Insufficient Agreements: Defective Formation And Expression Of Agreement

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Misunderstanding

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Both parties attach a different meaning to the same word.
R §20 – Effect of a Misunderstanding

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If the misunderstanding concerns a material term (with no fault).

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If the misunderstanding concerns a material term, and neither party knows or has reason to know of the misunderstanding, there is no contract! The court will find no K when both parties were equally at fault and both parties meanings were reasonable.
a. No K b/c there’s no way for the court to pick b/w the two meanings
b. Completely fortuitous on whom loss falls; depends on who breaches and where parties are in state of performance at time of breach.

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Ambiguity as to understanding a term, but uphold one party’s understanding

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b. If one party should know of the ambiguity, but doesn’t, and the other party neither knows nor should know, the party who is more at fault is bound by a contract on the other party’s terms.

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Raffles v. Wachelhaus

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{Peerless case}
o P agreed to sell cotton to D which was to arrive on the ship Peerless. Both parties were referring to different ships that arrived at different times when they made the K. D refused to accept the goods (on the later ship) b/c cotton prices had gone down.
o HOLDING: Old case, so decided under subjective theory. Ct. says there was no “meeting of the minds.” Can’t hold D to a K that he didn’t agree to. Same result if modern law was applied b/c the parties attached materially different meanings.

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Konic International v. Spokane Computer Services

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{“fifty-six-twenty”- modern day Peerless case}
o P’s employee looked for suitable surge protectors to buy for his company. He found some units b/w $50 and $200 that didn’t suit their needs. P called D and D’s salesman offered to build P’s required surge protector for “fifty-six-twenty.” D meant $5,620 but P thought he meant 56.20.
o HOLDING: modern day Peerless case. Price designation was a material term to which two different reasonable meanings were applied; no meeting of the minds. So no contract formed! And, seller ended up w/ the loss.
o *This doesn’t apply when one party’s understanding (bc of the other party’s fault) is less reasonable than the other party’s understanding.

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Misunderstanding as to a Minor Term

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We choose the more reasonable/fair meaning meaning

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Misunderstanding is different than a mistake!

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o Mistake: party not in accordance with the facts VS. Misunderstanding: parties attach different meanings to the same word
• EX of a MISTAKE> A and B both believe that timber is still here. But, all the timber has actually been destroyed by a fire. The party can void the contract and isn’t obligated to buy the land anymore.
• EX of a MISUNDERSTANDING> Misunderstanding the word ‘timber’ to mean something else.
o The law definitely favors finality, but if the mistake is of a grave nature…then you may be able to get out of the K.
o Wrong prediction about the future will hold is NOT a mistake. (We deny them an out when people make a judgment.)
• EX> Changing costs, changing weather or conditions, etc

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Four NECESSARY Terms in Order for the Contract to be Enforceable

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1. Parties of the contract
2. Subject matter of the contract
3. Time for performance
4. Price

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Indefinite Offers

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Vague Offer – if the acceptance doesn’t supply the missing terms, the court will find no K b/c of indefiniteness
• How to get around Indefiniteness of terms - the parties actions after formation imply an agreement on an essential term or sometimes the court will use gap fillers (i.e. reasonable price)
--Tests for indefiniteness:
• Test: Restatement § 33(2)
• Test: UCC §2-204(3)

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How to get around Indefiniteness of terms

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The parties actions after formation imply an agreement on an essential term or sometimes the court will use gap fillers (i.e. reasonable price)

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Test for indefiniteness: Restatement § 33(2)

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Terms of the contract are sufficiently definite if “they provide a basis for determining the existence of a breach and for giving an appropriate remedy. The fact that one or more of the terms of the proposed bargain are left open or uncertain may show that a manifestation of assent is not intended to be understood as an offer and acceptance.”

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Test for indefiniteness: UCC §2-204(3)

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Omission of Essential Terms: even though one or more of the terms is left open, a contract for the sale of goods 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.

