1. American Contract Law in a Comparative Perspective Professor Nathan M. Crystal University of South Carolina School of Law

2. Last Lecture Process of Agreement –Bilateral contracts –Unilateral contracts –Firm offers

3. Process of Agreement IV. Incomplete Bargains V. Pre-acceptance reliance VI. Battle of the Forms

4. IV. Incomplete Bargains

5. Leading case Walker v. Keith (Kentucky 1964)

6. Facts Walker leased a piece of real estate from Keith for a period of 10 years for a rent of $100 per month. The lease gave Walker the right to renew for another 10 years on the same terms as the original lease except for the price.

7. Facts (2) With regard to the renewal rent, the lease said that the rent “shall be agreed upon” by the parties based on a comparison of rental values and business conditions between the date of the original lease and the renewal date. Walker gave notice of renewal, but the parties were unable to agree on the renewal rent.

8. Decision Walker sued to enforce the renewal provision. The trial court set a rent of $125 per month. The Kentucky Court of Appeals held that the renewal clause was indefinite and unenforceable.

9. Reasoning The Court recognized that some courts had enforced an “agreement to agree” on rent by setting a reasonable rental. This court disagreed and gave two reasons.

10. Reasoning (2) (1) Paternalism. The court would be making an agreement for parties that they were capable of making on their own. (2) Efficiency. Enforcement of an agreement to agree is inefficient because it requires extensive judicial time to set the rent. Parties should be given an incentive to set their own rent and avoid this expense.

11. Argument for enforcement Courts that have enforced agreements to agree have generally focused on the intention of the parties. –By including the clause, the parties show an intention for the clause to have legal effect. –Refusal to enforce the clause violates their intention.

12. Current US Law--General Restatement (2d) Contracts §33, Certainty (2) The terms of a contract are reasonably 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.

13. Current US Law-UCC UCC 2-204(3), Formation in General Even if 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.

14. UCC—open price term UCC §2-305(1), Open Price Term The parties if they so intend may conclude a contract for sale even if 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; (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...

15. Pennzoil v. Texaco On January 3, 1984, Pennzoil and Getty Oil entered into an agreement in principle under which Pennzoil agreed to acquire all of the shares in Getty Oil at a price of $110 per share plus a possible $5 per share additional payment. The agreement in principle was subject to execution of formal merger agreement.

16. Pennzoil v. Texaco (2) On January 6, 1984, Getty agreed to sell its shares to Texaco at $125 per share. Pennzoil sued Texaco for tortious interference with its contract with Getty. Pennzoil recovered $7.53 billion in actual damages plus $3 billion in punitive damages. Texaco lost appeals in state and federal courts. It then filed for bankruptcy protection and eventually settled the case by paying Pennzoil $3 billion.

17. Analysis of Pennzoil v. Texaco Texaco contended that there was no contract between Getty and Pennzoil because the parties had not yet executed a formal merger agreement. The Texas court instructed the jury that whether a contract existed was a question of fact to be determined by the jury. Case is a dramatic example of modern approach to “agreements to agree”.

18. International and European Law CISG Arts. 14(1) and 55 UNIDROIT Principles Arts. 2.1.14, 2.1.13, 5.1.7 European Principles Arts. 2:103, 6:104

19. CISG Art. 14(1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.

20. CISG Art. 55 Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned.

21. UNIDROIT Principles, Art. 2.1.14(1) Contract with Terms Deliberately Left Open: (1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence.

22. UNIDROIT Principles 2.1.14(2) (2) The existence of the contract is not affected by the fact that subsequently (a) the parties reach no agreement on the term; or (b) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.

23. UNIDROIT Principles 2.1.13 Conclusion of contract dependent on agreement on specific matters or in a particular form Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form.

24. UNIDROIT Principles 5.1.7 Price determination (1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price....

25. European Principles Art. 2:103 Sufficient Agreement (1) There is sufficient agreement if the terms: (a) have been sufficiently defined by the parties so that the contract can be enforced, or (b) can be determined under these Principles. (2) However, if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached.

26. European Principles Art. 6:104 Determination of Price Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price. See also Arts. 6:105 (unilateral determination by a party) and 6:106 (determination by a third person)

27. V. Pre-acceptance Reliance

28. Leading Case James Baird Co. v. Gimbel Brothers, Inc. (Second Circuit Court of Appeals 1933)

29. Facts Pennsylvania Department of Highways was taking bids for the construction of a public building. Gimbel Bros., a linoleum supplier, sent an employee to the office of one of the contractors who had the specifications for the project.

30. Facts (2) The employee underestimated the amount of linoleum by 1/3. On December 24 Gimbel Bros. sent offers to 20-30 potential contractors for the project, offering to supply the linoleum for the project at two prices, depending on quality.

