#11258 - Terms And Meanings - Contracts

1. TERMS and MEANING? (We have an agreement, but for what?)

   1. Mutual Assent

      1. Generally

In the past, courts applied the “mirror image rule” to decide whether to enforce a contract: the parties subjective intentions needed to be in perfect alignment. Today, courts prefer to apply an objective standard, to see whether a reasonable person would recognize a contract exists.

• Rest. § 20:

  • (1) There is no mutual assent to a contract if both parties have materially different interpretations and

    • (a) Neither party knows or has reason to know of the other party’s interpretation, OR

    • (b) Each party knows or has reason to know the other party’s interpretation.

  • (2) One party’s interpretation wins if

    • (a) That party doesn’t know the meaning attached by the other party, but the other party knows the meaning attached by the first party, OR

    • (b) That party has no reason to know the meaning attached by the other party, but the other party has reason to know the meaning attached by the first party.

• This is a fault-based scheme. We care whether parties were “innocent” as to their misunderstanding.

• Where each party has in mind something completely different, each interpretation being equally meritorious, courts will typically not enforce the contract. (Raffles v. Wichelhaus: Peerless)

• The Objective Standard: Today, courts will examine whether a reasonable person in the parties’ situation would recognize that a contract has been formed and how to interpret the terms.

  1. Shrinkwrap licenses

A “shrinkwrap license” is a license which is “shrink wrapped” with the product, the terms of which are not accessible until after the customer has purchased the product. They pose problems of assent and enforceability.

• Sometimes it is only practicable to put the terms in a document inside the box or in a scrollable digital document, because the terms are so extensive and verbose. Courts allow payment to mark the point of “acceptance” even though the terms of use have not yet been assented to. (ProCD v. Zeidenberg)

• Where the terms are so verbose that users don’t normally read the terms anyway, it is acceptable to shrinkwrap the license terms, provided that the user has a reasonable time in which to return the product if he decides he doesn’t assent to the terms. (Hill v. Gateway)

• Consumers need to know the terms exist and where to view them. The customer must also have a reasonable time period in which to return the product. Problem: what happens if the expense is too great to justify return? (Qwest)

  1. Limited and Indefinite Promises

     1. Illusory promises

A promise is illusory if there is no mutuality of obligation—that is, if one party may terminate the contract at its discretion without performing any of its obligations.

• Where a party manifestly indicates it intends not to be bound, its “promise” is illusory. (Davis v. General Foods: the case of the stolen recipe)

• Indefiniteness =/= Illusoriness: A contract which fails to fix one’s obligation as to price, quantity, time scale, etc. does not necessarily fail for illusoriness. (Wood v. Lucy, Lady Duff-Gordon)

• Conditions of Satisfaction: Where a party makes its obligation dependent on a condition of satisfaction, it is still considered bound to its promise. The party has a duty to act in accordance with its true state of mind. (Omni Group v. Seattle First Nat’l Bank: architectural study; portrait painting hypo).

  • Objective Condition: For goods of purely economic quality, the court will apply an objective standard to determine whether the condition was met.

  • Subjective Condition: For goods with high personality, i.e. paintings, etc., the court will instead hold the party to act in good faith based on its actual subjective satisfaction.

    1. Indefiniteness

Indefiniteness of terms is not usually sufficient to render a contract unenforceable. Parties need not agree to or articulate all their terms in order to bind themselves, nor do they need to seal the contract in any special way.

• Rest. § 33: Indefinite Promises

  • (1) Even though a manifestation of intent is intended to be construed as an offer, it cannot be accepted and give rise to a contract unless the terms are reasonably certain.

  • (2) Terms are reasonably certain where there is a basis for determining whether the contract has been breached and for giving an appropriate remedy.

  • (3) The fact that terms are left open may be taken to show one or both parties didn’t intend a binding offer or acceptance.

• UCC § 2-204:

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

  • (2) An agreement may be a contract even though the moment of formation is indeterminate.