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Implication of Reasonable Terms

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Courts may supply the missing terms (i.e. “fill the gap”)
• If the “agreement” meets the UCC §2-204(3), then the courts may fill the gaps.
• If there is a strong industry custom/other objective test, then the court may fill in the gaps.
• Gap fillers are based on the assumption that these are the terms the parties would have agreed upon if they thought of them in advance.

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(Court setting a reasonable PRICE when one is not implied)

UCC §2-305(1):

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• For the court to set (an ‘Open Price Term’ to) a Reasonable Price UCC §2-305(1):
The parties if they so intend can conclude a contract for sale even though the price is not settled. In such case the price is a reasonable price at the time for delivery if:
a. Nothing is said in the contract as to price
b. The price is left to be agreed upon by the parties and they fail to agree
c. The price is to be determined by some agreed market or other standard or recorded by a third person or agency, but is not so recorded.

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How the Court treats other types of open/indefinite terms:

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o Absence of a Specified Place for Delivery → UCC §2-308(a): the place for delivery is the SELLER’S place of business, or if he has none, his residence
o Time for Shipment or Delivery → UCC §2-309: the time will be a “reasonable time”
o Time for Payment → payment is due at the time and place at which the buyer is to receive the goods
o Quantity Gaps → will NOT fill w/ a reasonable quantity, but rather default to zero (0)

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Where Parties Manifest an Intent, but it is too Indefinite for Enforcement

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Courts will not supply a reasonable term, b/c doing so might conflict w/ the intent of the parties

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Agreement to Agree

(Different approaches: common law, UCC, non-UCC, leases)

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The parties may agree on a K with an essential term open, with the intention that they will agree upon that term later.
o Common Law View – held to be too indefinite to be enforceable
o UCC Approach §2-305(1)(b) – allows the court to supply a reasonable price term if “the price is left to be agreed by the parties but they fail to agree.”
o Non-UCC Cases: grown increasingly willing to supply a reasonable price term if it is clear that the parties intended to enter into a binding contract
o Lease renewals- courts have been reluctant to follow the UCC lead where a tenant and landlord agree that the tenant shall, at the end of the lease term, have the option to renew it at a rental to be agreed upon.

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Varney v. Ditmars

{Indefinite Agreements- what does “fair share” mean?}

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{Indefinite Agreements- what does “fair share” mean?}
o D (employer) told P (employee) that if P continued to work for D, D would give P a “fair share” of the profits at the end of the year. D fired P because he wasn’t at work for a few days, P sues to recover fair share of the profits for the work he completed.
o HOLDING: There was no meeting of the minds, K was left open to D for negotiation bc the meaning of “fair share” was vague, indefinite, and an uncertain amount. The K provides no way for the Court to determine what D thought a fair share of the profits was.
o The agreement b/e the parties must be certain and explicit so that their full intention may be ascertained to a reasonable degree of certainty.
o In business transactions, the question of whether there is a definite and enforceable meaning is determined by the SUBJECTIVE intention of the parties.
o Note: P may be able to recover on quantum meruit (an off-the contract recovery) for the reasonable value of his services
o DISSENT: (Cardozo) When the parties “agree to agree in the future,” but don’t agree on a present price → it’s less justifiable to intervene in this circumstance bc the two parties are suppose to agree on the price later on. This doesn’t delegate any authority to the crt to help them come up with a price.

