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Contract Doctrine, Theory & Practice Volume One

Table of contents
Contract Doctrine, Theory & Practice Volume One
1st Edition
J.H. Verkerke
Table Of Contents
Introduction
Contract Doctrine, Theory & Practice

                      

 

Contract Doctrine,

Theory & Practice

 

Volume One

 

 

 

 

 

J.H. Verkerke

 

 

 

 

 

CALI eLangdell Press 2012

 

Notices

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About the Author

Before he received his law degree in 1990, J. H. (Rip) Verkerke earned a master's of philosophy in economics. Verkerke joined the Law School faculty in 1991 and teaches employment law, employment discrimination law, contracts and a seminar on law and economics.

While at Yale, Verkerke was articles editor and articles administrator for the Yale Law Journal and held a number of fellowships, including the John M. Olin Fellowship in Law, Economics, and Public Policy. After graduation, he clerked for Judge Ralph K. Winter Jr. of the U.S. Court of Appeals for the Second Circuit.

In June 1996 Verkerke received a three-year grant from the University's Academic Enhancement Program to establish the Program for Employment and Labor Law Studies at the Law School. He served as visiting professor of law at the University of Texas at Austin in the fall of 1997. Verkerke also participated in an ABA project to draft a new labor code for the transitional government of Afghanistan. In 2007, Verkerke received an All-University Teaching Award from UVA, and in 2011, he was selected as an inaugural member of the University Academy of Teaching.

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Preface

These teaching materials are a work-in-progress. Our reading assignments this semester will include all of the elements that make up a conventional casebook. You will read judicial opinions, statutory provisions, academic essays, and hypotheticals. You will puzzle over common law doctrines and carefully parse statutes. We will try to develop theories that can predict and justify the patterns of judicial decisions we observe.

Unlike a conventional casebook, however, I have selected each element of the readings myself. We will start at the beginning of these materials, read each assignment in order, and finish at the end. All of the reading assignments are also self-contained. When I ask you to read a statutory section or a portion of the Restatement, it will appear in the text at the point where you should read it. In addition, we will cover the entire set of materials. You will not spend the semester hauling around hundreds of extra pages that we have no time to read or discuss. At the end of each section, you will find discussion questions that track very closely the questions that I will ask during our class time together. Finally, the pages themselves are formatted to make reading easier and to give you plenty of space to take notes and mark up the text.

Our class also will use an online collaboration site to enrich and extend class discussions. This site will provide links to additional legal sources as well as questions for class discussion, practice problems, explanatory notes, and a discussion forum. The site will develop and evolve in response to your needs and interests. If you have any suggestions for changes or additions to these materials, I invite you to talk with me or post your ideas to our collaboration site.

Why study contract law?

The first semester of law school is mostly about learning to speak a new legal language (but emphatically not “legalese”), to formulate and evaluate legal arguments, to become comfortable with the distinctive style of legal analysis. We could teach these skills using almost any legal topic. But we begin the first-year curriculum with subjects that pervade the entire field of law. Contract principles have a long history and they form a significant part of the way that lawyers think about many legal problems. As you will discover when you study insurance law, employment law, family law, and dozens of other practice areas, your knowledge of contract doctrine and theory will be invaluable.

Why collaborative teaching materials?

The ultimate goal of this project is to involve many professors in producing a library of materials for teaching contracts (and other subjects). For the moment, I will be solely responsible for collecting public domain content and generating problems and explanatory essays. These embryonic reading materials will grow and evolve as I use and expand them and as other professors join in producing additional content. I gratefully acknowledge the extraordinary work of my talented research assistants who have been instrumental in helping me to put these materials together. Thanks to Sarah Bryan, Mario Lorello, Elizabeth Young, Vishal Phalgoo, Valerie Barker and Jim Sherwood.

I believe that it is equally important to involve students in the ongoing process of refining and improving how we teach legal subjects. Our collaboration site will provide a platform for student-generated content and lively dialogue. With your enthusiastic engagement, we will finish the semester with an excellent understanding of contracts and a useful collection of reference materials. I invite each of you to join us for what will be a challenging, sometimes frustrating, but ultimately rewarding, intellectual journey.

Chapter One
Introduction to the Legal Significance of Promise Making

The goal of this chapter is to introduce you to some of the fundamental questions that organize our study of contract law and theory. At least initially, we will focus exclusively on the judge-made rules of the “common law.” Prior judicial decisions—often referred to as “precedents”—comprise the only legally authoritative source of the common law. However, the American Law Institute (ALI), a prestigious organization of judges, professors and practicing lawyers, has promulgated “Restatements” for many core areas of the law, including contracts. We will study various sources of contract law in more detail soon, but for the moment, bear in mind that the Restatement (Second) of Contracts (1981), [hereinafter Restatement (Second)], quoted repeatedly in these reading materials is a highly influential formulation of the law of contracts.

1.1. What is a Promise?

We begin by considering what it means to make a promise. Let’s forget for just a moment about the law and think instead what normal people mean when they talk about a promise. Suppose that your professor tells you on the first day of class: “I promise that you’ll enjoy Contracts this semester.” Consider how we should understand this “promise.” Does the fact that the statement is oral rather than in writing make any difference? Is there anything about the circumstances in which this statement is made that undermines your confidence that the professor intends for this “promise” to be binding?

Now read the following sections of the Restatement (Second), and think about how the legal use of the term “promise” relates to our common sense understanding of the word.

Restatement (Second) of Contracts

§ 1. Contract Defined

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

§ 2. Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee.

(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

§ 3. Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

§ 4. How a Promise May Be Made

A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.

1.0.1 Discussion of Promise 

Try to identify the essential elements or components of the legal meaning of the word “promise.” Can you draw a diagram to represent how these elements relate to one another?

Now think about why people make promises. Why not just perform the act? Why talk about it first?

1.1.1. Principal Case – Bailey v. West

Our first principal case continues to explore what it means to make a promise. As you read the court’s opinion, think carefully about how you would describe the facts or tell the story of what happened. Consider also the “procedural posture” of the case. How has the litigation progressed? Who sued whom? What has happened so far? Who won at each stage and what did they get in the way of remedies? How does the Rhode Island Supreme Court resolve the case?

Bailey v. West

Supreme Court of Rhode Island

105 R.I. 61, 249 A.2d 414 (1969)

Paolino, Justice.

[1] This is a civil action wherein the plaintiff [Bailey] alleges that the defendant [West] is indebted to him for the reasonable value of his services rendered in connection with the feeding, care and maintenance of a certain race horse named “Bascom's Folly” from May 3, 1962 through July 3, 1966. The case was tried before a justice of the superior court sitting without a jury, and resulted in a decision for the plaintiff for his cost of boarding the horse for the five months immediately subsequent to May 3, 1962, and for certain expenses incurred by him in trimming its hoofs. The cause is now before us on the plaintiff's appeal and defendant's cross appeal from the judgment entered pursuant to such decision.

[2] The facts material to a resolution of the precise issues raised herein are as follows. In late April 1962, defendant, accompanied by his horse trainer, went to Belmont Park in New York to buy race horses. On April 27, 1962, defendant purchased Bascom's Folly from a Dr. Strauss and arranged to have the horse shipped to Suffolk Downs in East Boston, Massachusetts. Upon its arrival defendant's trainer discovered that the horse was lame, and so notified defendant, who ordered him to reship the horse by van to the seller at Belmont Park. The seller refused to accept delivery at Belmont on May 3, 1962, and thereupon, the van driver, one Kelly, called defendant's trainer and asked for further instructions. Although the trial testimony is in conflict as to what the trainer told him, it is not disputed that on the same day Kelly brought Bascom's Folly to plaintiff's farm where the horse remained until July 3, 1966, when it was sold by plaintiff to a third party.

[3] While Bascom's Folly was residing at his horse farm, plaintiff sent bills for its feed and board to defendant at regular intervals. According to testimony elicited from defendant at the trial, the first such bill was received by him some two or three months after Bascom's Folly was placed on plaintiff's farm. He also stated that he immediately returned the bill to plaintiff with the notation that he was not the owner of the horse nor was it sent to plaintiff's farm at his request. The plaintiff testified that he sent bills monthly to defendant and that the first notice he received from him disclaiming ownership was “maybe after a month or two or so” subsequent to the time when the horse was left in plaintiff's care.

[4] In his decision the trial judge found that defendant's trainer had informed Kelly during their telephone conversation of May 3, 1962, that “he would have to do whatever he wanted to do with the horse, that he wouldn't be on any farm at the defendant's expense.” He also found, however, that when Bascom's Folly was brought to his farm, plaintiff was not aware of the telephone conversation between Kelly and defendant's trainer, and hence, even though he knew there was a controversy surrounding the ownership of the horse, he was entitled to assume that “there is an implication here that, ‘I am to take care of this horse.’” Continuing his decision, the trial justice stated that in view of the result reached by this court in a recent opinion  wherein we held that the instant defendant was liable to the original seller, Dr. Strauss, for the purchase price of this horse, there was a contract “implied in fact” between the plaintiff and defendant to board Bascom's Folly and that this contract continued until plaintiff received notification from defendant that he would not be responsible for the horse's board. The trial justice further stated that “I think there was notice given at least at the end of the four months, and I think we must add another month on there for a reasonable disposition of his property.”

[5] In view of the conclusion we reach with respect to defendant's first two contentions, we shall confine ourselves solely to a discussion and resolution of the issues necessarily implicit therein, and shall not examine other subsidiary arguments advanced by plaintiff and defendant.

I

[6] The defendant alleges in his brief and oral argument that the trial judge erred in finding a contract implied in fact between the parties. We agree.

[7] The following quotation from 17 C.J.S. Contracts § 4 at pp. 557-560, illustrates the elements necessary to the establishment of a contract implied in fact:

A “contract implied in fact,” … or an implied contract in the proper sense, arises where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts, or, as it has been otherwise stated, where there are circumstances which, according to the ordinary course of dealing and the common understanding of men, show a mutual intent to contract.

