Contracts I Outline – OFFER, ACCEPTANCE, and CONSIDERATION

General Notes:
**RULE: To determine whether common law or UCC applies, consider whether the dominant factor or
essence of the transaction is the sale of materials OR services**
-Restatement §1: A contract is a promise or 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
* Executory Contract = A contract not yet fully performed
*Adhesion Contract = “take it or leave it” contract
*Merchant = a person who deals in goods in their occupation or having knowledge or skills of those
goods

I. Is There a Deal?
A. Mutual Assent
• Mutual assent requires:
o An offer and an acceptance, and
o A clearly manifested willingness by both parties to enter into a contract
• Prove: a clearly manifested willingness by both parties to enter into a contract (that the
parties both wanted the same thing) by:
o Objective Theory of Contract Formation = what a reasonable person would interpret
from the promisor’s outward expression (conduct/words).
⇒ A party’s intent is deemed to be what a reasonable person in that position would
think that the offeror’s objective manifestation of intent meant. (Lucy v. Zehmer)
*Don’t consider Subjective Theory = what the promisee really believed
• If either party knows that the true intention of the other party is not to contract, there can be
no mutual assent
• Even if a party makes an offer in jest, so long as the offeree reasonably believes he was
serious, the contract will be binding (Lucy)
*Look at the totality of the circumstances, and if offeror could be reasonably certain

B. Offer
• A proposal by one party to the other, manifesting a willingness to enter into a bargain so
made as to justify another person in understanding that his assent to that bargain is invited
and, if given, will create a binding contract between the parties (Restatement §24)
-the offer must:
• manifest present contractual intent (look at words used, ex. I will vs. I would)
• show a certainty and definiteness of terms (look at price or quantity terms)
• be communicated to the offeree (say or write something)
(This test is based on the objective theory)
*Cannot be merely words of preliminary negotiation (Restatement §26:)
“A manifestation of willingness to enter into a bargain IS NOT an offer if the person to
who it is addressed knows or has reason to know that the person making it does not
intend to conclude a bargain until he has made a further manifestation.”
• An offer must still be “live” to be accepted
• An advertisement will be an offer ONLY when:
o It invites a response that will complete the deal. There must be a sufficient amount of
definite language (ex: price, quantity, and method of acceptance [like first come, first
served]). Generally, ads and solicitations are invitations for an offer
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C. Destruction of the offer
• Restatement § 36(1) says that an offeree’s power of acceptance may be terminated by:
a. Rejection – (Restatement § 38)
(1) An offeree’s power of acceptance is terminated by his rejection of the offer, UNLESS the
offeror has already manifested a contrary intention
(2) A manifestation of intention not to accept an offer is a rejection UNLESS the offeree
manifests an intention to take it under further advisement
b. Lapse – an unreasonable lapse of time will terminate the offer
c. Death of Incapacity of the offeror – (Restatement §48) An offeree’s power of acceptance
is terminated when the offeree or offeror dies or is deprived of legal capacity to enter into
the proposed contract
d. Revocation – Two types:
(1) Direct revocation = the offeror explicitly says that he is taking the offer off the table
(2) Indirect revocation = when the offeree is informed that the offer has been withdrawn from
some other way or party (notice can be public or general)
o Restatement §43: An offeree’s power of acceptance is terminated when the offeror
takes definite action inconsistent with an intention to enter into the proposed
contract and the offeree requires reliable information to that effect
⇒ The offeree must know that the offer has been withdrawn. A mere rumor that the
offer was revoked would not suffice, it must be reliable info
• An offer cannot be revoked if it has already been accepted
• Restatement § 36(2): In addition, an offeree’s power of acceptance is terminated by the non-
occurrence of any condition of acceptance under the terms of the offer

D. Irrevocable Offers: Option Contracts and Firm Offers

 *Common Law (and Restatement § 87):
An offer is binding as an option contract if it:
(1) is in writing
(2) is signed
(3) **includes consideration**
• Consideration IS needed to bind the offeror to his promise to hold the offer open
• SOME courts will rule that the function of consideration is a formality. Actual exchange
of the consideration may not be necessary.
o Restatement says that recital of consideration is enough to make the option
binding.
• OTHER courts will rule that NOT exchanging consideration only creates a rebuttable
presumption that consideration was received, as in Burgess (so defendant will have the
evidentiary burden to rebut the presumption by showing that he never actually received
the consideration. If he can do that, then he is not bound by his promise to hold the offer
open) **Note: NY does NOT require exchange of consideration
 UCC 2-205: Firm Offers (cannot be revoked):
(1) In writing
(2) Signed
(3) An express promise to hold offer open
(4) Offeror must be a merchant
(5) It is a purchase or sale of GOODS
• **No Consideration is needed**

