a "letter of intent," or "agreement in principle," setting out the outlines of the deal. Such an agreement may specify that it is "subject to execution of a definitive agreement"---following such matters as completion of certain legally required formalities, appraisal of the assets, clearing of title, or approval by the parties’ attorneys to take care of any possible question or contingency---as the phrase goes, to "dot all the ‘i’s’ and cross all the ‘t’s.’" For one reason or another the deal later collapses, and one party claims that the preliminary agreement is itself legally binding---independent of the final definitive contract. Are the parties bound, or are they free until the final writing is signed?
The answer will depend on an assessment by the court, or a jury, of the intention of the parties. It is possible that the parties intended to contract informally, and that the later final, definitive agreement consisted merely of "technical requirements of little consequence," meant to serve only as a housekeeping device, to memorialize their agreement or to make sure that minor legal details were in order. If the parties do intend to contract orally or informally, the mere fact that they intended to commit their agreement to a formal writing at a later time does not prevent a court from saying that a contract has already been entered into. On the other hand, it is possible that the final written agreement was intended to be the final culmination of the negotiations, so that the parties did not consider themselves bound at all until the very last minute. In making that determination, courts will be influenced by such factors as (1) the extent to which all essential terms of the alleged contract had been agreed on, (2) whether the parties had begun to act or perform under the alleged contract, and (3) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected.
"Agreements in principle," "letters of intent," and "memoranda of understanding" are frequently necessary in the relatively early stages of commercial transactions, but the intended use of these documents may vary considerably---and whether they constitute a binding commitment or a mere stage in the bargaining process is often unclear. Obviously, the more likely it is that a court in later litigation will "fill" what appears to be a "gap" in the parties' "agreement," the greater care transactional attorneys must take: They must take steps in advance to make it clearly understood, both by the other party and by a court that may later hear a dispute, that preliminary agreement on particular aspects or issues in a negotiation is just that---"preliminary" and "tentative"; they must take pains to clearly demarcate in practice the precise moment when an agreement is intended to ripen into a binding obligation from which the client may no longer withdraw
b. "Pre-Contractual" LiabilityIn the cases I have just been talking about, if an "intention to contract" is found---and if there is some "reasonably certain basis" for giving a contractual remedy---then the promisee will be entitled to all the usual remedies provided by Contract law. On the other hand, if no such "intention" is found, there is no contractual liability at all. Traditionally this has been thought to mean that both parties remain "as free as the breeze"--- able to walk away, without consequences, for any reason whatever. This result would mean that if one of the parties has changed his position in any way---if, say, he has begun to act in the hope and confidence that a deal would eventually be struck---he is simply out of luck.
In a number of cases, however, courts are beginning to impose liability for conduct in the bargaining process, and to provide remedies for harm suffered during that process even before we can say that any "contract" at all has been entered into.
10. Special Applications: Auction SalesWe have already seen that in an increasing number of cases (for example, cases involving the exchange of pre-printed forms and cases involving preliminary negotiations) the traditional model of contract formation by "offer and acceptance" has been eroded---and indeed. often seems to have become simply irrelevant. There are many other areas of Contract law in which special rules have evolved, and where it seems difficult to fit contract formation neatly into the usual "offer and acceptance" mechanism.
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One example is the law of auction sales, whose rules are in large part a codification of many centuries of history and custom. A sale at auction is complete when the auctioneer, acting for the seller, so announces by the "fall of the hammer or in other customary manner." The auctioneer is free to complete he sale at any time---and, on the other hand, is free to reject all bids and withdraw the goods from sale any time until the hammer falls. Until that time, any bidder for his part is perfectly free to withdraw his bid. In many cases, then, this makes it look as if the auctioneer is inviting offers from prospective bidders, and makes a bidder look like the offeror---who may "revoke" his offer before the auctioneer’s acceptance. This is indeed the "normal procedure," and what the law will presume in the absence of some indication to the contrary. However, auction sales are often held "without reserve"---in which case the normal understanding is that the goods may not be withdrawn, but must be sold to the highest bidder. In that case, it is the auctioneer who has in effect made an offer---and an irrevocable one. Yet, curiously, even in such cases the last and highest bidder is not bound to his bid---but he may still retract it at any time until the hammer falls.
VI. Requirements of Form: Statute of FraudsThere is no general requirement in the United States that contracts, to be legally binding, must be in writing and signed. In theory, important contracts---even contracts involving large sums of money---can be made orally and still be enforceable, provided that the court or jury believes the evidence that has been introduced concerning the existence and the terms of the alleged contract.