It has been said that a contract implied in fact must contain all the elements of an express contract. So, such a contract is dependent on mutual agreement or consent, and on the intention of the parties: and a meeting of the minds is required. A contract implied in fact is to every intent and purpose an agreement between the parties, and it cannot be found to exist unless a contract status is shown. Such a contract does not arise out of an implied legal duty or obligation, but out of facts from which consent may be inferred; there must be a manifestation of assent arising wholly or in part from acts other than words, and a contract cannot be implied in fact where the facts are inconsistent with its existence.

[8] Therefore, essential elements of contracts implied in fact are mutual agreement, and intent to promise, but the agreement and the promise have not been made in words and are implied from the facts. Power-Matics, Inc. v. Ligotti, 191 A.2d 483 (N.J. Super. 1963); St. Paul Fire & M. Ins. Co. v. Indemnity Ins. Co. of No. America, 158 A.2d 825 (N.J. 1960); St. John's First Lutheran Church v. Storsteen, 84 N.W.2d 725 (S.D. 1957). 

[9] In the instant case, plaintiff sued on the theory of a contract “implied in law.” There was no evidence introduced by him to support the establishment of a contract implied in fact, and he cannot now argue solely on the basis of the trial justice's decision for such a result.

[10] The source of the obligation in a contract implied in fact, as in express contracts, is in the intention of the parties. We hold that there was no mutual agreement and intent to promise between the plaintiff and defendant so as to establish a contract implied in fact for defendant to pay plaintiff for the maintenance of this horse. From the time Kelly delivered the horse to him plaintiff knew there was a dispute as to its ownership, and his subsequent actions indicated he did not know with whom, if anyone, he had a contract. After he had accepted the horse, he made inquiries as to its ownership and, initially, and for some time thereafter, sent his billsto both defendant and Dr. Strauss, the original seller.

[11] There is also uncontroverted testimony in the record that prior to the assertion of the claim which is the subject of this suit neither defendant nor his trainer had ever had any business transactions with plaintiff, and had never used his farm to board horses. Additionally, there is uncontradicted evidence that this horse, when found to be lame, was shipped by defendant's trainer not to plaintiff's farm, but back to the seller at Belmont Park. What is most important, the trial justice expressly stated that he believed the testimony of defendant's trainer that he had instructed Kelly that defendant would not be responsible for boarding the horse on any farm.

[12] From our examination of the record we are constrained to conclude that the trial justice overlooked and misconceived material evidence which establishes beyond question that there never existed between the parties an element essential to the formulation of any true contract, namely, an intent to contract. Compare Morrissey v. Piette, R.I., 241 A.2d 302, 303.

II

[13] The defendant's second contention is that, even assuming the trial justice was in essence predicating defendant's liability upon a quasi-contractual theory, his decision is still unsupported by competent evidence and is clearly erroneous.

[14] The following discussion of quasi-contracts appears in 12 Am.Jur., Contracts, § 6 (1938) at pp. 503 to 504:

A quasi-contract has no reference to the intentions or expressions of the parties. The obligation is imposed despite, and frequently in frustration of, their intention. For a quasi contract neither promise nor privity, real or imagined, is necessary. In quasi contracts the obligation arises, not from consent of the parties, as in the case of contracts, express or implied in fact, but from the law of natural immutable justice and equity. The act, or acts, from which the law implies the contract must, however, be voluntary. Where a case shows that it is the duty of the defendant to pay, the law imputes to him a promise to fulfil that obligation. The duty, which thus forms the foundation of a quasi-contractual obligation, is frequently based on the doctrine of unjust enrichment.…. The law will not imply a promise against the express declaration of the party to be charged, made at the time of the supposed undertaking, unless such party is under legal obligation paramount to his will to perform some duty, and he is not under such legal obligation unless there is a demand in equity and good conscience that he should perform the duty.

[15] Therefore, the essential elements of a quasi-contract are a benefit conferred upon defendant by plaintiff, appreciation by defendant of such benefit, and acceptance and retention by defendant of such benefit under such circumstances that it would be inequitable to retain the benefit without payment of the value thereof. Home Savings Bank v. General Finance Corp., 10 Wis.2d 417, 103 N.W.2d 117, 81 A.L.R.2d 580.

[16] The key question raised by this appeal with respect to the establishment of a quasi-contract is whether or not plaintiff was acting as a “volunteer” at the time he accepted the horse for boarding at his farm. There is a long line of authority which has clearly enunciated the general rule that “if a performance is rendered by one person without any request by another, it is very unlikely that this person will be under a legal duty to pay compensation.” 1 A Corbin, Contracts § 234.

[17] The Restatement of Restitution, § 2 (1937) provides: “A person who officiously confers a benefit upon another is not entitled to restitution therefor.” Comment a in the above-mentioned section states in part as follows:

Policy ordinarily requires that a person who has conferred a benefit…by way of giving another services…should not be permitted to require the other to pay therefor, unless the one conferring the benefit had a valid reason for so doing. A person is not required to deal with another unless he so desires and, ordinarily, a person should not be required to become an obligor unless he so desires.

[18] Applying those principles to the facts in the case at bar it is clear that plaintiff cannot recover. The plaintiff's testimony on cross-examination is the only evidence in the record relating to what transpired between Kelly and him at the time the horse was accepted for boarding. The defendant's attorney asked plaintiff if he had any conversation with Kelly at that time, and plaintiff answered in substance that he had noticed that the horse was very lame and that Kelly had told him: “That's why they wouldn't accept him at Belmont Track.” The plaintiff also testified that he had inquired of Kelly as to the ownership of Bascom's Folly, and had been told that “Dr. Strauss made a deal and that's all I know.” It further appears from the record that plaintiff acknowledged receipt of the horse by signing a uniform livestock bill of lading, which clearly indicated on its face that the horse in question had been consigned by defendant's trainer not to plaintiff, but to Dr. Strauss's trainer at Belmont Park. Knowing at the time he accepted the horse for boarding that a controversy surrounded its ownership, plaintiff could not reasonably expect remuneration from defendant, nor can it be said that defendant acquiesced in the conferment of a benefit upon him. The undisputed testimony was that defendant, upon receipt of plaintiff's first bill, immediately notified him that he was not the owner of Bascom's Folly and would not be responsible for its keep.

[19] It is our judgment that the plaintiff was a mere volunteer who boarded and maintained Bascom's Folly at his own risk and with full knowledge that he might not be reimbursed for expenses he incurred incident thereto.

[20] The plaintiff's appeal is denied and dismissed, the defendant's cross appeal is sustained, and the cause is remanded to the superior court for entry of judgment for the defendant.

 

1.1.1 Discussion of implied contract claim in Bailey v. West

Write down a detailed chronological account of what happened in this case. Try to identify the key legal questions that the court thought it should resolve. How does the court rule on these questions? Where does the court find legal authority to support its resolution of the case? What facts did the court think were most relevant to its decision? Can you think of how we might argue that Bailey rather than West should have prevailed?

One way of thinking about this case is to ask whether the court should endorse Bailey’s or West’s expectations about the alleged boarding contract. Is there any common thread that can unify our efforts to analyze the parties’ expectations? What word could we use to describe the test that the court applies to decide whether Bailey has a legal right to expect payment for boarding Bascom’s Folly?

Are you happy living under a rule that refuses to protect Bailey’s expectations? What would happen if we were to flip the rule and force West to pay Bailey for boarding his horse? Would it be good to require people like West to anticipate how people like Bailey will interpret situations like this one?

1.1.2 The Law of Agency

Although the court sometimes talks about Bailey and West as though they were dealing directly with one another, the Bailey case is also full of potential “agents.” A complex body of law determines who is an agent and what that agent is authorized to do on behalf of his or her “principal.” Here are a few sections of the Restatement (Third) of Agency (2006), [hereinafter Restament (Third)], that explain the basic legal rules governing when someone has the legal authority to make a contract for another person.

Restatement (Third) of Agency

§ 1.03 Manifestation

A person manifests assent or intention through written or spoken words or other conduct.

§ 2.01 Actual Authority

An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.

§ 2.03 Apparent Authority

Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.

§ 3.03 Creation of Apparent Authority

Apparent authority, as defined in § 2.03, is created by a person's manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation.

§ 3.11 Termination of Apparent Authority

(1) The termination of actual authority does not by itself end any apparent authority held by an agent.

(2) Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.

1.1.3 Hypo on Agency

Paula owns a major national restaurant chain called Pig Place. The chain’s staff includes Andrew, the Pig Place purchasing manager. It is Andrew’s job to deal with food distributors and farms. He places orders, receives deliveries, handles returns, and approves payment on behalf of the restaurants. Among the suppliers with whom Andrew has regularly done business is Confinement Farms.

During a recent staff meeting, Paula told Andrew she had decided that the chain must no longer purchase any meat raised in inhumane conditions. Accordingly, Paula instructed Andrew to order only products certified by the Organic Growers Council (OGC). She explained that Pig Place would soon begin a major print, radio and television advertising campaign announcing the new policy and touting the health and environmental benefits of treating food animals humanely. Paula expressly instructed Andrew to stop dealing with Confinement Farms because they run a conventional growing and packaging operation that lacks OGC certification.

Andrew ignored Paula’s instructions and placed an order for 100,000 pounds of pork from Tom, who is the national sales manager at Confinement. A day later, Pig Place’s media campaign began and wholesale meat markets responded with alarm. The price of conventionally raised pork fell by 35 percent. Pig Place wants to cancel the order, but Confinement stands to lose more than $70,000 if it must resell the pork. Paula has fired Andrew for disregarding her instructions, but Andrew can’t afford to pay for the decline in the value of the meat.

1.1.4 Discussion of Agency

As between Pig Place and Confinement, who should bear the loss? Can you think of any arguments that would justify imposing the loss on Pig Place? On Confinement?