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 • Must be accepted within the time stated, or if no time is stated a reasonable time is
inferred which may not exceed 3 months
o Even if the contract specifies longer than 3 months, the court WILL NOT honor a
time longer than 3 months. Parties can renew deal at the end of 3 months or pay
consideration to create an option contract to hold open the offer
• *A merchant = a person who deals in goods in their occupation or having knowledge or
skills of those goods

E. Requirements for Acceptance

• *The offeror is master of his offer and may prescribe any method of acceptance. If no
method is specified, the offeree may accept in any reasonable method.
• Ways to accept:
o By promise (bilateral)
o By performance (unilateral)
o By beginning performance
o By Silence or Inaction
• *RULE: Acceptance will only be effective if the offer is still “on the table.” An offer is taken
“off the table” by (1) death/incapacity, (2) rejection, (3) lapse of time or (4) revocation.
• Restatement § 50(1): Acceptance of an offer is a manifestation of assent to the terms of an
offer made by an offeree in a manner invited or required by the offer (so, if it was accepted in
a different manner it IS NOT acceptance)
 Traditional view asks whether it is a:
o Unilateral Contract: seeks the offeree to perform (ex: a reward)
o Bilateral Contract: seeks a promise in return
-It has to be one or the other, and the offer must be accepted in accordance with
the characterization of the offer
**Part performance DOES NOT = acceptance
 Restatement/Modern view says:
• That unless the offer specifies that it must be accepted by either return promise or
performance, the offer invites acceptance in any manner and by any medium reasonable
in the circumstances. (Restatement §31 & 32)
**Part performance DOES NOT = acceptance.
⇒ HOWEVER, when the offer specifies acceptance by performance only (i.e.
what we would traditionally call a unilateral contract), part performance
creates an option contract. Partial performance acts as consideration to hold
the offer open for completion. Offeror must hold the offer open for a
reasonable time for offeree to complete performance. It is not revocable
before a reasonable time has been allowed (Think of Brooklyn Bridge
example). It is implied that the offer will be held open long enough for
complete performance. Restatement §45
-If performance is never completed, then the offeree is NOT bound by his
promise
-Commencement of performance can be determined in different ways

• Restatement §51 says that if a person learns of an offer AFTER he has already rendered
part of the performance requested by the offer, he may accept the offer by completing
performance

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 • Restatement §53 says that an offer can be accepted by performance ONLY if the offer
invites such acceptance
o Performance DOES not constitute an acceptance if:
a. The offeree has already notified offeror of non-acceptance his
subsequent performance does not constitute acceptance,
b. if an offeree performs in a manner invited as acceptance of the offer
AFTER he has manifested an intention NOT to accept, it does not
constitute acceptance
• Restatement §62 says that where an offer invites an offeree to CHOOSE between
acceptance by promise and performance, the beginning of the invited performance is an
acceptance by performance (which operates as a promise to render complete
performance)
• *Default rule: (Carbolic) If the offer does not state that notification of acceptance is a
requirement, then notification of acceptance is not necessary and commencement of
performance will bind the offeror to hold the offer open for a reasonable amount of
time
• Restatement §54(2) says that “if an offeree who accepts by rendering performance has
reason to know that the offeror has no adequate means of learning of the performance
with reasonable promptness and certainty, the offeror is NOT bound UNLESS:
(a) Offeree exercises reasonable diligence to notify the offeror of
acceptance, or
(b) Offeror learn of performance w/in a reasonable time, or
(c) The offer indicates that notification of acceptance is not required”

F. Promissory Acceptance (and the Mailbox Rule)

*When a promise can be effective as an acceptance, the time at which acceptance or revocation
becomes effective is critical in determining whether there is mutual assent
• Restatement § 56 “Except where the offer manifests a contrary intention, it is essential to an
acceptance by PROMISE either that the offeree exercise reasonable diligence to notify the
offeror of acceptance or that the offeror receive the acceptance seasonably.”
• Restatement § 63 “Unless the offer provides otherwise,
(a) an acceptance made in a manner and by a medium invited by an offer is
operative and completes the manifestation of mutual assent as soon as put out of
the offeree’s possession, without regard to whether it ever reaches the offeror;
(This applies to Mailbox AND when acceptance is conveyed to an agent of the offeror)
(b) BUT an acceptance under an option contract is not operative until received by
the offeror
• *An acceptance not communicated to the offeror is not an acceptance
• Restatement §50(3): “Acceptance by a promise requires that the offeree complete every act
essential to the making of the promise
• Mailbox Rule: Acceptance is effective at dispatch (even if only dropped in the mail)
*Conversely, revocations, rejections, and offers are effective upon receipt
*Applies only to acceptances in response to an offer sent by mail
*Even if offeree never receives the acceptance, it is still effective