However there are statutes, in force in every state, that do impose a writing requirement for certain types of contracts. These statutes are all modeled after a 17th century English statute and are usually referred to, as that statute was, as "the Statute of Frauds." Where the statute of frauds applies, it makes unenforceable an agreement that meets all the other requirements of a binding contract, e.g., offer, acceptance, consideration, and so forth. And it prevents the enforcement of a contract even though the evidence is overwhelming that in fact an otherwise enforceable agreement was reached---even though, for example, the making of the oral contract took place in front of ten disinterested witnesses, all of whom are willing to testify that full agreement was reached.
In general, the types of contracts covered by [the usual phrase is "falling within"] the statute of frauds are the following:
1. Contracts for the Sale of Goods for the Price of $500 or More.
3. Contracts "Not to Performed Within One Year from the Making Thereof"
In most jurisdictions, the statute of frauds does not require that the actual contract between the parties be in writing---all that is required is that (in the words of the UCC) there must be "some writing sufficient to indicate that a contract . . . has been made between the parties and signed by the party against whom enforcement is sought." Thus, several different documents referring to the same transaction, or a letter or other memorandum signed at a later time---or even a letter repudiating the agreement---may satisfy the statutory requirement if they provide sufficient evidence of existence of the alleged agreement.
Over the years, a number of exceptions have developed to the writing requirement of the statute. In many cases, it has appeared to the courts that strictly applying the "statute of frauds" would permit a defendant to act unjustly---that allowing him to escape an obligation that he had freely assumed towards the plaintiff would result in perpetrating fraud, not preventing it. These exceptions are generally specific to the particular kind of contract involved---that is, behavior that will "take a contract out of" [that is, create an exception to] the writing requirement for sales of land, will not necessarily create an exception to the requirement for other kinds of oral agreements.
What these exceptions tend to have in common, though, is judicial sensitivity to the situation where one party has relied on the oral agreement---has acted to his detriment in the belief that a contract existed. For example, "part performance" of a contract for the sale of land may make that contract enforceable even without a writing: In most states, an oral agreement to sell land becomes enforceable once the buyer has taken possession of land with the seller’s assent, and has paid part of the price or has made improvements on the property. Oral agreements to sell goods may become enforceable if the seller has made a "substantial beginning of their manufacture or commitments for their procurement," and if the goods are to be "specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business"; the statute of frauds will also not apply as to goods for which payment has already been made, or which have already been received and accepted.
If a plaintiff can bring his case within one of these established exceptions, the oral agreement will be fully enforceable. If he cannot, he still may be able to recover on a theory of "restitution" for the reasonable value of any "benefit" that he has conferred on the defendant. "Restitution" is a term with rich historical connotations, that has a number of meanings in American law: It is one possible remedy for a breach of contract, where an innocent party has conferred a benefit on the other breaching party---for example, by making a part payment or by furnishing services under the contract; the court may then require the other party to "disgorge" the benefit that he has received by returning it or its value. But restitution can also constitute a substantive basis for recovery even if a contract does not exist; the overriding principle is still the prevention of "unjust enrichment."
The "parol evidence rule" reflects the assumption that the document itself contains all the elements of the deal, and that duties, restrictions, and qualifications that for any reason do not appear in the written document---even though apparently accepted at an earlier stage---were not intended by the parties to survive. Under the rule:
1. If a written agreement is an "integrated agreement"---that is, if it was "intended by the parties as a final expression of their agreement with respect to such terms as are included therein"---then it may not be "contradicted" by "inconsistent" prior agreements. If the written agreement provides that land will be conveyed for a price of $10,000, the seller will not be allowed to show a prior oral---or even a prior written---promise by the buyer to pay $15,000.
2. If the written agreement is "completely integrated"---that is, if it was "intended also as a complete and exclusive statement of the terms of the agreement"---then, within the scope of that agreement, even consistent additional terms may not be shown. Obviously, if a defendant is being sued on a written contract for the sale of coal, he will be allowed to show that he has a claim against the other party based on a prior contract for the sale of aluminum---this is a so-called "collateral contract." But on the other hand, if there is a written contract for the sale of a tract of land, the buyer---who may have intended to use the property as a vacation home---may not be permitted to show that the seller had orally promised, as part of the transaction, to remove an ugly "ice house" standing in plain view across the road. The promise to remove the ice house, a court held, is "so closely related to the subject dealt with in the written agreement" that it may not be proven; the purpose behind the rule "was a wise one . . . notwithstanding injustice here and there."