Now consider how the Restatement (Third),  rules on agency might apply. Did Andrew have actual authority to act on Pig Place’s behalf? Is this a proper case for applying the doctrine of apparent authority?

How might the choice of a legal rule affect the behavior of similar parties in the future? Does thinking about these prospective effects provide any justification for choosing one rule rather than another?

1.1.5 Problem on Agency

How do these agency rules apply to the situation in Bailey v. West? Is there a plausible argument based on agency law that supports finding that West should be obliged to pay for boarding Bascom’s Folly? If so, who is the agent or other actor who has the legal authority to act on behalf of whom? Can you also develop agency law arguments that tend to excuse West from any obligation to Bailey?

1.1.6 The Law of Restitution

After rejecting Bailey’s implied contract claim, the Bailey court also considers whether West should be bound to pay Bailey for boarding services under “a quasi-contractual theory.” Modern commentary has largely abandoned the term “quasi-contract” and instead analyzes such claims under the law of restitution. Courts ordinarily refuse to provide compensation without evidence of a bargain. They often characterize the unsuccessful claimant as a “mere volunteer” or even perhaps an “officious intermeddler.” In very limited circumstances, however, courts may be willing to impose liability on someone who receives a benefit for which he or she has not bargained. An oft-quoted example is the following hypothetical from a judicial opinion:

If a person saw day after day a laborer at work in his field doing services which must of necessity enure to his benefit, knowing that the laborer expected pay for his work, when it was perfectly easy to notify him his services were not wanted, even if a request were not expressly proved, such a request, either previous or contemporaneous with the performance of the services might fairly be inferred. But if the fact was merely brought to his attention upon a single occasion and casually, if he had little opportunity to notify the other that he did not desire the work and should not pay for it, or could only do so at the expense of much time and trouble, the same inference might not be made.

Day v. Caton, 119 Mass. 513 (1876) (Holmes, J.).

1.1.7 Hypo on Restitution

Bob (the Builder) runs a construction company. A farmer hires Bob to demolish a ramshackle barn and erect in its place a prefabricated metal shed. The farmer agrees to pay the standard price for the shed and to allow Bob to sell any lumber he can salvage from the old barn. Unfortunately, Bob loses the scrap of paper on which he had written the directions to the farm. He recalls, however, that the farm is located just west of the intersection between Owensville and Garth Roads.

Relying on Google Maps and his recollection of the directions, Bob quickly finds a decrepit barn and spends the next week completing the demolition and shed construction. Bob also notices that a fence on the neighboring property is in disrepair. He decides to use the lumber salvaged from the barn to fix the fence.

When Bob calls the farmer to collect his bill, he discovers to his chagrin that there were several old barns in the immediate area. The new shed stands on land owned by Randle, a retired investment banker. Randle had spent every afternoon of the previous week sipping martinis on his back porch while he watched Bob at work on his barn. The fence owner, Jane, spent the week vacationing in Europe. Both Randle and Jane are delighted with Bob’s work but they each refuse to pay.

Suppose that Bob seeks restitution from Randle and Jane. Who do you expect will win and why? Suppose that Bob had instead demolished a barn and built the shed on Jane’s land. Would Bob have a better or worse chance of recovery against Jane?

1.1.8 Discussion of Restitution

Do the “essential elements of quasi-contract” discussed in Bailey v. West help us to determine whether Bob will prevail against Randle or Jane?

Consider how a rule denying Bob compensation will affect the behavior of future contractors and other homeowners. What would happen if we were to flip the rule and allow Bob to recover against both of the lucky homeowners?

Does Bailey have any argument for restitutionary recovery from West?

Can you see any connection between the principles that govern the implied contract claim in Bailey v. West, the agency issue, and the rules for restitution?

1.1.2. Principal Case – Lucy v. Zehmer

Our second principal case addresses another context in which the parties dispute the existence of a promise. As you read the opinion, ask yourself from whose perspective the court chooses to evaluate Zehmer’s alleged promise to sell his farm.

Lucy v. Zehmer

Supreme Court of Virginia

196 Va. 493, 84 S.E.2d 516 (1954)

Buchanan, J., delivered the opinion of the court.

[1] This suit was instituted by W. O. Lucy and J. C. Lucy, complainants, against A. H. Zehmer and Ida S. Zehmer, his wife, defendants, to have specific performance of a contract by which it was alleged the Zehmers had sold to W. O. Lucy a tract of land owned by A. H. Zehmer in Dinwiddie county containing 471.6 acres, more or less, known as the Ferguson farm, for $50,000. J. C. Lucy, the other complainant, is a brother of W. O. Lucy, to whom W. O. Lucy transferred a half interest in his alleged purchase.

[2] The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

[3] The answer of A. H. Zehmer admitted that at the time mentioned W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.

[4] Depositions were taken and the decree appealed from was entered holding that the complainants had failed to establish their right to specific performance, and dismissing their bill. The assignment of error is to this action of the court.

[5] W. O. Lucy, a lumberman and farmer, thus testified in substance: He had known Zehmer for fifteen or twenty years and had been familiar with the Ferguson farm for ten years. Seven or eight years ago he had offered Zehmer $20,000 for the farm which Zehmer had accepted, but the agreement was verbal and Zehmer backed out. On the night of December 20, 1952, around eight o'clock, he took an employee to McKenney, where Zehmer lived and operated a restaurant, filling station and motor court. While there he decided to see Zehmer and again try to buy the Ferguson farm. He entered the restaurant and talked to Mrs. Zehmer until Zehmer came in. He asked Zehmer if he had sold the Ferguson farm. Zehmer replied that he had not. Lucy said, “I bet you wouldn't take $50,000.00 for that place.” Zehmer replied, “Yes, I would too; you wouldn't give fifty.” Lucy said he would and told Zehmer to write up an agreement to that effect. Zehmer took a restaurant check and wrote on the back of it, “I do hereby agree to sell to W. O. Lucy the Ferguson Farm for $50,000 complete.” Lucy told him he had better change it to “We” because Mrs. Zehmer would have to sign it too. Zehmer then tore up what he had written, wrote the agreement quoted above and asked Mrs. Zehmer, who was at the other end of the counter ten or twelve feet away, to sign it. Mrs. Zehmer said she would for $50,000 and signed it. Zehmer brought it back and gave it to Lucy, who offered him $5 which Zehmer refused, saying, “You don't need to give me any money, you got the agreement there signed by both of us.”

[6] The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three heifers.

[7] Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.

[8] December 20 was on Saturday. Next day Lucy telephoned to J. C. Lucy and arranged with the latter to take a half interest in the purchase and pay half of the consideration. On Monday he engaged an attorney to examine the title. The attorney reported favorably on December 31 and on January 2 Lucy wrote Zehmer stating that the title was satisfactory, that he was ready to pay the purchase price in cash and asking when Zehmer would be ready to close the deal. Zehmer replied by letter, mailed on January 13, asserting that he had never agreed or intended to sell.

[9] Mr. and Mrs. Zehmer were called by the complainants as adverse witnesses. Zehmer testified in substance as follows:

[10] He bought this farm more than ten years ago for $11,000. He had had twenty-five offers, more or less, to buy it, including several from Lucy, who had never offered any specific sum of money. He had given them all the same answer, that he was not interested in selling it. On this Saturday night before Christmas it looked like everybody and his brother came by there to have a drink. He took a good many drinks during the afternoon and had a pint of his own. When he entered the restaurant around eight-thirty Lucy was there and he could see that he was “pretty high.” He said to Lucy, “Boy, you got some good liquor, drinking, ain't you?” Lucy then offered him a drink. “I was already high as a Georgia pine, and didn't have any more better sense than to pour another great big slug out and gulp it down, and he took one too.”

[11] After they had talked a while Lucy asked whether he still had the Ferguson farm. He replied that he had not sold it and Lucy said, “I bet you wouldn't take $50,000.00 for it.” Zehmer asked him if he would give $50,000 and Lucy said yes. Zehmer replied, “You haven't got $50,000 in cash.” Lucy said he did and Zehmer replied that he did not believe it. They argued “pro and con for a long time,” mainly about “whether he had $50,000 in cash that he could put up right then and buy that farm.”

[12] Finally, said Zehmer, Lucy told him if he didn't believe he had $50,000, “you sign that piece of paper here and say you will take $50,000.00 for the farm.” He, Zehmer, “just grabbed the back off of a guest check there” and wrote on the back of it. At that point in his testimony Zehmer asked to see what he had written to “see if I recognize my own handwriting.” He examined the paper and exclaimed, “Great balls of fire, I got 'Firgerson’ for Ferguson. I have got satisfactory spelled wrong. I don't recognize that writing if I would see it, wouldn't know it was mine.”

[13] After Zehmer had, as he described it, “scribbled this thing off,” Lucy said, “Get your wife to sign it.” Zehmer walked over to where she was and she at first refused to sign but did so after he told her that he “was just needling him [Lucy], and didn't mean a thing in the world, that I was not selling the farm.” Zehmer then “took it back over there…and I was still looking at the dern thing. I had the drink right there by my hand, and I reached over to get a drink, and he said, ‘Let me see it.’ He reached and picked it up, and when I looked back again he had it in his pocket and he dropped a five dollar bill over there, and he said, ‘Here is five dollars payment on it.’…I said, ‘Hell no, that is beer and liquor talking. I am not going to sell you the farm. I have told you that too many times before.’”

[14] Mrs. Zehmer testified that when Lucy came into the restaurant he looked as if he had had a drink. When Zehmer came in he took a drink out of a bottle that Lucy handed him. She went back to help the waitress who was getting things ready for next day. Lucy and Zehmer were talking but she did not pay too much attention to what they were saying. She heard Lucy ask Zehmer if he had sold the Ferguson farm, and Zehmer replied that he had not and did not want to sell it. Lucy said, “I bet you wouldn't take $50,000 cash for that farm,” and Zehmer replied, “You haven't got $50,000 cash.” Lucy said, “I can get it.” Zehmer said he might form a company and get it, “but you haven't got $50,000.00 cash to pay me tonight.” Lucy asked him if he would put it in writing that he would sell him this farm. Zehmer then wrote on the back of a pad, “I agree to sell the Ferguson Place to W. O. Lucy for $50,000.00 cash.” Lucy said, “All right, get your wife to sign it.” Zehmer came back to where she was standing and said, “You want to put your name to this?” She said “No,” but he said in an undertone, “It is nothing but a joke,” and she signed it.