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G. Acceptance by Performance
• Restatement § 30: An offer may invite or require acceptance to be made by an affirmative
answer in words or by performance and unless otherwise indicated by language or
circumstance, an offer invites acceptance in any manner and by any medium reasonable
under the circumstances
• RULE for acceptance by performance (Restatement §45):
(1) Where an offer invites an offeree to accept ONLY by rendering a performance, an
option contract is created when the offeree begins the invited performance.
(2) The underlying contract of sale would only be created upon the offeree’s completion of
performance; however, the commencement of performance would bind the offeror to
hold the offer open.
(SEE E ABOVE for the other rules of acceptance by performance)

H. Acceptance by Silence or Inaction

*Generally, silence or inaction does not constitute acceptance, HOWEVER, in certain situations
and with certain relationships it can
• Restatement §69(1) says that where an offeree fails to reply to an offer, his silence and
inaction operate as an acceptance in the following cases ONLY:
(a) Benefit of Services: “Where an offeree takes the benefit of offered services
with reasonable opportunity to reject them and reason to know that they were
offered with the expectation of compensation”
(b) Reason to Understand: “Where the offeror has stated or given the offeree
reason to understand that assent my be manifested by silence or inaction, and the
offeree in remaining silent and inactive intends to accept the offer”
(c) Prior Course of Dealing: “Where because of previous dealings or otherwise, it
is reasonable that the offeree should notify the offeror if he does NOT intend to
accept”

I. Electronic Acceptances
• When a person agrees to terms on the internet, it challenges the notion of mutual assent
because it is not certain that the terms are completely understood
• *Browsewrap and Clickwrap → assent by terms occurs on the computer (terms are
presented somewhere on the browser and the user must click it to accept)
o Many have arbitration clauses which prevent litigation
• Placement of terms is important
o Is it obvious?
o Is consumer savvy enough to know?

J. Acceptances that Deviate from the Offer

 Traditional Rule:
• **Mirror Image Rule: There is no assent when there is variation in the acceptance from
the offer**
-Purported/Imperfect Acceptance = acceptance with additional conditions
• *If any terms are changed or if new terms are added in an acceptance, it acts as an
IMPLIED REJECTION of the previous offer, and creates a COUNTEROFFER, where
the previous offeror becomes an offeree who holds the power to accept

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 Modern Rule/Restatement § 59 & 61:
*A purported acceptance that adds terms or requests change of terms IS an effective
acceptance UNLESS the offeree conditions deal on offeror's assent to those
added/changed terms (then it would be a counter-offer)
• Restatement §39 Counter-offers
(1) A counter-offer is an offer made by an offeree to his offeror relating to the
same matter as the original offer and proposing a substituted bargain differing
from that proposed by the original offer
(2) An offeree’s power of acceptance is terminated by the making of a counter-
offer, unless the offeror has manifested a contrary intention or unless the counter-
offer manifests a contrary intention of the offeree
• Restatement §58 “An acceptance must comply with the requirements of the offer as to the
promise to be made or the performance to be rendered”
• Restatement §60 If an offer MERELY suggests a permitted place, time or manner of
acceptance, another method of acceptance is not precluded.
 UCC 2-207:
• Offeree's additional or different terms DO NOT necessarily defeat formation of a contract
o -also look to whether purported acceptance is made conditional on offeror's assent
to additional/different terms.
• **UCC 2-207: (SEE FLOWCHART)
“(1) A definite and seasonable expression of acceptance OR a written
confirmation which is sent within a reasonable time operates as an acceptance
EVEN THOUGH states terms additional to or different from those offered or
agreed upon, UNLESS acceptance is expressly made conditional on assent to the
additional or different terms.” (Then it is a counter offer)
“(2) The additional terms are to be construed as proposals for addition to the
contract. BETWEEN MERCHANTS such terms become part of the contract
UNLESS:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given
within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the writings of the parties do not
otherwise establish a contract. In such case the terms of the particular contract
consist of those terms on which writings of the parties agree, together with any
supplementary terms incorporated under any other provisions of this act.”
*Merchant = a person who deals in goods in their occupation or having knowledge or
skills of those goods