The real problem that the "parol evidence rule" poses is this: How can we know whether or not the parties "intended" their writing to be the final and definitive statement of their agreement? Many courts, particularly during the first half of this century, held that such intention can be found only by looking at the writing itself (in a frequent phrase, "within the four corners" of the document). For these courts, the question is whether the writing appears to be final and complete "on its face." This approach is particularly likely if the writing contains a standard "merger clause," stating that the writing represents a final and complete integration of the parties’ agreement.
On the other hand, the more modern tendency is to look outside the document to the surrounding circumstances---including the prior negotiations themselves---to see whether the writing was intended to supersede or discharge prior oral understandings. On this view, "a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties." This view of the parol evidence rule may reduce it to something of a truism---a writing has the legal effect of superseding earlier agreements if the parties wanted it to do so! But even on this view, the rule remains important as a device for controlling the flow of information to a jury: The legal effect of writing must be determined by the court before allowing any evidence of the alleged prior agreement to be submitted to the jury, which is the ultimate fact-finder in most civil cases.
A number of exceptions have developed over the years to mitigate the possible harshness of the parol evidence rule:
1. Probably the most important exception is that evidence of prior agreements or negotiations may always be considered in order to explain or interpret the writing: It is obviously necessary to know first what the writing means, before we can know whether it is being "contradicted’ or "supplemented." An earlier view held by many courts was that prior agreements or negotiations could only be used for this purpose if the writing was "unclear" or "ambiguous"; however, it seems generally recognized today that "even though words seem on their face to have only a single possible meaning, other meanings often appear when the circumstances are disclosed."
2. Since the parol evidence rule supposes that a writing was intended to supersede all earlier agreements, it obviously does not prevent the proof of oral agreements made subsequent to the writing. Contracting parties are always free to modify or terminate, by later oral agreements, their existing obligations and adopt different terms that better suit their interests.
But what if the parties wish to prevent the possibility of future oral modifications---perhaps in order to "protect against false allegations" of modification, or to control their own agents in the field who might be tempted to make unauthorized promises? Can they create their own private statute of frauds by inserting in their contract a clause making later oral modifications ineffective? At common law, courts tended to hold that the parties could not do this---after all, they reasoned, can’t the parties choose to orally cancel their entire contract, including the "no oral modification" clause itself? The UCC, however, now provides otherwise: If the parties’ signed agreement excludes future modifications except by a further signed writing, such a clause will be given effect. Even under such a provision, though, the effectiveness of a "no oral modification" clause must be limited if one the parties has materially changed his position by relying on the modification.
VIII. Modification and RenegotiationAssuming that a valid contract has been formed, it may be thought desirable at some later time to make some alterations in the original deal. Circumstances may have changed in a way that had not originally been anticipated by the parties, so that the party furnishing goods or services may want or need a revised and higher price, or the party receiving goods or services may want or need a revised and lower price. Earlier English and American cases---applying a fairly rigid version of what "Contract doctrine" seemed to require---held that any promise to pay more money for the same goods or services that were called for under the original contract (or to accept less money for the same goods or services) would be unenforceable. Typical of such cases is an early English decision which refused to enforce the promise of a ship’s captain to pay more money to members of the crew when, during the course of the voyage, some seamen had deserted: The captain’s promise was "void for want of consideration," since the crew members had already "sold all their services till the voyage should be completed," However, even courts that purported to follow such a doctrine would often seize on "slight variations" or "trifling circumstances" in the contractual adjustment in order to satisfy the requirement of consideration---and thus to depart from the rule when it seemed fair to do so.
Now one can imagine two very different sorts of stories about cases where the parties have agreed, say, to a higher price for goods or services than was called for in the original contract. In one story, the buyer has relied on the seller to supply the goods, and has passed up alternative sources of supply that are no longer available. At that point, the seller---aware of the precarious situation that the buyer finds himself in---threatens to withhold delivery unless the buyer agrees to pay a higher price, and the buyer is forced to acquiesce. Such unscrupulous behavior on the part of the seller---a form of "extortion"---obviously should not result in an enforceable modification. In an alternative story, the seller's costs for raw materials have increased dramatically---perhaps because of a foreign war that has reduced his sources of supply, or the threat of a nationwide strike; similarly, a contractor may have encountered unexpected soil conditions which have made excavation and extraction of minerals more costly. Under serious business pressure, the seller or contractor requests an upward modification in the price, and the other party agrees. There may be many reasons why he may do so: Leaving aside a sense of fairness, he may feel that there is a "symbiotic" relationship between his business and the sellers' business---that is, the continued economic health of the seller is important to his own business, and that insisting on the "letter of the bargain" to the fullest extent may under the circumstances actually be injurious to them both. A very similar story may involve an employer whose business is suffering because of a war, and whose employees agree to take a cut in pay in the hopes of keeping the business afloat.