[15] She said that only one paper was written and it said: “I hereby agree to sell,” but the “I” had been changed to “We”. However, she said she read what she signed and was then asked, “When you read ‘We hereby agree to sell to W. O. Lucy,’ what did you interpret that to mean, that particular phrase?” She said she thought that was a cash sale that night; but she also said that when she read that part about “title satisfactory to buyer” she understood that if the title was good Lucy would pay $50,000 but if the title was bad he would have a right to reject it, and that that was her understanding at the time she signed her name.

[16] On examination by her own counsel she said that her husband laid this piece of paper down after it was signed; that Lucy said to let him see it, took it, folded it and put it in his wallet, then said to Zehmer, “Let me give you $5.00,” but Zehmer said, “No, this is liquor talking. I don't want to sell the farm, I have told you that I want my son to have it. This is all a joke.” Lucy then said at least twice, “Zehmer, you have sold your farm,” wheeled around and started for the door. He paused at the door and said, “I will bring you $50,000.00 tomorrow….No, tomorrow is Sunday. I will bring it to you Monday.” She said you could tell definitely that he was drinking and she said to her husband, “You should have taken him home,” but he said, “Well, I am just about as bad off as he is.”

[17] The waitress referred to by Mrs. Zehmer testified that when Lucy first came in “he was mouthy.” When Zehmer came in they were laughing and joking and she thought they took a drink or two. She was sweeping and cleaning up for next day. She said she heard Lucy tell Zehmer, “I will give you so much for the farm,” and Zehmer said, “You haven't got that much.” Lucy answered, “Oh, yes, I will give you that much.” Then “they jotted down something on paper … and Mr. Lucy reached over and took it, said let me see it.” He looked at it, put it in his pocket and in about a minute he left. She was asked whether she saw Lucy offer Zehmer any money and replied, “He had five dollars laying up there, they didn't take it.” She said Zehmer told Lucy he didn't want his money “because he didn't have enough money to pay for his property, and wasn't going to sell his farm.” Both of them appeared to be drinking right much, she said.

[18] She repeated on cross-examination that she was busy and paying no attention to what was going on. She was some distance away and did not see either of them sign the paper. She was asked whether she saw Zehmer put the agreement down on the table in front of Lucy, and her answer was this: “Time he got through writing whatever it was on the paper, Mr. Lucy reached over and said, ‘Let's see it.’ He took it and put it in his pocket,’ before showing it to Mrs. Zehmer.” Her version was that Lucy kept raising his offer until it got to $50,000.

[19] The defendants insist that the evidence was ample to support their contention that the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

[20] It is an unusual, if not bizarre, defense. When made to the writing admittedly prepared by one of the defendants and signed by both, clear evidence is required to sustain it.

[21] In his testimony Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. It is contradicted by other evidence as to the condition of both parties, and rendered of no weight by the testimony of his wife that when Lucy left the restaurant she suggested that Zehmer drive him home. The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. 17 C.J.S., Contracts, § 133 b., p. 483; Taliaferro v. Emery, 124 Va. 674, 98 S.E. 627. It was in fact conceded by defendants’ counsel in oral argument that under the evidence Zehmer was not too drunk to make a valid contract.

[22] The evidence is convincing also that Zehmer wrote two agreements, the first one beginning “I hereby agree to sell.” Zehmer first said he could not remember about that, then that “I don't think I wrote but one out.” Mrs. Zehmer said that what he wrote was “I hereby agree,” but that the “I” was changed to “We” after that night. The agreement that was written and signed is in the record and indicates no such change. Neither are the mistakes in spelling that Zehmer sought to point out readily apparent.

[23] The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy's objection to the first draft because it was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the completeness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

[24] On Sunday, the day after the instrument was signed on Saturday night, there was a social gathering in a home in the town of McKenney at which there were general comments that the sale had been made. Mrs. Zehmer testified that on that occasion as she passed by a group of people, including Lucy, who were talking about the transaction, $50,000 was mentioned, whereupon she stepped up and said, “Well, with the high-price whiskey you were drinking last night you should have paid more. That was cheap.” Lucy testified that at that time Zehmer told him that he did not want to “stick” him or hold him to the agreement because he, Lucy, was too tight and didn't know what he was doing, to which Lucy replied that he was not too tight; that he had been stuck before and was going through with it. Zehmer's version was that he said to Lucy: “I am not trying to claim it wasn't a deal on account of the fact the price was too low. If I had wanted to sell $50,000.00 would be a good price, in fact I think you would get stuck at $50,000.00.” A disinterested witness testified that what Zehmer said to Lucy was that “he was going to let him up off the deal, because he thought he was too tight, didn't know what he was doing. Lucy said something to the effect that ‘I have been stuck before and I will go through with it.’”

[25] If it be assumed, contrary to what we think the evidence shows, that Zehmer was jesting about selling his farm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows that Lucy did not so understand it but considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as on himself. The very next day he arranged with his brother to put up half the money and take a half interest in the land. The day after that he employed an attorney to examine the title. The next night, Tuesday, he was back at Zehmer's place and there Zehmer told him for the first time, Lucy said, that he wasn't going to sell and he told Zehmer, “You know you sold that place fair and square.” After receiving the report from his attorney that the title was good he wrote to Zehmer that he was ready to close the deal.

[26] Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and a good faith sale and purchase of the farm.

[27] In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. ‘The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.’” First Nat. Bank v. Roanoke Oil Co., 169 Va. 99, 114, 192 S.E. 764, 770.

[28] At no time prior to the execution of the contract had Zehmer indicated to Lucy by word or act that he was not in earnest about selling the farm. They had argued about it and discussed its terms, as Zehmer admitted, for a long time. Lucy testified that if there was any jesting it was about paying $50,000 that night. The contract and the evidence show that he was not expected to pay the money that night. Zehmer said that after the writing was signed he laid it down on the counter in front of Lucy. Lucy said Zehmer handed it to him. In any event there had been what appeared to be a good faith offer and a good faith acceptance, followed by the execution and apparent delivery of a written contract. Both said that Lucy put the writing in his pocket and then offered Zehmer $5 to seal the bargain. Not until then, even under the defendants' evidence, was anything said or done to indicate that the matter was a joke. Both of the Zehmers testified that when Zehmer asked his wife to sign he whispered that it was a joke so Lucy wouldn't hear and that it was not intended that he should hear.

[29] The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party. Restatement of the Law of Contracts, Vol. I, § 71, p. 74.

…The law, therefore, judges of an agreement between two persons exclusively from those expressions of their intentions which are communicated between them….

Clark on Contracts, 4 ed., § 3, p. 4.

[30] An agreement or mutual assent is of course essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind. 17 C.J.S., Contracts, § 32, p. 361; 12 Am. Jur., Contracts, § 19, p. 515.

[31] So a person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement, 17 C.J.S., Contracts, § 47, p. 390; Clark on Contracts, 4 ed., § 27, at p. 54.

[32] Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.

[33] Defendants contend further, however, that even though a contract was made, equity should decline to enforce it under the circumstances. These circumstances have been set forth in detail above. They disclose some drinking by the two parties but not to an extent that they were unable to understand fully what they were doing. There was no fraud, no misrepresentation, no sharp practice and no dealing between unequal parties. The farm had been bought for $11,000 and was assessed for taxation at $6,300. The purchase price was $50,000. Zehmer admitted that it was a good price. There is in fact present in this case none of the grounds usually urged against specific performance.

[34] Specific performance, it is true, is not a matter of absolute or arbitrary right, but is addressed to the reasonable and sound discretion of the court. First Nat. Bank v. Roanoke Oil Co., supra, 169 Va. at p. 116, 192 S.E. at p. 771. But it is likewise true that the discretion which may be exercised is not an arbitrary or capricious one, but one which is controlled by the established doctrines and settled principles of equity; and, generally, where a contract is in its nature and circumstances unobjectionable, it is as much a matter of course for courts of equity to decree a specific performance of it as it is for a court of law to give damages for a breach of it. Bond v. Crawford, 193 Va. 437, 444, 69 S.E.2d 470, 475.

[35] The complainants are entitled to have specific performance of the contracts sued on. The decree appealed from is therefore reversed and the cause is remanded for the entry of a proper decree requiring the defendants to perform the contract in accordance with the prayer of the bill.

Reversed and remanded.

 

1.2.1 Capacity to Contract

In Lucy, the court discusses at some length the possibility that Zehmer might be excused from contractual liability because he was intoxicated. The law concerning intoxication is simply one manifestation of a more general principle that we refer to as “capacity to contract.” Here is what the Restatement (Second) has to say on the subject:

Restatement (Second) of Contracts

§ 12. Capacity To Contract

(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances.

(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is

(a) under guardianship, or

(b) an infant, or

(c) mentally ill or defective, or

(d) intoxicated.

§ 16. Intoxicated Persons

A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication

(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or

(b) he is unable to act in a reasonable manner in relation to the transaction.

1.2.2 Discussion of Lucy v. Zehmer

What leads the court to reject Zehmer’s intoxication defense?

How does the court respond to Zehmer’s contention that his offer to sell the Ferguson farm was in jest?

Can you construct an argument to justify the court’s approach?

How would future parties respond if the legal rule favored Zehmer rather than Lucy in these circumstances?