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Martin Delicatessen v. Schumacher

{Incomplete and Deferred Agreement}

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{Incomplete and Deferred Agreement}
o D leased a store to P for 5 years containing a renewal clause whereby P could renew the lease for an additional 5 years at rentals “to be agreed upon.” D wanted a huge increase in rent, P wanted a reasonable value.
o HOLDING: There was no hint of a commitment to be bound to fair market value. This is a mere agreement to agree (w/ a material term left open for future negotiations) and is unenforceable. No method provided in lease to determine the rent to be paid.
• Note: Martin v. Schumacher under R §33 and §34 analysis - There could be reliance in not looking for another building, investing money in the property, etc
o §34(3) – action in reliance of an agreement make a contractual remedy appropriate even though uncertainty exists

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Oglebay v. Norton

{Incomplete agreement deferred to crt – Intent to be bound}

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{Incomplete agreement deferred to crt – Intent to be bound}
o P and D had a long-standing history together. Their K had 2 different price determination methods (would either agree or use market price). When iron ore business went down, rate disputes began b/w P and D.
o ISSUE: 1) Did the parties intend to be bound by the terms of the contract, despite the failure of its pricing mechanisms? YES.
• 2) If the parties did intend to be bound, may the court establish a reasonable rate for the 1986 season? YES.
• 3) May the crt continue to exercise equitable jurisdiction over the parties and require the parties to use a mediator if they cannot agree on the rate for future shipping seasons? YES.
o HOLDING: 1) Intent to be bound: question for the trier of fact. The crt had competent evidence to conclude the parties intended to be bound despite the failure of the pricing mechanisms → bc the long-standing and close relationship b/e the parties.
• 2) “Agreements to agree” are enforceable when the parties have manifested an intention to be bound. If the parties intend to be bound, the crt will fill in some of the gaps for the parties to reach a fair and just result.
• Applied §2-305 (Crts fixing price). Crt fixed a reasonable price that fell acceptably b/e the rate range extremes proven at trial (credible evidence in the record to support that the rate was reasonable.
• Specific performance was necessary b/c the dramatic changes would make it impossible to award damages.
• 3) If the parties intend to be bound, the crt may exercise its equitable jurisdictions and intervene by appointing a mediator (bc it wouldn’t detract from the parties’ significant obligations under the K and it merely facilitates the parties’ ability to interact under the contract.)

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Implication of Reasonable Terms, not just the UCC §2-204(3)...also the Restatement §204!

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Not just the UCC! → Restatement §204: “When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.”

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Contract left to One Party’s Specifications

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Parties may agree that one of them has the right to determine a particular term of performance at a subsequent date.
• UCC view §2-311(1) - the contract “is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits sets by commercial reasonableness.” If the party who has the right to make such a specification fails to do so, the other party may treat this failure as a breach of contract.
o Seller may perform in any reasonable manner, if other party does not set

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Indefiniteness can be cured by...

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performance or part-performance

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Hoffman v. Red Owl Stores, Inc. {Indefinite, promissory estoppel}

Remedies Where Agreement is Incomplete or Indefinite

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o D and P negotiated back and forth about P’s interested in owning a Red Owl franchise; D made constant assurances to P that if he did certain things, like buy an option to get land, he would get his franchise; D’s tested P’s commitment, but never make a formal offer; P eventually terminated negotiations, but sought recovery for his expenditures before that point
o HOLDING: P relied on representations made by D and fulfilled conditions required under negotiations; injustice without relief for P b/c of D’s failure to keep promises which induced P’s to their detriment; P given reliance damages; P can’t claim lost profits under, so he can’t get money for Wautoma store (that would be expectancy); damages limited as justice requires under Sec. 90; not going to award full-fledged damages here b/c we don’t know what parties would’ve agreed on in end. He was entitled to restitution damages for the bakery reliance only, damages measured by the difference between the sales price and the fair market value of the store.
o RULE: For promissory estoppel, don’t need assurances that rise to the level of a legally operative offer, just need to show that promises were made and the other party relied on them; interim liability rule
i. Under promissory estoppel, it might be appropriate to award reliance damages, but not full breach of contract expectancy damages
ii. Only compensated for reasonable reliance, so they won’t go around relying haphazardly, thinking they’ll get all of it back in the end
iii. Allowing P to recover is good for the Red Owl’s of the world b/c it will allow people to rely on their promises; otherwise, no one would want to make agreements with them