Leaving aside any legal technicalities, the law should obviously distinguish between these two extreme cases. The UCC does so explicitly: It distinguishes between, on the one hand, "the extortion of a 'modification' without legitimate commercial reason" and, on the other hand, a modification made in "good faith," which "may in some situations require an objectively demonstrable reason for seeking a modification." In the latter case, no consideration is necessary for an agreement that modifies the contract. We can see that the focus of attention has once again shifted away from the existence of consideration, and towards the policing and monitoring of agreements to insure their ultimate fairness. The Official Comment to the Code suggests that "such matters as a market shift which makes performance come to involve a loss may provide such a reason [for modification] even though there is no such unforeseen difficulty as would make out a legal excuse from performance."
It seems an inevitable feature of the common-law system that the broad and flexible "standard" incorporated in the Code will be the subject of much litigation---as sellers try to demonstrate that their case is more similar to the second scenario I mentioned (the "good faith" modification due to an increase in seller's cost), and buyers who have agreed to a modification and then changed their minds try to demonstrate that it is more similar to the first scenario. Customs and usages with respect to what is considered to be legitimate and acceptable reasons for seeking modification can be expected to add some predictability to the practical application of this standard.
IX. Defenses to Contractual Liability1. Bargaining Misconduct: Fraud and Duress
If the enforcement of bargains is justified on the grounds that it promotes individual autonomy and the proper allocation of "productive energy and product" in the economy, then such a rationale does not readily apply in cases where one party’s misconduct has made the other’s "agreement" less than meaningful. We can have no assurance that the bargaining process has reached the "right result" if, for example, one party has misrepresented to the other the identity or the character of the property or service being sold---or has induced the other party to sign the agreement by placing a gun to his head. In these circumstances, the victim should be able to "avoid" the contract.
In the classic case of misrepresentation, one party has made an assertion to the other that "is not in accord with the facts." The contract can be avoided if the misrepresentation is "fraudulent"---that is, where the speaker either knows or believes that his assertion is not true, or at least does not have the confidence in his assertion that he implies. But it is not necessary that there be any intent to defraud---even an innocent misrepresentation is enough, if it is "material"---that is, likely to induce a reasonable person to agree---and if the other party has been induced to enter into the agreement by justifiable reliance on this false assertion. (Reliance on mere "opinions," or mere expressions of "judgment as to quality, value, authenticity, or similar matters," may not be sufficient).
Traditionally, this principle was not extended to cases where---rather than lying about a particular fact---the party with greater knowledge simply kept silent. No general duty to disclose existed---even where it was clear that the other party was ignorant of the fact being withheld, and that knowledge of this fact would materially affect his decision to enter into the contract. Negotiation, after all, cannot be turned into a discovery proceeding; the dilemma is to reconcile the notion of negotiation as an adversarial relationship---in which the parties jockey to make "the best deal possible"---with the standards of honesty and fair dealing that should be encouraged in parties dealing with each other. Increasingly, however, courts are adopting the principle that in some cases, silence can be the legal equivalent of a misrepresentation: The Restatement, for example, treats nondisclosure as amounting to a false assertion at least where the mistaken party was "entitled" to know the truth because of some "relationship of trust and confidence" between the parties, or where one party is mistaken as to a "basic assumption" of the contract and non-disclosure would amount to a "failure to act in good faith and in accordance with reasonable standards of fair dealing."
Note that I have been talking only about misrepresentation as giving rise to a right on the part of the innocent party to escape or "avoid" the contract. The right of avoidance for misrepresentation overlaps with other legal principles---where the remedies of the injured party may be somewhat broader. If the misrepresentation was fraudulent, or even negligent, then there may be an affirmative right to recover damages in tort in the traditional tort action of "deceit." Alternatively, a seller’s misrepresentation about the quality of goods may be functionally equivalent to a contractual undertaking---that is, a promise---that the goods will conform to that quality: Such an "affirmation of fact" or "description" of the goods, if made "the basis of the bargain," can constitute an express warranty on the part of the seller, the breach of which will give rise to the recovery of normal contract damages.