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K. Misunderstood, Incomplete and Indefinite Terms
• Mutual Misunderstanding: There can be no mutual assent if the parties have assented to
different things, so no contract is formed(Raffles “Peerless Ship)
• Restatement §33- Certainty:
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot
be accepted so as to form a contract unless the terms of the contract are reasonable certain
(2) Terms are reasonable certain if they provide a basis for determining the existence of a
breach and for giving an appropriate remedy
(3) The fact that one or more terms of a proposed bargain are left open or uncertain MAY
show that a manifestation of intention is not intended to be understood as an offer OR as an
acceptance.
**Indefiniteness can be used as a defense to liability
• Restatement §20:
“(1) There is NO manifestation of mutual assent to an exchange if the parties attach
materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other
(b) each party knows or each party has reason to know the meaning attached by
the other
(2) The manifestations of the parties are operative in accordance with the meaning
attached to them by one of the parties if:
(a) That party does not know of any different meaning attached by the other, and
the other knows the meaning attached by the first party; or
(b) That party has no reason to know of any different meaning attached by the
other, and the other has reason to know the meaning attached by the first party.”
*First, look at the parties’ expectation interests
*If both interpretations are reasonable, then it must be determined if there is a contract
• UCC 2-204:
A contract will not fail for indefiniteness although one or more terms are left open IF the
parties have intended to make a contract and there is a reasonably certain basis for giving
an appropriate remedy

L. Agreements to Agree
• Letters of Intent:
o Usually non-binding predicates to further negotiations between parties, unless they can be
regarded as binding contracts
o They will usually contain a standard “not legally binding” clause BUT courts in some
cases may still enforce it if it is evident that the parties’ intention was actually to make a
binding agreement
o Some regard the letter of intent as imposing a duty to negotiate in good faith independent
of the underlying transaction (meaning that although neither party is bound yet to the
principal transaction, neither may walk away from negotiations without having made
every reasonable effort to conclude the deal.

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 o (But remember BMI, where the letter of intent expressly designated the confidentiality
agreements as the SOLE exception to the general disclaimer that the letter was “not
legally binding,” so clearly there was no BINDING agreement to negotiate in good faith.)

• In certain cases, parties leave a key term open because they consider themselves bound and
decide to defer agreement on that term until a later time
o If the parties fail to come to an agreement, the issue for the courts is whether the
agreement as struck is too indefinite to enforce or whether the court should supply the
missing term in order to save the deal
• If parties intend to be bound, the courts will try to enforce that intention even if the parties’
expression of that agreement is unclear or incomplete. The key is their intentions (and mutual
assent about the agreement)
• *Keith and Moolenar cases demonstrate difference of opinion among cases concerning whether
a lease extension option that leaves rent to be agreed upon at later date can create a binding
contract when the offeree exercises the option. (There is a disagreement on whether
"reasonable rent" too uncertain and, thus, defeats creation of a binding lease renewal contract).

II. The Doctrine of Consideration and Consideration Substitutes

A. Bargain and the Legal Concept of Consideration
*Quid pro quo = this for that
• We say that consideration = inducement
 Traditional Inquiry:
• Looked to whether promisor received a benefit, and promisee had a detriment
• Hamer v. Sidway changed this rule. It allowed nephew’s restriction of lawful freedom of
action which was induced by the promise to represent consideration
 Modern View/Restatement:
• Restatement § 71 Consideration:
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in
exchange for his promise and is given by the promisee in exchange for that promise
(3) The performance may consist of
(a) An act other than a promise, or
(b) A forbearance (the act of refraining from something)
(c) The creation, modification, or destruction of a legal relationship
(4) The performance or return promise may be given TO the promisor OR TO some other
person. It may be given BY the promisee OR BY some other person.”
• Consideration is a “bargained-for exchange”
• *Courts do not look at the amount or adequacy of consideration. It only matters if there is
inducement
• *Remember that there is no consideration exchanged if a promise would be completed
REGARDLESS of the actions of the promisee (ex. Ricketts where the grandfather would
have given her the money even if she didn’t leave her job – he didn’t require her to quit
her job)

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(1) Consideration – Gratuitous Promises
• A purpose of consideration is to distinguish between gratuitous and non-gratuitous
promises
• There must be consideration to legally enforce a promise to make a gift
o **However, if promissory estoppel can be applied successfully, a party may
be legally enforced to make the gift
• Remember Kirksey – the promise was a mere gratuity because no consideration was
exchanged (she didn’t act in some way and she didn’t refrain from doing anything in
the court’s opinion)
• *Remember that it is sometimes difficult to determine whether words of a condition
in a promise indicate a request for consideration or state a mere condition in a
gratuitous promise
(2) Consideration and Contract Modification
*Executory Contract = A contract not yet fully performed
 Traditional Rule:
• Pre-existing duty rule: A promise to pay a person for what he already contractual
obligated to do is unenforceable
• Additional consideration is needed to support modification to an existing contract
(Alaska Packers’ Ass’n).
o Courts will not enforce an agreement that has been acquired by coercion or
duress and will hold the parties to their original contract regardless of whether it
is profitable or unprofitable.
o NOT supported by consideration if one of the parties to the agreement does or
promises to do something that he is legally obligated to do or refrains or
promises to refrain from doing something he is not legally privileged to do
-This is to prevent a “hold up game,” where the person has no choice but to
agree to modification
 Modern Rule/ Restatement § 89:
• “A promise modifying a duty under a contract not fully performed on either side IS
binding:
(a) IF the modification is fair and equitable in view of circumstances NOT
anticipated by the parties when the contract was made; or
(b) To the extent provided by statute; or
(c) To the extent that justice requires enforcement in view of material change of
position in reliance on the promise.”
• §89 (a) is satisfied if:
(1) The modification was voluntary
(2) The contract was executory (not yet completed)
(3) Modification was due to unanticipated circumstances
AND (4) Fair and equitable
• Does not require additional consideration as long as it meets Restatement § 89
criteria