1.2.3 Leonard v. Pepsico

Sometimes a purported promise is merely a joke. In the celebrated case of Leonard v. Pepsico, 88 F. Supp. 116 (S.D.N.Y. 1997), the court considered Leonard’s claim that a “Pepsi Stuff” commercial constituted a promise to redeem 7,000,000 Pepsi Points for a Harrier Jet. Leonard submitted an order form, fifteen Pepsi Points, and a check for $700,008.50 to purchase the remaining points. Although the order form offered additional points at 10 cents each, it did not list the jet as an available premium. Leonard wrote in “1 Harrier Jet” in the “Item” column and “7,000,000” in the “Total Points” column. Pepsico returned Leonard’s submission and explained that the company had included the images of the Harrier Jet for its comic effect. The court similarly rejected plaintiff’s claim and opined that:

[N]o objective person could reasonably have concluded that the commercial actually offered consumers a Harrier Jet.… In evaluating the commercial, the Court must not consider defendant’s subjective intent in making the commercial, or plaintiff’s subjective view of what the commercial offered, but what an objective, reasonable person would have understood the commercial to convey… If it is clear that an offer was not serious, then no offer has been made: An obvious joke, of course, would not give rise to a contract.

Id. at 137.

1.2. Which Promises Are Enforced?

Now that we have a better understanding of how courts determine whether someone has made a promise, we can consider which promises are enforced and why. As we will see, doctrines such as indefiniteness and consideration prevent enforcement of some seriously intended promises. But first consider whether there are any influences other than legal enforcement that tend to encourage people to keep their promises.

1.2.1. Why Enforce Promises?

2.1.1 Alternative Methods of Enforcement

Imagine that you are the proprietor of a specialty auto parts manufacturer. You sell your products to retailers who in turn sell them to car fanciers who use them to customize their rides. What would you do if a production problem threatened your ability to make timely deliveries of a hot new rear spoiler? For example, you might have to decide whether to incur added costs for overtime hours and for expedited delivery of raw materials. Presume for the moment that litigation costs will prevent retailers from suing you for breach.

What factors will affect your choice about these additional expenses? Are there any extra-legal enforcement mechanisms that might lead you to exert yourself to restore supply quickly despite the absence of any effective legal sanction for breach?

Yet another way to shed light on the role of legal enforcement is to examine the problem of instantly retracted promises.

2.1.2 Hypo on Instant Retraction

Suppose that, disappointed with the result in Bailey v. West, poor Mr. Bailey decides to get out of the horse farm business. One morning, he mournfully signs a written agreement to sell his farm to a neighbor and long-time competitor. He walks outside and runs into a dear old friend who convinces him that he should continue in business. Bailey rushes back inside to tell the neighbor that the deal is off, but the neighbor insists that they have a deal. Bailey subsequently refuses to convey the farm.

What do you suppose happens when the neighbor sues Bailey for the farm?

2.1.3 Discussion of Instant Retraction

One possible argument against enforcement in this hypothetical is that it would be inefficient to force Bailey to turn over the farm. He must value the farm more highly than the neighbor because he is willing to give up the purchase price in order to keep it.

Can you see any problems with this reasoning? What exactly does Bailey’s decision tell us about his valuation of the farm in comparison with the neighbor’s valuation of the property?

Another argument is that we enforce promises in order to protect beneficial reliance and to reduce detrimental reliance. Thus, we shouldn’t enforce this instantly retracted promise because the neighbor has not yet relied on the promise.

What would you expect to happen if courts adopted a rule that conditioned enforcement on proof of reliance?

Consider how the parties in our hypothetical might try to prove or disprove reliance.

Would future parties behave any differently in reaction to such a rule? In other words, what are the likely “prospective effects” of a legal rule permitting instant retraction?

2.1.4 Gap Filling

A moment’s thought will reveal that it is impossible to write a complete contract. No contract can possibly deal with every contingency, with every state of the world that might occur, with every change of circumstances that might affect the parties’ willingness and ability to perform the duties they have promised to perform. Indeed, the possibilities are infinite and our time and resources for anticipating situations and drafting appropriate provisions are decidedly finite. Thus, we inevitably draft incomplete contracts.

One important function of contract law is, therefore, to fill the gaps in these incomplete agreements. We will refer to these court-supplied terms as contract “default rules.” Like the default settings in a word processing program for font size, margins, and line spacing, contract defaults apply unless the parties make a contrary agreement.

In order to begin to understand the role of defaults, consider the following hypothetical.

2.1.5 Hypo on Gap Filling

My colleague Paul Mahoney and I agree that I will lease his car for a year while he is on leave to establish a new law office in Russia. We explicitly agree on a rental rate of $100/month and a lease term of one year. Suppose that the car’s clutch fails six months into the lease. How would you expect a court to respond to my claim that Mahoney is obligated to pay for the necessary repairs?

2.1.6 Discussion of Gap Filling

We can array various approaches to gap filling along a continuum. At one extreme are simple majoritarian default rules, a one-size-fits-all solution. At the opposite extreme is a highly tailored default term that tries to capture what these particular parties would have agreed to if they had bargained over the issue.

What would be a good majoritarian rule for the car lease hypothetical?

How would a court decide on a tailored default for the same situation?

Which approach to gap filling do you favor? Why?

Can you think of any problems that courts or parties might encounter under your preferred approach?

1.2.2. Introduction to Indefiniteness Doctrine

As we have discussed, contractual liability requires at least some evidence that a party intended to make a legally enforceable promise. We also have seen that all contracts are necessarily incomplete and that courts create default rules to fill in these inevitable gaps. Indeed, supplying omitted terms is a central function of contract law. However, the question remains how far courts should go to remedy contractual incompleteness. Perhaps there should be certain essential terms that the parties themselves must specify in order to form a contract.

The “indefiniteness” doctrine refers to a legal conclusion that a purported contract contains too many gaps to warrant enforcement. We will explore two competing reasons for refusing to enforce indefinite agreements. First, a court might believe that gaps in an agreement are so fundamental they indicate that the parties lacked the requisite intent to contract. Courts frequently rely on this intent-based reasoning to refuse to enforce so-called “agreements to agree.” Suppose, for example, that Sam tells Wanda that he’ll accept a management position at her high-tech startup company for “a salary to be determined by future negotiations between the parties.” If the parties are subsequently unable to agree on a salary, many courts will refuse to find an enforceable employment contract. Sam and Wanda’s failure to agree on this important contract term shows that they did not intend to be bound to a legally enforceable agreement.

The second argument for refusing to enforce indefinite agreements proceeds on the assumption that the parties intended to form an enforceable contract. Courts taking this approach focus on concerns about judicial capacity and the parties’ lack of care in drafting. For example, in Walker v. Keith, 382 S.W.2d 198 (Ky. Ct. App. 1964), the court explained that:

Stipulations such as the one before us have been the source of interminable litigation. Courts are called upon not to enforce an agreement or to determine what the agreement was, but to write their own concept of what would constitute a proper one. Why this paternalistic task should be undertaken is difficult to understand when the parties could so easily provide any number of workable methods by which rents could be adjusted. As a practical matter, courts sometimes must assert their right not to be imposed upon.

As you read the indefiniteness cases that follow (Varney, Corthell, D.R. Curtis, and Schumacher), try to determine what judgment underlies the court’s decision to refuse enforcement.

1.2.3. Principal Case – Varney v. Ditmars

Varney v. Ditmars

Court of Appeals of New York

217 N.Y. 223, 111 N.E. 822 (1916)

Chase, Judge

[1] This is an action brought for an alleged wrongful discharge of an employee. The defendant is an architect employing engineers, draftsmen and other assistants. The plaintiff is an architect and draftsman. In October, 1910, he applied to the defendant for employment and when asked what wages he wanted, replied that he would start for $40 per week. He was employed at $35 per week. A short time thereafter he informed the defendant that he had another position offered to him and the defendant said that if he would remain with him and help him through the work in his office he thought he could offer him a better future than anybody else. He continued in the employ of the defendant and became acquainted with a designer in the office and said designer and the plaintiff from time to time prior to the 1st of February, 1911, talked with the defendant about the work in his office. On that day by arrangement the two remained with the defendant after the regular office hours and the defendant said: "I am going to give you $5 more a week; if you boys will go on and continue the way you have been and get me out of this trouble and get these jobs started that were in the office three years, on the first of next January I will close my books and give you a fair share of my profits. That was the result of the conversation. That was all of that conversation." The plaintiff was given charge of the drafting. Thereafter suggestions were made by the plaintiff and said designer about discharging many of the defendant's employees and employing new men and such suggestions were carried out and the two worked in the defendant's office over time and many Sundays and holidays. At least one piece of work that the defendant said had been in his office for three years was completed. The plaintiff on his cross-examination told the story of the employment of himself and said designer as follows: "And he says at that time 'I am going to give you $5 more a week starting this week.' This was about Thursday. He says 'You boys go on and continue the work you are doing and the first of January next year I will close my books and give you a fair share of my profits.' Those were his exact words."

[2] Thereafter the plaintiff was paid $40 a week. On November 6, 1911, the night before the general election in this state, the defendant requested that all of his employees that could do so, should work on election day. The plaintiff told the defendant that he wanted to remain at home to attend an election in the village where he lived. About four o'clock in the afternoon of election day he was taken ill and remained at his house ill until a time that as nearly as can be stated from the evidence was subsequent to December 1, 1911. On Saturday, November 11, the defendant caused to be delivered to the plaintiff a letter in which he said: "I am sending you herewith your pay for one day's work of seven hours, performed on Monday, the 6th inst. On Monday night, I made it my special duty to inform you that the office would be open all day Election Day and that I expected you and all the men to report for work. Much to my surprise and indignation, on Tuesday you made no appearance and all the men remained away, in obedience of your instructions to them of the previous evening. An act of this kind I consider one of extreme disloyalty and insubordination and I therefore am obliged to dispense with your services."