It is easy to see that agreements induced by the threat of unlawful conduct---such as a threatened crime or tort---can be avoided by the victim. Courts have readily extended that principle beyond such simple cases, recognizing that other forms of "duress" or coercion may be equally improper means of procuring "assent" to a proposed contract---for example, a threat in bad faith to bring litigation. Where one party to an existing contract of sale attempts to exploit the buyer’s desperate need for the goods---by threatening not to deliver them unless the buyer pays a much higher price than originally promised---the buyer can escape his promise to pay the higher price on the same grounds of duress. (We have, already, seen alternative possible explanations for a refusal to enforce this kind of promise---for example, that it lacks consideration, or that it is a modification made "in bad faith" and "without legitimate commercial reason").
Courts regularly repeat, however, that the mere fact one party is taking advantage of another’s "desperate financial straits"---the mere "threat of considerable financial loss"---cannot constitute duress, unless the financial difficulty of the complaining party is due to the other party’s conduct. "Such economic stress must be attributable to the party against whom duress is alleged." It is after all inherent in a market economy governed by "freedom of contract" that market forces may constrain individuals of unequal bargaining strength to agree to terms less advantageous to them than they would like: "The adverse effect on the finality of settlements and hence on the willingness of parties to settle their contract disputes without litigation would be great if the cash needs of one party were alone enough to entitle him to a trial on the validity of the settlement.".
2. Mistake and Changed Circumstances
Sometimes an agreement is made on the basis of an assumption of fact that simply turns out to be untrue---a "mistake," not discovered until sometime later. Where this mistake was shared by both parties---a "mutual mistake"---and was a "basic assumption on which the contract was made," which would have "a material effect on the agreed exchange of performances," courts have allowed the injured party to avoid the contract.
Where the mistake of fact is not "mutual," but "unilateral"---typically, where one party in fact knows the truth and, what is more, knows that the other party is proceeding on a mistaken assumption---we have in effect the problem of nondisclosure that I have already mentioned. In some cases, as we have seen, keeping silent in such circumstances can be seen by courts as equivalent to an affirmative misrepresentation.
In the cow case, the parties discovered after making the agreement that the true situation had, all along, been different from what they had originally supposed it to be. Similar questions can arise when there is no mistake of fact at all, but later events---equally unforeseen and unexpected---occur to affect the performance of a contract. The principle is limited to "extraordinary circumstances"---but such circumstances can sometimes make performance so vitally different from what was expected by the parties as to alter the essential nature of that performance; in such cases, the party adversely affected by the change may claim excuse from the contract. So, for example, a promisor may claim that:
- it has literally become "impossible" to perform the contract according to its terms. The leading English case of this type involved the burning down of the defendant’s music hall before the date when the plaintiff had contracted to rent it; the court held that "the music hall having ceased to exist, without fault of either party, both parties are excused." Another example is the death of an individual who has contracted to perform personal services---"it is sufficiently rare for a party to under take a duty to render personal service in spite of his death or incapacity that an intention to do so must be clearly manifested."
- the party’s performance, while not literally impossible, has become economically impracticable because of extreme and unreasonable difficulty, expense, injury, or loss. In the leading American case, a buyer agreed to take from the seller’s gravel pit all the gravel he needed for the construction of a bridge. After taking all the gravel above water level, he was excused from further performance: Although there was more gravel on the land, "it was so situated that the [buyer] could not take it by ordinary means, nor except at a prohibitive cost"---for all practical purposes, then, the situation was "not different from that of a total absence" of gravel.
- even though performance is neither impossible nor even "impracticable," circumstances have so drastically changed that the performance for which one party agreed to pay under the contract has simply become worthless to him---the purpose of the agreement has thus been "frustrated." In the leading case of this type, one party agreed to rent a room overlooking the planned route of the coronation procession of King Edward VII; the rental rate for this privilege was far in excess of the normal rental of the room. When the coronation procession was canceled because of the King’s sudden illness, the court allowed the renter to avoid the contract.
Nevertheless, occasional dramatic events, resulting perhaps in a severe shortage of raw materials or of supplies due to war or crop failure, may sometimes justify a court’s conclusion that such events were not "sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part or the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances." As this comment suggests, the fact that an event was "unforeseeable" may be significant as suggesting that its non-occurrence was a "basic assumption" on which the contract was made: However, foreseeable and even foreseen events may qualify also, since the parties may not have thought it sufficiently important a risk to have made it the subject of explicit bargaining. "Virtually nothing is truly unforeseeable"---and the true task of a court should be to try to identify those occurrences which were or should reasonably have been part of the decisionmaking process and included in the negotiations leading to the contract.