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 • *Note: Restatement says a promise to perform an existing contractual duty to a 3rd
party is consideration unless it is coercive

• **If it is NY and NOT a sale of goods: NY General Obligations Law § 5-

1103:
A modified or discharged contract WITHOUT additional consideration is
valid, provided that:
(1) The modification or discharge is IN WRITING; and
(2) Is SIGNED by the party against whom it is sought to enforce
 UCC 2-209:
(1) An agreement modifying a contract needs no consideration to be binding
(2) If an agreement already signed excludes modification EXCEPT by a signed record,
it cannot be modified UNLESS the agreement is between merchants and the modified
agreement is separately signed by one party in a form provided by the other merchant
(3) The modified contract must satisfy the requirements of the statute of frauds
(4) Attempts at modification or rescission (cancellation of the contract and each party returns to
the state they were in before any contract was made) can operate as a waiver
(5) A party that has made a waiver affecting an executory portion of the contract may
retract the waiver by reasonable notification received by the other party that strict
performance will be required of any term waived, UNLESS the retraction would be
unjust in view of a material change of position in reliance on the waiver
• **Only requirement is that the request for modification be made in good faith
(no consideration is necessary)
(3) Previously Received Benefit and the role of Moral Obligations
• Even if there is a moral obligation to pay a debt, there may not be a legal obligation
• There is a general RULE that promises made AFTER the offeree has already done
some act are not legally enforceable
o *EXCEPTION to that rule= Material Benefit Rule:
Where the promisee cares for, improves, and preserves the property of the
promisor, though done without his request, it is sufficient consideration for
the promisor’s subsequent agreement to pay for the service, because of the
material benefit received
• Material Benefit Rule=Restatement §86:
(1) A promise made in recognition of a benefit previously received by the
promisor from the promisee is binding to the extent necessary to prevent
injustice
(2) A promise is not binding under Subsection (1)
(a) If the promisee conferred (gave) the benefit as a gift or for other
reasons the promisor has not been unjustly enriched; or
(b) To the extent that its value is disproportionate to the benefit
o Unjust Enrichment = when the promisee receives compensation which grossly
outweighs the benefit to the promisor
o Usually an obligation to make restitution arises out of this (which gives
recovery based on the benefit incurred to the promisor – not what promisee lost,
but what promisor gained but shouldn’t have)

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 • Broken down elements of material benefit rule:
(1) Promisor received a material benefit from promisee
(2) Material benefit received under circumstances created a moral obligation
(3) There is a subsequent promise to pay
(4) The nature of the circumstances were such that the promisee reasonably
believed he would be compensated
*Webb v. McGowin (material benefit was that his life was saved)

B. Promissory Estoppel as a Consideration Substitute

(1) Promissory Estoppel
• Restatement § 90 – Elements of Promissory Estoppel
(1) A promise is made
(2) The promisor reasonably expects to induce action or forbearance
(3) The promisee detrimentally relies on the promise
(4) Injustice can be avoided only by enforcing the promise
• Promissory estoppel is an offensive doctrine which can be relied upon to convince a
court to enforce the promise when:
o a plaintiff relies on a promise to their detriment, but there was NO
consideration exchanged (like with a gift or gratuitous promise)
• Usually plaintiff should show that he was induced by the promise to take a particular
course of action that it would not have otherwise taken
• *Note: In some cases, even though there was consideration exchanged and there IS an
enforceable contract, a plaintiff may CHOOSE to argue promissory estoppel because
they may be able to collect more from reliance damages (as opposed to expectation
damages)
o Promissory Estoppel damages are Reliance damages = damages due to the
reliance on the promise (like lost wages)
o Breached Contract damages are Expectation damages = damages due to the
expectation that the contract would be completed (like the money promised)
• Remember Ricketts v. Scothorn, where granddaughter left work in reliance that her
grandfather would pay her money (no consideration was exchanged, but she prevailed)
(2) Option Contracts, Revisited
• Restatement §87:
(1) An offer is binding as an option contract if it:
(a) Is in writing and signed by the offeror, recited a purported consideration for
the making of an offer, and proposes an exchange on fair terms within a
reasonable time; or
(b) Is made irrevocable by statute
***(2) An offer which the offeror should reasonably expect to induce action or
forbearance (an intentional refraining from an act) of a substantial character on the part
of the offeree before acceptance and which DOES induce such action or forbearance is
binding as an option contract to the extent necessary to avoid injustice
*(RELIANCE THEORY – Preparation to perform v. Partial performance)