[3] After the plaintiff had recovered from his illness and was able to do so he went to the defendant's office (the date does not appear) and told him that he was ready, willing and able to continue his services under the agreement. The defendant denied that he had any agreement with him and refused to permit him to continue in his service. Thereafter and prior to January 1, 1912, the plaintiff received for special work about $50.

[4] The plaintiff seeks to recover in this action for services from November 7, 1911, to December 31, 1911, inclusive, at $40 per week and for a fair and reasonable percentage of the net profits of the defendant's business from February 1, 1911, to January 1, 1912, and demands judgment for $1,680.

[5] At the trial he was the only witness sworn as to the alleged contract and at the close of his case the complaint was dismissed.

[6] The statement alleged to have been made by the defendant about giving the plaintiff and said designer a fair share of his profits is vague, indefinite and uncertain and the amount cannot be computed from anything that was said by the parties or by reference to any document, paper or other transaction. The minds of the parties never met upon any particular share of the defendant's profits to be given the employees or upon any plan by which such share could be computed or determined. The contract so far as it related to the special promise or inducement was never consummated. It was left subject to the will of the defendant or for further negotiation. It is urged that the defendant by the use of the word "fair" in referring to a share of his profits, was as certain and definite as people are in the purchase and sale of a chattel when the price is not expressly agreed upon, and that if the agreement in question is declared to be too indefinite and uncertain to be enforced a similar conclusion must be reached in every case where a chattel is sold without expressly fixing the price therefor.

[7] The question whether the words "fair" and "reasonable" have a definite and enforceable meaning when used in business transactions is dependent upon the intention of the parties in the use of such words and upon the subject-matter to which they refer. In cases of merchandising and in the purchase and sale of chattels the parties may use the words "fair and reasonable value" as synonymous with "market value." A promise to pay the fair market value of goods may be inferred from what is expressly agreed by the parties. The fair, reasonable or market value of goods can be shown by direct testimony of those competent to give such testimony. The competency to speak grows out of experience and knowledge. The testimony of such witnesses does not rest upon conjecture. The opinion of this court in United Press v. N. Y. Press Co. (164 N. Y. 406) was not intended to assert that a contract of sale is unenforceable unless the price is expressly mentioned and determined.

[8] In the case of a contract for the sale of goods or for hire without a fixed price or consideration being named it will be presumed that a reasonable price or consideration is intended and the person who enters into such a contract for goods or service is liable therefor as on an implied contract. Such contracts are common, and when there is nothing therein to limit or prevent an implication as to the price, they are, so far as the terms of the contract are concerned, binding obligations.

[9] The contract in question, so far as it relates to a share of the defendant's profits, is not only uncertain but it is necessarily affected by so many other facts that are in themselves indefinite and uncertain that the intention of the parties is pure conjecture. A fair share of the defendant's profits may be any amount from a nominal sum to a material part according to the particular views of the person whose guess is considered. Such an executory contract must rest for performance upon the honor and good faith of the parties making it. The courts cannot aid parties in such a case when they are unable or unwilling to agree upon the terms of their own proposed contract.

[10] It is elementary in the law that, for the validity of a contract, the promise, or the agreement, of the parties to it must be certain and explicit and that their full intention may be ascertained to a reasonable degree of certainty. Their agreement must be neither vague nor indefinite, and, if thus defective, parol proof cannot be resorted to. (United Press v. N. Y. Press Co., supra, and cases cited; Ruling Case Law, vol. 6, 644.)

[11] The courts in this state, in reliance upon and approval of the rule as stated in the United Press case, have decided many cases involving the same rule. Thus, in Mackintosh v. Thompson (58 App. Div. 25) and again in Mackintosh v. Kimball (101 App. Div. 494) the plaintiff sought to recover compensation in addition to a stated salary which he had received and which additional amount rested upon a claim by him that while he was employed by the defendants he informed them that he intended to leave their employ unless he was given an increase in salary, and that one of the defendants said to him that they would make it worth his while if he would stay on, and would increase his salary, and that his idea was to give him an interest in the profits on certain buildings that they were then erecting. The plaintiff further alleges that he asked what would be the amount of the increase and was told, "You can depend upon me; I will see that you get a satisfactory amount." The court held that the arrangement was too indefinite to form the basis of any obligation on the part of the defendants.

[12] In Bluemner v. Garvin (120 App. Div. 29) the plaintiff and defendant were architects, and the plaintiff alleged that he drew plans for a public building in accordance with a contract held by the defendant and pursuant to a special agreement that if the plans were accepted the defendant would give him a fair share of the commissions to be received by him. The court held that a good cause of action was stated on quantum meruit, but that the contract was too vague and indefinite to be enforced.

[13] A similar rule has been adopted in many other states. I mention a few of them. In Fairplay School Township v. O'Neal (127 Ind. 95) a verbal contract between a school trustee and a teacher, in which the latter undertook to teach school for a term in the district, and the trustee promised to pay her "good wages," it was held that the alleged contract was void for uncertainty as to compensation, and that the school township was not liable for its breach.

[14] In Dayton v. Stone (111 Mich. 196) the plaintiff had sold to the defendant her stock of goods and fixtures, and by the contract of sale the undamaged goods were to be inventoried and taken at cost price, and the damaged goods at prices to be agreed upon. In an action for breach of contract it was held that the contract was an entire one, and that so far as it left the price of the damaged goods to be fixed and determined it was uncertain and incomplete, and not one which could be enforced against the defendant.

[15] In Wittkowsky v. Wasson (71 N. C. 451) it was held that where the price of certain property was to be fixed by agreement between the parties after the time of the agreement and they did not agree upon the price that the title to the property did not pass.

[16]  In Adams v. Adams (26 Ala. 272) a promise by a defendant for a valuable consideration to give his daughter a "full share of his property" which then and there was worth $ 25,000 was held to be too indefinite and uncertain to support an action.

[17] In Van Slyke v. Broadway Ins. Co. (115 Cal. 644) a contract between an insurance agent and the insurance company for a contingent commission of 5% which did not give the facts upon which the contingency depended nor state the sum on which the 5% was to be computed was held unenforceable and also that it could not be aided by parol.

[18]  In Marvel v. Standard Oil Co. (169 Mass. 553) a contract by which the defendant agreed to sell the plaintiff its oil on such reasonable terms as to enable him to compete successfully with other parties selling in the same territory was held to be too indefinite and too general to be enforceable as a contract.

[19] In Burks v. Stam (65 Mo. App. 455) a contract for the sale of two race horses for a specified sum and providing for a further payment of a fixed sum by the purchaser if he did well and had no bad luck with the horses was held too vague to admit of enforcement.

[20] In Butler v. Kemmerer (218 Pa. St. 242) the plaintiff was in the employ of the defendant at a regular salary and the defendant promised him that if there were any profits in the business he would divide them with the plaintiff "upon a very liberal basis." The action was brought to recover a part of the profits of the business and the court held that the contract was never made complete and that there was no standard by which to measure the degree of liberality with which the defendant should regard the plaintiff.

[21] The only cases called to our attention that tend to sustain the appellant's position are Noble v. Joseph Burnett Co. (208 Mass. 75) and Silver v. Graves (210 Mass. 26). The first at least of such cases is distinguishable from the case under consideration, but in any event the decisions therein should not be held sufficient to sustain the plaintiff's contention in view of the authorities in this state.

[22] The rule stated from the United Press case does not prevent a recovery upon quantum meruit in case one party to an alleged contract has performed in reliance upon the terms thereof, vague, indefinite and uncertain though they are. In such case the law will presume a promise to pay the reasonable value of the services. Judge Gray, who wrote the opinion in the United Press case, said therein: "I entertain no doubt that, where work has been done, or articles have been furnished, a recovery may be based upon quantum meruit, or quantum valebat; but, where a contract is of an executory character and requires performance over a future period of time, as here, and it is silent as to the price which is to be paid to the plaintiff during its term, I do not think that it possesses binding force. As the parties had omitted to make the price a subject of covenant, in the nature of things, it would have to be the subject of future agreement, or stipulation." (p. 412.)

[23] In Petze v. Morse Dry Dock & Repair Co. (125 N.Y. App. Div. 267, 270) the court say: “There is no contract so long as any essential element is open to negotiation.” In that case a contract was made by which an employee in addition to certain specified compensation was to receive 5% of the net distributable profits of a business and it was further provided that "the method of accounting to determine the net distributable profits is to be agreed upon later when the company's accounts have developed for a better understanding." The parties never agreed as to the method of determining the net profits and the plaintiff was discharged before the expiration of the term. The court in the opinion say that "the plaintiff could recover for what he had done on a quantum meruit, and the employment must be deemed to have commenced with a full understanding on the part of both parties that that was the situation." The judgment of the Appellate Division was unanimously affirmed without opinion in this court. (195 N. Y. 584.)

[24] So, this case, while I do not think that the plaintiff can recover anything as extra work, yet if the work actually performed as stated was worth more than $40 per week, he having performed until November 7, 1910, could, on a proper complaint, recover its value less the amount received. (See Bluemner v. Garvin, supra; S. C., 124 App. Div. 491; King v. Broadhurst, 164 App. Div. 689.)

[25] The plaintiff claims that he at least should have been allowed to go to the jury on the question as to whether he was entitled to recover at the rate of $40 per week from November 7, 1911, to December 31, 1911, inclusive. He did not perform any services for the defendant from November 6 until some time after December 1st, by reason of his illness. He has not shown just when he offered to return. It appears that between the time when he offered to return and January 1st he received $50 for other services.

[26] The amount that the plaintiff could recover, therefore, if any, based upon the agreement to pay $40 per week would be very small, and he did not present to the court facts from which it could be computed. His employment by the defendant was conditional upon his continuing the way he had been working, getting the defendant out of his trouble and getting certain unenumerated jobs that were in the office three years, started. There was nothing in the contract specifying the length of service except as stated. It was not an unqualified agreement to continue the plaintiff in his service until the first of January, and it does not appear whether or not the special conditions upon which the contract was made had been performed. Even apart from the question whether the plaintiff's absence from the defendant's office by reason of his illness would permit the defendant to refuse to take him back into his employ, I do not think that on the testimony as it appears before us it was error to refuse to leave to the jury the question whether the plaintiff was entitled to recover anything [at] the rate of $40 per week.