3. "Contracts of Adhesion" and Unconscionability
As we have seen, contract law in its traditional form did not impose any requirement that an exchange be "fair" in order to be enforceable. The doctrine of consideration, as I discussed earlier, did not attempt to weigh the relative values of the things exchanged---the operative model was that of two parties of roughly equal bargaining power arriving, by a process of free negotiation, at a deal which they thought advanced both of their interests. Such a non-interventionist attitude was particularly suited to classical free-market economic theory and to the laissez faire capitalism of the late 19th and early 20th centuries which it served---encouraging actors in the marketplace to make the best deals they could, with confidence that those deals would be enforced no matter how one-sided.
More recently, American law has taken a somewhat different approach. While still adhering to the general notion of "freedom of contract," both courts and legislatures have deemed it appropriate to engage in some greater degree of "policing" of bargains--- particularly in the area of "consumer" contracts where the free-market model seems to have the least legitimacy. As consumers, we are all familiar with the realities of this market: We all are familiar with the experience of being presented with a standard, printed form "contract" in situations where we have virtually no opportunity or ability to read, understand, or "bargain" about the terms---when, for example, we are buying a car or a computer, leasing a car or an apartment, opening up an account at a bank, or taking out an insurance policy. Such mass-produced agreements are given to us on a "take it or leave it" basis; we have no choice as to the terms, and indeed our only choice is whether or not to "adhere" to them---hence the term, "contracts of adhesion." Of course such transactions are an inescapable fact of contemporary life---it is hard to see how modern business could proceed without them, and there is nothing necessarily illicit about them. Yet challenges to the terms of these agreements are increasingly common, and courts have developed doctrinal tools for use in scrutinizing these contracts in an attempt to prevent the more extreme forms of unfairness and "indecency."
While in the past courts might attempt to police unfair contracts by use of the doctrines of "fraud" and "duress," or by construing contractual language in such a way as to favor the weaker party, these devices have in recent years been generalized and reinforced by a broader principle---that courts may refuse to enforce contracts, or terms of contracts, that were "unconscionable" at the time the contract was entered into.
The contours of "unconscionability" remain vague and ill-defined. The Code cautions that the principle remains "one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power": This is consistent with the links between "unconscionability" and the traditional law of fraud and duress; and it is also consistent with the continuing reluctance of courts to police bargains for substantive unfairness alone---reflecting their awareness that it is not usually thought of as part of their job description to redress fundamental imbalances in society's distribution of wealth. Although the main focus of ""unconscionability" is therefore on possible defects in the process of bargaining, it is true that "gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party," may certainly be relevant to the inquiry----they may at least "confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative . . . " It is common to say that "unconscionability" has two possible components---"procedural," involving abuses of the bargaining process, and "substantive," involving an unreasonable imbalance in "overly harsh" or "one-sided" terms; it is also commonly assumed that while both elements usually have to be present, they exist on a sliding scale---so that the more of one that is present, the less need there is to be able to find the other.
The primary applicability of "unconscionability" has been in consumer contracts---in cases where terms hidden in a maze of hard-to-read "fine print," and obscured by difficult to understand "legalese," would otherwise lead to harsh and surprising consequences for the consumer. (This is not, however, exclusively true---cases can also be found where the beneficiary has been an "inexperienced" or "unsophisticated" small businessman.). Of course, regulation of consumer contracts is no longer left exclusively or even principally to the courts as an application of ordinary "contract law." In recent years heightened involvement in consumer protection has taken place on the part of state and federal legislatures and administrative agencies---which have shown particular interest in such matters as product warranties and defective consumer products, consumer credit, and the regulation of "unfair or deceptive acts or practices" in consumer sales. This development illustrates my earlier point that as particular fields of activity attract legislative interest and regulation, they become specialized areas that have simply been removed from the domain of "pure contract."
X. Remedies for Breach of Contract1. Material Breach: Rescission and Restitution
2. Specific Performance as an "Exceptional" Remedy3. Damages
a. "Expectancy Damages"b. "Mitigation"c. Relianced. Liquidated Damages
XI. Rights and Obligations of Third Parties.
Source- http://www.jurisdoctor.adv.br/legis/contract.htm
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