  • (3) Even though certain terms are left open in a contract, it will not fail for indefiniteness if the parties have intended to make a contract and there is a reasonable basis for remedy.

• UCC § 2-305:

  • (1) Parties can complete a sale even if they are silent on price. The price defaults to a reasonable price if:

    • (a) Nothing is said as to price

    • (b) The price is left to be agreed on and the parties never agree

    • (c) The price is left to be determined by a third party or other market measure and is never recorded.

• UCC § 2-306:

  • (1) A contract which measures quantity by the seller’s output or the buyer’s needs means such measurements must be made in good faith, except that no quantity unreasonably disproportionate to a stated estimate or any normal or otherwise comparable prior output or demand may be tendered or demanded.

  • (2) An output contract which specifies exclusive dealing for the buyer, seller, or both means both parties are bound to use their best efforts to fulfill the other party’s needs.

• Output Contracts / Requirements Contracts: When parties make indefinite agreements to buy all output or fulfill an entire requirement which is otherwise indefinite, they assume a duty to take reasonable steps to fulfill the contract. There may be an express or implied provision to give notice if performance becomes impossible or impracticable and one or the other intends to cancel. (Feld v. Henry S. Levy & Sons: crushed toast)

• Agreements to Agree: An agreement which fixes no terms and simply stipulates that the parties intend to fix terms in the future is an “agreement to agree” and isn’t enforceable. However, the agreement may contain enforceable provisions, such as confidentiality agreements. (Sun Printing v. Remington Paper). An agreement which fixes some terms but agrees to settle others later is enforceable.

  1. Ambiguity

The terms of a contract are ambiguous when there are multiple reasonable interpretations of the terms and neither party knew or had reason to know of the other’s view, or both did. (Peerless, Rest. § 20)

• Parol Evidence Creating Ambiguity: Where the meaning of a contract is clear on its face, parol evidence is not admissible to create ambiguity which would not otherwise be there. (WWW Assoc. v. Giancontieri: the termination clause was really only meant to protect one party) (See: PAROL EVIDENCE RULE)

• Forthright Negotiator Principle: This is the Rest. § 20 position. Where A knows B’s reading of the contract differed from its own, but B doesn’t know and has no reason to know A’s reading, B is the “innocent” party and the court will enforce B’s reading of the contract.

  1. The Parol Evidence Rule

The Parol Evidence Rule is an old doctrine that restricts the use of negotiating history to vary the terms of a written agreement intended to be the final expression of the contract by the parties.

1. Black-Letter Law

• Rest. § 209: Integrated Agreements

  • (1) An integrated agreement is a writing constituting the final agreement between parties on one or more terms.

  • (2) Whether there is an integrated agreement should be determined by the court before deciding on the contract’s interpretation and whether to apply the PER.

  • (3) Where the parties have an agreement in writing that looks complete on its face, we presume it’s an integrated agreement unless other evidence suggests that it isn’t.

• Rest. § 213: Parol Evidence Rule

  • (1) A binding integrated agreement discharges prior agreements to the extent they are inconsistent.

  • (2) A “completely” integrated agreement discharges prior agreements to the extent they are within its scope.

  • (3) An integrated agreement which is not binding or which is voidable and is avoided does not discharge prior agreements. But an integrated agreement which is not binding may still discharge a term which would have been in the agreement if it had not been integrated.

• Rest. § 214: Evidence of Prior or Contemporaneous Agreements or Negotiations

  • Agreements and negotiations prior to the writing are admissible as evidence to establish:

    • That the writing is or is not integrated

    • That the integration is partial or complete

    • The meaning of the writing, whether or not integrated

    • Illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause

    • Ground for granting or denying recission, reformation, specific performance, or other remedy

• Rest. § 216: Consistent Additional Terms

  • (1) Evidence of consistent additional terms is admissible to supplement an integrated agreement unless the court finds the agreement was completely integrated.

  • (2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is:

    • (a) Agreed to for separate consideration, or

    • (b) A term of the sort normally omitted from the writing.

• UCC § 2-202:

  • (1) Terms which on which the parties...