[27] The judgment should be affirmed, with costs.

Cardozo, Judge ([concurring in the judgment in part and] dissenting [in part]).

[28] I do not think it is true that a promise to pay an employee a fair share of the profits in addition to his salary is always and of necessity too vague to be enforced (Noble v. Joseph Burnett Co., 208 Mass. 75; Silver v. Graves, 210 Mass. 26; Brennan v. Employers Liability Assurance Corp., Ltd., 213 Mass. 365; Joy v. St. Louis, 138 U.S. 1, 43). The promise must, of course, appear to have been made with contractual intent (Henderson Bridge Co. v. McGrath, 134 U.S. 260, 275). But if that intent is present, it cannot be said from the mere form of the promise that the estimate of the reward is inherently impossible. The data essential to measurement may be lacking in the particular instance, and yet they may conceivably be supplied. It is possible, for example, that in some occupations an employee would be able to prove a percentage regulated by custom. The difficulty in this case is not so much in the contract as in the evidence. Even if the data required for computation might conceivably have been supplied, the plaintiff did not supply them. He would not have supplied them if all the evidence which he offered, and which the court excluded, had been received. He has not failed because the nature of the contract is such that damages are of necessity incapable of proof. He has failed because he did not prove them.

[29] There is nothing inconsistent with this view in United Press v. N. Y. Press Co. (164 N. Y. 406). The case is often cited as authority for the proposition that an agreement to buy merchandise at a fair and reasonable price is so indefinite that an action may not be maintained for its breach in so far as it is still executory. Nothing of the kind was decided, or with reason could have been. What the court did was to construe a particular agreement, and to hold that the parties intended to reserve the price for future adjustment. If instead of reserving the price for future adjustment, they had manifested an intent on the one hand to pay and on the other to accept a fair price, the case is far from holding that a jury could not determine what such a price would be and assess the damages accordingly. Such an intent, moreover, might be manifested not only through express words, but also through reasonable implication. It was because there was neither an express statement nor a reasonable implication of such an intent that the court held the agreement void to the extent that it had not been executed.

[30] On the ground that the plaintiff failed to supply the data essential to computation, I concur in the conclusion that profits were not to be included as an element of damage. I do not concur, however, in the conclusion that he failed to make out a case of damage to the extent of his loss of salary. The amount may be small, but none the less it belongs to him. The hiring was not at will (Watson v. Gugino, 204 N. Y. 535; Martin v. N. Y. Life Ins. Co., 148 N. Y. 117). The plain implication was that it should continue until the end of the year when the books were to be closed. The evidence would permit the jury to find that the plaintiff was discharged without cause, and he is entitled to damages measured by his salary for the unexpired term.

[31] The judgment should be reversed and a new trial granted, with costs to abide the event.

2.3.1 Discussion of Varney v. Ditmars

What terms in Varney’s employment agreement are uncertain?

What is the basis for Justice Cardozo’s “dissent”? Does he agree or disagree with the majority’s ruling on a “fair share of profits”?

Do you see any evidence that the court doubts the parties intended to form a contract?

Is there any hint of the drafting concern?

What is the basis for the many cases cited by the majority? Can you tell by reading the court’s description of those cases whether they rest on doubt about the parties’ intent to contract or defects in their contractual drafting?

2.3.2 Corthell v. Summit Thread Co.

In Corthell v. Summit Thread Co., 132 Me. 94 (1933), an employee promised to turn over future inventions in return for “reasonable recognition” from his employer. A written agreement provided that “the basis and amount of recognition [shall] rest entirely with Summit Thread Company at all times … to be interpreted in good faith on the basis of what is reasonable and not technically.” In upholding the enforceability of this agreement, the court said:

There is no more settled rule of law applicable to actions based on contracts than that an agreement, in order to be binding, must be sufficiently definite to enable the Court to determine its exact meaning and fix exactly the legal liability of the parties. Indefiniteness may relate to the time of performance, the price to be paid, work to be done, property to be transferred or other miscellaneous stipulations of the agreement. If the contract makes no statement as to the price to be paid, the law invokes the standard of reasonableness, and the fair value of the services or property is recoverable. If the terms of the agreement are uncertain as to price, but exclude the supposition that a reasonable price was intended, no contract can arise. … [T]he contract of the parties indicates that they both promised with “contractual intent,” the one intending to pay and the other to accept a fair price for the inventions turned over. “Reasonable recognition” seems to have meant what was fair and just between the parties, that is, reasonable compensation.

Id. at 99.

2.3.3 Reconciling Varney and Corthell

Is it possible to reconcile the holdings of Varney and Corthell?

What might explain the differences between the courts’ reaction to language that appears equally vague in the two agreements?

1.2.4. Sources of Contract Law

Our discussion to this point has focused on what is known as the common law of contracts. Originating in judge-made English common law, the U.S. common law has developed and in some respects diverged from the English model in the two centuries since independence. The only fully authoritative statement of common law rules are the judicial decisions applying those rules. However, the American Law Institute (ALI) – a prestigious organization of prominent attorneys, judges and academics – has periodically published a Restatement of the Law of Contracts and of other subjects such as torts, agency law, etc. The most recent edition for contracts, the Restatement (Second), was completed in 1981. Though formally non-binding, the Restatement (Second) exerts a powerful influence on judges throughout the country and provides attorneys with an invaluable compendium of prevailing legal doctrines.

In addition to the common law, it is also essential for a contemporary contracts lawyer to be knowledgeable about the Uniform Commercial Code (“the UCC” or “the Code”). The UCC was originally drafted as a joint project of the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the ALI. These organizations offered the UCC to the states for adoption and every state has since enacted legislation largely incorporating the provisions of Article 2 concerning the sale of goods.

The driving force and principal architect of the Code was Professor Karl Llewellyn. He sought to modernize and update the law by encouraging courts to discover the commercial norms that he thought were imminent in each transaction and industry. As a result, UCC provisions often make legal rules depend on determining what is “reasonable” in the circumstances. Thus, we have provisions that refer to a “reasonable price,” to a “reasonable time for delivery,” and to “reasonable limitations of damages.” One challenge for students and practitioners is to give content to these apparently amorphous concepts.

For the purposes of our study of contract law, we need only be concerned with Article 2, which defines its coverage in § 2-102:

Unless the context otherwise requires, this Article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

The application of the UCC thus depends crucially on the meaning of the term “goods,” which § 2‑103(1)(k) defines as follows:

"Goods" means all things that are movable at the time of identification to a contract for sale. The term includes future goods, specially manufactured goods, the unborn young of animals, growing crops, and other identified things attached to realty as described in Section 2-107. The term does not include information, the money in which the price is to be paid, investment securities under Article 8, the subject matter of foreign exchange transactions, or choses in action.

Section 2-107 elaborates on the coverage of goods to be severed from realty:

(1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this Article if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.

(2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this Article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

(3) The provisions of this section are subject to any third party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer's rights under the contract for sale.

It is important to understand that the statutory provisions of the UCC take precedence over the common law for transactions in goods. Thus, when goods are involved your first thought should be to determine whether there is an applicable Code provision. Only if no statutory provision addresses the issue should you consider resort to the background principles of the common law of contracts. In contrast, the UCC is inapplicable to transactions that do not involve goods. The most common examples are contracts for services, real estate, and intangible rights such as intellectual property.

1.2.5. Principal Case – D.R. Curtis Co. v. Mathews

Now try applying your developing understanding of indefiniteness doctrine to the following case.

D.R. Curtis, Company v. Matthews

Court of Appeals of Idaho

103 Idaho 776; 653 P.2d 1188 (1982) 

Walters, C.J.

[1] This case involves the enforceability of a contract for the sale of goods where the parties left a factor in the price term to be agreed upon and failed to subsequently agree on the factor left open. Grant Mathews, a grain farmer, appeals a judgment holding him in breach of a contract for the sale of hard red spring wheat, and ordering him to pay $12,450 damages to D.R. Curtis Company. We affirm the judgment.

[2] The respondent, D.R. Curtis Company, is a brokerage firm in the farm commodity market. As a "middleman" between producers and exporters of farm commodities, Curtis Company buys crops directly from a farmer and then sells the crop to the exporter. Thus, for each contract to purchase grain from a producer, Curtis Company makes an interrelated, but independent, agreement to sell the grain to a grain exporter. When the company deals with hard red spring wheat for export, the grain is generally sold to large export companies in the Portland, Oregon ("North Coast"), exchange. Grain sold in this exchange is delivered to and shipped from Portland.

[3] In April, 1978, Raleigh Curtis, a grain broker for Curtis Company, contacted Mathews by telephone to discuss the purchase of Mathews' hard red spring wheat crop. Mathews had never before sold his grain to Curtis Company, although he had sold other crops to the company. Nor had he ever before dealt in the Portland grain export market. His experience was limited to the procedures in the domestic grain market at Ogden, Utah. Raleigh Curtis informed Mathews that the then current price of hard red spring wheat at the Portland grain terminal was $3.58 per bushel. That price was attractive, so Mathews orally agreed to sell 30,000 bushels to Curtis Company.

[4] Both Mathews and Curtis Company, from prior dealings in the hard red spring wheat market, realized that although an express price per bushel is agreed upon, the price actually to be paid for the grain is not fixed until the grain is delivered to market. The actual price is determined, with respect to the expressed contract price term, by three factors: the protein content of the grain, the protein "basis" figure, and the protein "scale." The protein content, i.e., the actual percentage of protein in the grain, is commonly determined in the grain market at the time of delivery. The protein "basis" is a figure ordinarily agreed upon between the broker and the exporter, at the time they contract, in advance of delivery. The protein "scale" is commonly determined by the grain exporter on the day the wheat is delivered to the grain terminal.