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III. Is it A Deal That the Law Will Enforce? (Defenses)
A. Mistake
*Some jurisdictions (and the Restatement) do not make any distinctions between mistake of law and
mistake of fact **So Analyze it both ways
*A mistake = a belief that is not in accord with the facts (Restatement § 151)
a. Mutual Mistake of Fact
• Both parties operate on a false belief
• Restatement § 152 says that a contract is VOIDABLE when:
(1) There is a mutual mistake of fact at the time the contract was made, and
(2) The mistake is material
(3) The adversely affected party DOES NOT bear the risk of the mistake (see
Restatement § 154),
o It is material when it goes to the substance of the deal (think of
Sherwood v. Walker – barren cow case); parties proceeded to make a
contract because of this mistaken fact, or the contract would have been
different had this fact been known
• Restatement § 154 says that a party bears the risk of a mistake when:
(1) The risk is allocated to him by agreement of the parties, OR
(2) He is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats
his limited knowledge as sufficient, OR
(He knows he’s not sure about the fact but he thinks that’s fine)
(3) The risk is allocated to him by the court on the ground that it is reasonable
in the circumstances to do so
b. Mutual Mistake of Law
• Both parties operate on a false belief of the law (Burggraff case –zoning laws)
o They believe the law to be one thing and proceed with the contract
because of that belief
• NOT GROUNDS FOR RESCISSION because parties are presumed to know the law or at
least be capable of verifying it; ignorance of the law is no defense!
• *Differs from mistake of fact because parties cannot be expected to be acquainted with ALL
factual matters
c. Unilateral Mistake
• When only one party operates on a false belief
• Restatement § 153 says that a contract is VOIDABLE when:
(1) There is a mistake by 1 party of fact at the time the contract was made,
(2) The mistake had a material effect on the deal,
(3) The adversely affected party does not bear the risk of mistake,
and
(4) Enforcement of the contract would be unconscionable OR
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 (5) The other party had reason to know of the mistake, or his fault caused the
mistake

B. Fraud, Material Misrepresentation or Nondisclosure

a. Fraud and Material Misrepresentation
• In torts, an action for fraud requires some degree of deceit (cannot be innocent) and can yield
damages
• HOWEVER in CONTRACTS, the goal is to make things fair, so an innocent
misrepresentation of a material fact CAN be grounds for rescission
• A misrepresentation is an assertion that is not in accord with the facts (Restatement §159)
• There are two types of misrepresentations (which are grounds for rescission):
(1) Fraudulent – requires knowledge that representation was false
o Restatement § 162(1) says a misrepresentation is fraudulent if the
maker:
1. intends his assertion to induce a party to manifest his assent,
and the maker:
a) KNOWS or BELIEVES that the assertion IS NOT in accord
with the facts, or
b) does not have the confidence that he states or implies in the
truth of the assertion, or
c) knows that he does not have the basis that he states or implies
for the assertion
(2) Innocent Material – the person asserts something that he believes in good
faith to be true
o This is equally a reason to rescind; in contract law for purposes of
being voidable, an innocent material misrepresentation = fraudulent
misrepresentation,
o SO it must be determined if the innocent misrepresentation is material
o Halpert v. Rosenthal says that it is material when “it becomes likely to
affect the conduct of a reasonable man with reference to a transaction”
o Restatement §162(2) says a misrepresentation is material when:
1. It is not in accord with the facts
2. It is likely to induce a reasonable person to manifest his
intent, causing a (detrimental)reliance of recipient
3. The reliance is reasonable
*(Basically, the person would not have entered into the contract had
they known this fact – the misrepresentation caused them to assent to
the agreement)
• Justification for innocent material misrepresentation = fraudulent is that “it would be unjust
and inequitable to permit a person who has made a misrepresentation, even innocently, to
retain the fruits of a bargain induced by such representations” Halpert v. Rosenthal
• *If a person said “I believe…(there are no termites)” then there IS NOT a misrepresentation
(as long as the speaker really does believe it)

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  It is still in accord with the facts because it is an opinion; it is not an actual
representation because it is NOT a statement that there are in fact no termites
 This is only a representation of the speaker’s belief
• Mistake v. Innocent Misrepresentation
 Mistake = an (incorrect) belief that the parties come to the table w/ but NOT
based on anything the parties SAID
 Misrepresentation = an (incorrect) assertion from a party (something some
one SAID)