[5] Protein "basis" is a standard against which the actual protein content is compared. If the protein content coincides with the fixed protein "basis" figure, then the price paid per bushel coincides with the price expressed in the contract. When protein content and protein "basis" do not coincide, the actual price paid for the grain is determined on the protein "scale," which runs up and down from the protein "basis." The "scale" is expressed as cents-per-bushel for each one-quarter-percent by which the protein content exceeds, or falls short of, the protein "basis" figure.

[6] Mathews testified that he expected the "basis" figure in his agreement with Curtis Company to be established by mutual agreement with Curtis Company. Because Curtis was unable to ascertain a protein "basis" figure while negotiating with Mathews, and because protein "scale" was commonly set by the grain export company on the day the grain was delivered, protein "basis" and protein "scale" were left open, to be established later.

[7] On the day after their oral agreement, Raleigh Curtis signed and mailed a written memorandum to Mathews. It stated the terms of the agreement as follows: "$3.58 per bushel. Delivered Rail North Coast… . Hard Red Spring Wheat -- Protein scale to be established." No reference to a protein "basis" term or to a means of establishing the term was made. Mathews later testified that because protein "basis" was not mentioned he understood the written terms of the contract to mean that a protein "basis" figure was either not required or was still mutually to be agreed upon. He signed and returned the memorandum. Curtis Company sold the quantity of grain commensurate with this purchase to exporters within twenty-four hours of the purchase.

[8] In September, at harvest time, Curtis Company informed Mathews that fourteen percent was the protein "basis" figure for the grain contract. The company had known that a "basis" of fourteen was required at the time they sold the grain to the grain export companies. It is not clear why Curtis Company waited until September to inform Mathews of the fourteen percent protein "basis" figure. Mathews replied he could not meet that figure, and he disavowed any contract. Thereafter, the parties continued to communicate, with Curtis Company trying to assure itself that Mathews had arranged to deliver the grain to Portland.

[9] Curtis Company employees went to Mathews' farm in November to test the protein content of his hard red spring wheat and to check his progress in arranging to deliver the grain. When they arrived, Mathews informed them that he had already sold his grain through the Ogden domestic market. Curtis Company then filed this suit for breach of contract.

[10] The trial court determined that the parties had entered into the oral agreement and had executed the written memorandum with the intent to enter into a binding contract. Because Mathews failed to deliver the grain as required by the contract, the court concluded that Mathews breached the contract. Curtis Company was awarded $12,450 as the cost of "cover."

[11] On appeal, Mathews contends that the trial court erred in determining how price was to be determined under the contract. He further argues that the contract should fail because it is ambiguous and indefinite. Mathews asserts that Finding of Fact No. 11 is not supported by substantial and competent evidence. He alleges the error stems from a failure to distinguish between protein scale and protein basis. Assuming that no agreement was reached regarding protein basis, he urges that the contract is unenforceable because it is ambiguous and indefinite. He also asserts that the trial court applied an incorrect measure of damages.

[12] We first address the alleged error in Finding of Fact No. 11. It appears undisputed that both Mathews and Curtis Company, from prior dealings in the grain market, knew that protein "scale" was established by the export purchaser on the date of delivery and at the place of delivery. It is not disputed that the parties expressly agreed that protein scale was to be established in this manner. On the other hand, the record does not show that Mathews and Curtis Company agreed to accept the "basis" figure fixed in the market. Consequently, we do not find substantial evidence in the record to support that part of Finding No. 11 which states "[that] the contract provided … [for] basis to be established on the date of delivery which is prevailing in the market at the place of delivery." We do not conclude, however, that this error materially affects the ultimate holding of the trial court.

[13] The trial court found that the parties had the requisite intent to form a binding contract for sale at the time they entered into the contract. This finding is supported by competent and substantial evidence and we will not disturb it on appeal. I.R.C.P. 52(a); Nesbitt v. Wolfkiel, 100 Idaho 396, 598 P.2d 1046 (1979). Parties to a contract for the sale of goods may make a binding contract for sale even though the price is not settled, so long as they intend to enter into a binding contract. I.C. §§ 28-2-305, 28-2-204(3). That is, in the sale of goods, a contract will not fail on the grounds of indefiniteness when the price term is left open, see I.C. § 28-2-305, comment 1, so long as the agreement is entered with the mutual intent of the parties to make a binding contract.

[14] If the price in such a binding contract is left open by the parties to be established by later agreement and they fail to reach later agreement, the parties are still bound to perform under the contract for the sale of goods. In such a case, the price is a reasonable price at the time for delivery. I.C. § 28-2-305(1)(b).

[15] Here, the protein "basis" was a component of price; and, therefore it was an essential term of the contract for sale of the wheat. The term was left open to be established by the parties at a later date. The fact that this term was left open to be established, and the parties failed to reach an agreement on the figure, does not make the contract ambiguous or void for indefiniteness. It simply means that a reasonable figure remained to be determined. The record discloses no proof that a fourteen percent "basis" figure was unreasonable in the "North Coast" market. We hold that the trial court correctly determined that Mathews breached the contract for sale of grain.

[16] In regard to the damages question, the trial court correctly determined that the proper standard for damages for nondelivery of the grain was the difference between the market price at the time the buyer learned of the breach and the contract price. I.C. § 28-2-713. The trial court found that Curtis Company learned of the breach on November 6 when Mathews refused to deliver the grain. The Portland market price for hard red spring wheat on this date was $3.99½ per bushel. This was $0.41½ more than the contract price of $ 3.58 per bushel. Thus, $0.41½ (damages per bushel) multiplied by 30,000 bushels gives a figure of $12,450, which the trial court awarded as damages.

[17] Mathews argues that Curtis Company first learned that the grain would not be delivered in September when he stated that he was not going to deliver his grain subject to a fourteen percent "basis" requirement. Thus, he argues, the trial court erred by using the November 6 market price instead of September market prices in the computation of damages. Determination of the date when the buyer learned of the breach is a question of fact. Conflicting evidence exists in the record concerning the date when Curtis Company first learned that Mathews did not intend to deliver his grain pursuant to the contract. Mathews did inform Curtis Company in September that he would not agree to the fourteen percent figure. However, after that time he continued to communicate by telephone with Curtis Company employees, and he was still apparently willing to load his grain on Curtis Company trucks. The trial court made no mention of the September date in its findings of fact. The finding of the trial court that the breach occurred on November 6 is supported by substantial and competent evidence. Although conflicting evidence does exist, we will not disturb this finding. J.E.T. Development v. Dorsey Const. Co., 102 Idaho 863, 642 P.2d 954 (Ct.App.1982).

[18] Finally, Curtis Company requests that it be allowed recovery of a reasonable attorney fee for defense of this appeal. The request is made pursuant to I.C. § 12-120(2), which provides that in any action to recover on a contract relating to the purchase or sale of goods, the prevailing party shall be allowed a reasonable attorney fee to be set by the court, to be taxed and collected as costs. Curtis Company is the prevailing party both at trial and on this appeal. The action involves recovery for breach of a contract for the sale of goods. The request is therefore proper and is granted, subject to I.A.R. 41. McKee Bros., Ltd. v. Mesa Equipment, Inc., 102 Idaho 202, 628 P.2d 1036 (1981).

[19] The judgment is affirmed; costs and attorney fees to respondent, Curtis Company. Burnett and Swanstrom, JJ., concur.

 

2.5.1 Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher

In Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105 (1981), the parties executed a real estate lease containing an option to renew at a price to be agreed upon. The renewal clause provided that the “Tenant may renew this lease for an additional period of five years at annual rentals to be agreed upon; Tenant shall give Landlord thirty (30) days written notice, to be mailed certified mail, return receipt requested, of the intention to exercise such right.” The tenant sought to exercise this option but the landlord demanded a rental rate for renewal of $900 per month, far in excess of the $650 rate provided for the final year of the original lease. The tenant sued to compel the landlord to extend the lease at a “reasonable rate” or “fair market value.” Although a lower court granted the tenant specific performance at a “fair” rent, the appellate court reversed. The court invoked a widely applied rule that a mere “agreement to agree, in which a material term is left for future negotiations, is unenforceable.” In the court’s view, it takes at least some evidence of an agreement on all material terms before a court can step in to resolve any contractual ambiguity. An agreement to agree demonstrates to the contrary that the parties were unable to reach an agreement on that term.

2.5.2 Discussion of D.R. Curtis and Schumacher

Suppose that D.R. Curtis had involved an agreement to rent real estate or provide services rather than a contract for the sale of goods. Would the deal be enforceable?

Does Schumacher have anything to teach us about this question?

Why does the contract for the sale of goods in this case end up being enforced?

In this connection, consider the following provisions of the Uniform Commercial Code (UCC):

§ 2-204. Formation in General.

(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

§ 2-305. Open Price Term.

(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if

     (a) nothing is said as to price; or

     (b) the price is left to be agreed by the parties and they fail to agree; or

     (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third     person or agency and it is not so set or recorded.

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.

(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price.

(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

2.5.3 Problem: Price vs. Quantity Under the UCC

As we have seen, the Code allows a court to supply a “reasonable price” when it determines that the parties intended to have an enforceable agreement but omitted or failed to agree on a price. See U.C.C. § 2-305. Similarly, the Code supplies “reasonable” judge-made defaults for many other missing terms in an agreement. A curious puzzle, however, is that the UCC contains no provision for supplying a “reasonable quantity” when the parties fail to specify one. Moreover, in a section concerned with the formal requirements for enforcing certain contracts, the Code expressly provides that a “contract is not enforceable under this subsection beyond the quantity of good shown in the writing.” See U.C.C. § 2-201.

Try to develop an explanation for this disparate treatment of quantity and price (along with other terms). Why does the Code appear so willing to supply a missing price term and simultaneously reluctant to enforce a contract that omits the quantity?

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