• Restatement § 164 says that a contract is VOIDABLE if:

1. A party’s manifestation of assent is induced by fraudulent or material
misrepresentation made by THE OTHER PARTY to the transaction upon
which he was justified in relying
2. A party’s manifestation of assent is induced by a fraudulent or material
misrepresentation by a 3rd PARTY upon which he was justified in relying
 UNLESS the other party to the transaction in good faith and
without reason to know of the misrepresentation either gives
value or relies materially on the transaction
b. Nondisclosure
• Traditional view = Swinton v. Whitinsville (still accepted in some jurisdictions)
*There is no duty to speak or disclose the info about the termites (the non-
apparent defect) when not questioned about it – no misrepresentation (just as a
buyer does not have a duty to disclose a non-apparent virtue)
*”Buyer Beware”
*NY probably still follows this rule
• Modern View = Weintraub v. Krobatsch & Restatement (not accepted in all jurisdictions)
*There IS a duty to speak “whenever justice, equity, and fair dealing demand it”
Weintraub
*To determine when there is a duty, ask:
-was it a deliberate concealment?
-was it a latent defect?
-was it of such great magnitude or significant in nature to justify
rescission?
* Restatement §160 says that an action intended/know to be likely to prevent
another from learning a fact = an assertion that the fact does not exist (fraudulent
misrepresentation)
* Restatement §161 says that a person’s nondisclosure of a fact known to him =
an assertion that the fact does not exist in these cases only:
(1) Where he knows disclosure of the fact is necessary to prevent some
previous assertion from being a misrepresentation or from being
fraudulent or material
(2) Where he knows disclosure of the fact would correct a mistake of the
other party as to a basic assumption on which that party is making the
contract and if nondisclosure of the fact amount to a failure to act in
good faith and in accordance with reasonable standards of fair dealing
(3) Where he knows disclosure of the fact would correct a mistake of the
other party as to the contents or effect of a writing, evidencing or
embodying an agreement in whole or part

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 (4) *Where the other person is entitled to know the fact because of a
relation of trust and confidence between them

C. Capacity
• Restatement § 48 provides that an offeree’s power of acceptance is terminated when the
offeree is deprived of legal capacity to enter into the proposed contract
• Two types of individuals who don’t have capacity to make a contract:
(1) Infants (people under the age of majority, usually 18)
(2) Mentally Ill (may include individuals intoxicated to the point where they can be
considered mentally ill)
• People who don’t have capacity can void a contract at their option (they don’t have to, it just
makes the contract voidable)
• The other party cannot get out of the contract by saying that it is void because the other
person is an infant or mentally ill – they are bound
• Exceptions (where those lacking capacity cannot disaffirm a contract):
o Contracts for necessaries (things that are indispensable to living – whatever is needed
for subsistence, health, comfort, and education)
 This is a fact sensitive issue – for each individual, different things may be
considered a necessary
 Luxuries fall outside of the necessary category, so a car may be a necessary, but
not a Porsche
 Justification is that merchants would stop selling necessaries to minors
o Ratification
 Once a person reaches the age of majority or is no longer mentally ill and they
affirm a contract by action or inaction, they lose the right to disaffirm
o Fraud MAY BE an exception
 When a minor misrepresents his age, like showing a fake ID
 Courts can deal with this in 2 ways:
1. Estopping the minor from denying the age he said he was, so he cannot
disaffirm the contract, or
2. Will allow the minor to disaffirm and rescind, but will then be liable in tort
damages for fraud
 The other party will probably be able to void the contract if the infant
misrepresents his age

D. Duress and Undue Influence (hard to prove, rarely successful)

a. Duress
• By physical compulsion (taking a person’s hand and forcing them), or
• By non-physical compulsion, like economic duress (which is hard to pinpoint)
o When does that pressure cross the line from only commercial pressure to economic
duress?
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 • Elements of Economic Duress:
(1) Wrongful Threat
(2) Free will of the party receiving the threat is overborne (the party cannot exercise their
free will)
• Restatement § 175 says that duress by threat makes a contract voidable when:
(1) Party’s manifestation of assent is induced by an improper threat that leaves him no
reasonable alternative
(2) Party’s manifestation of assent is induced by a 3rd party UNLESS the other party to the
transaction in good faith and without reason to know of the duress either gives value or
relies materially on the transaction

• Restatement § 176(1) says a threat is improper when:

(a) A crime or a tort is threatened,
(b) Criminal prosecution is threatened,
(c) The use of civil process is threatened and the threat is made in bad faith, or
(d) ***The threat is a breach of the duty of good faith and fair dealing under a contract
with the recipient
o We now look to duress concerning the “hold up game” when there is a pre-existing
duty and it is usually grounds for rescission
• Restatement §176(2) says a threat is improper if the resulting exchange is not on fair terms
AND:
(a) The threatened act would harm the recipient and would not significantly benefit the
party making the threat,
(b) The effectiveness of the threat in inducing the manifestation of assent is significantly
increased by prior unfair dealing by the party making the threat, or
(c) What is threatened is otherwise a use of power for illegitimate ends
• Think of Austin v. Loral (Loral had to accept Austin’s terms or they could not meet their
deadline, and they tried to find another subcontractor but they couldn’t
b. Undue Influence
• Undue influence is unfair persuasion of a party who is under the domination of the person
exercising the persuasion, or who by virtue of the relation between them is justified in
assuming that the person will NOT act in a manner which would be detrimental to his
welfare (Restatement §177(1))
• Restatement § 177 also says that undue influence makes a contract voidable by the victim
when:
o The party’s manifestation of assent is induced by undue influence
o The party’s manifestation of assent is induced by a 3rd party UNLESS the other party
to the transaction in good faith and without reason to know of the undue influence
either gives value or relies materially on the transaction
• To determine whether there is undue influence (Odorizzi):
(1) Subservient object and dominant subject
(2) Lessened capacity of the subservient object to make a free contract
• Over-persuasion may include (Odorizzi):
-unusual or inappropriate time
-unusual place
-demand that business be finished at once
-emphasis on consequences of delay
-multiple persuaders against a single subservient party

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 -absence of 3rd party advisors to subservient party
-statements that there is no time to consult financial advisors or attorneys

E. Illegality and Public Policy

• A court will not enforce a contract that is illegal or against public policy
o Example of illegality: the sale of drugs, or a contract to injure someone else
o Example of against public policy: unfair exculpatory clauses and unfair covenants not
to compete
• An unfair exculpatory clause protects a party from being sued should an incident arise
(Power Ridge snow tubing injury, exculpatory clause was unenforceable because it was
against public policy because of the specific nature of D’s operation)
o *NY does not permit (by statute) exculpatory clauses in a place of “public
amusement” – General Obligations Law
• Covenants not to compete are usually found in employment Ks and include terms that should
the employee leave the employer, he will not compete by doing business for a given amount
of time in a given geographical area
o Jurisdictions are split on enforcing these covenants, and it may depend on the
specifics of a case (Valley Medical Specialists v. Farber – covenant was not
enforceable because Farber was a doctor so public policy outweighed Valley’s
protectable interests)
• Restatement §178 says that a K or term is unenforceable if legislation provides that it is
unenforceable, or its enforcement is clearly outweighed in the circumstances by a public
policy against the enforcement of such terms
• Other examples include: Ks which interfere with family, Ks violating the K of someone else,
Ks to commit a tort, which agree to excuse misrepresentations of fact...

F. Unconscionability (hard to prove, rarely successful)

• Derived from UCC 2-302, but also can be applicable to contracts other than the sale of goods
(think of Williams v. Walker-Thomas – furniture bought on installment plan by poor woman
with 7 children)
• Look at substantive content AND procedural content:
o Fairness and reasonableness
o Terms and procedures
 How it was formed
 What does it look like? Fine print, very long?
 Huge disparity in bargaining power
• Unconscionability = (1) an absence of meaningful choice on the part of one party + (2)
contract terms which are unreasonably favorable to the other party

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 o All circumstances surrounding the transaction must be considered to determine
whether a meaningful choice is present
• This doctrine ensures that the more powerful party won’t “surprise” the other party with
some overly oppressive term
• Jurisdictions are split – some require both substantive AND procedural unconscionability,
some may find one or the other sufficient grounds to rescind
o *NY does not require both, as long as the P can show one or the other strongly

G. Statute of Frauds
• “Within the Statute of Frauds” means that it is the type of agreement the law requires to be in
writing
• Types of K required to be in writing:
o Agreements for the sale of goods of $500 or more (UCC 2-201)
o Real Estate contracts for more than 1 year (including 2 year leases and sale of land)
 1 year leases and month to month leases do not have to be in writing (however
it is probably a good idea to have it in writing)
o Contracts not capable of being performed within 1 year of the date of entering into
the contract
 This includes, for example, an employment contract signed on 12/1/06 for
starting work on 1/1/07 for 1 year CANNOT be completed 1 year from
12/1/07 (only on 1/1/08), or an agreement made on 10/1/05 for a musician to
perform on 5/1/07 CANNOT be completed in 1 year
 This category does not include an agreement which could be capable of
completing in one year, like a contract to build a house (may or may not be
completed in a year, but it is possible)
• “Statute of Frauds is Satisfied” means that if it is within the statute of frauds (required by law
to be in writing), it is in writing and signed

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