31. Facts (3) The offer stated that “if successful in being awarded this contract,” prices were guaranteed and that the offer was being made for “prompt acceptance after the general contract has been awarded.” On December 28 James Baird received the offer.

32. Facts (4) Later that day Gimbel Bros. discovered its mistake and telegraphed all contractors that it was withdrawing its offer and would be substituting a new offer at approximately twice the price. This withdrawal reached James Baird on the afternoon of the 28 th, but after James Baird had submitted its bid to PDH.

33. Facts (5) On December 30 James Baird was awarded the contract and insisted that Gimbel Bros. honor its original bid. On January 2 James Baird formally accepted Gimbel Bros. original offer. When Gimbel Bros. refused to honor the offer James Baird brought suit.

34. Decision The Court of Appeals found for the defendant Gimbel Bros. No breach of contract No contract was formed because Gimbel Bros. revoked its bid before James Baird accepted its bid. Use of the bid by James Baird did not constitute acceptance because the bid referred to acceptance after the award of the general contract.

35. Decision (2) Option Contract No option contract because James Baird did not give any consideration for Gimbel Bros.to make its bid irrevocable. Promissory Estoppel Court indicates that promissory estoppel applies when a promise that does not seek an exchange is relied on. Offers are not intended to become promises until consideration received.

36. Current US Law US law now rejects decision in James Baird. California Supreme Court adopted contrary view in Drennan v. Star Paving Co. This view has been incorporated into Restatement (2d) of Contracts §87(2).

37. Restatement (2d) of Contracts §87(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action of forbearance is binding as an option contract to the extent necessary to avoid injustice. Note that section is similar to Restatement 90.

38. International and European Law CISG Art. 16(2) UNIDROIT Principles Art. 2.1.4(2) European Principles Art. 2:202(3)

39. CISG Art. 16(2) (2) However, an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer

40. UNIDROIT Principles Art. 2.1.4(2) Revocation of Offer... (2) However, an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.

41. European Principles Art.2:202(3) Revocation of an Offer (3) However, a revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; or (b) it states a fixed time for its acceptance; or (c) it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.

42. VI. The Battle of the Forms

43. Background—Assumptions of Traditional Contract Law The parties enter into preliminary negotiations seeking a contract. At some point, one party makes an offer. The other party reviews the offer and decides whether to accept. The other party can accept, reject, or make counter-offer. The process continues until a contract is formed or the parties break off negotiations.

44. Background (2) Modern contract making often does not proceed in this way. In commercial transactions, one party will often submit an order using its standard form document. The other party will respond using its standard form document.

45. Background (3) Sometimes there may be negotiations over basic terms such as price and delivery date. Standard terms are rarely discussed. Parties often behave as if a contract exists, even though standard terms do not agree or are in conflict. This situation is commonly referred to as the “battle of the forms”.

46. Leading case Roto-Lith, Ltd.v. F.P. Bartlett & Co. (First Circuit Court of Appeals 1962)

47. Facts Plaintiff manufactured cellophane bags used for wrapping vegetables. Defendant supplied a chemical used to seal the bags. Plaintiff placed an order for the chemical using its standard order form. Defendant accepted using a form that disclaimed all warranties.

48. Facts (2) Defendant’s acceptance stated that plaintiff must notify defendant immediately if its terms were not acceptable. Plaintiff did not object and accepted delivery of the shipment of chemicals. The chemical was defective and the plaintiff brought suit for breach of warranty.

49. Decision The court held that the defendant seller’s form constituted a counteroffer rather than an acceptance. The buyer accepted the counteroffer by receiving the chemical without objection. Therefore, the defendant’s disclaimer of warranties was part of the contract.

50. Current US law Roto-Lith is now governed by UCC §2-207, which was revised just last year.

51. UCC §2-207 (2004 rev.) Terms of Contract; Effect of Confirmation (1) Subject to Section 2-202, if (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract are:

52. UCC §2-207 (a) terms that appear in the records of both parties; (b) terms, whether in a record or not, to which both parties agree; and (c) terms supplied or incorporated under any provision of this Act.

53. Roto-Lith under revised 2-207 A contract exists by virtue of the conduct of the parties. The parties did not agree on a disclaimer of warranties, nor does that term appear in both forms.

54. Roto-Lith under revised 2-207 Therefore the contract includes terms supplied by the Code –Disclaimers are not implied terms –Warranty of merchantability is an implied term, UCC §2-314. If the chemical was defective, the plaintiff could recover for breach of this warranty and the disclaimer would not apply.

55. Battle of the Forms under International and European Law CISG, Art. 19 UNIDROIT Principles Arts. 2.1.11, 2.1.22 European Principles Arts. 2:208, 2:209

56. CISG Art. 19(1) (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer.

57. CISG Art.19(2) (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

58. CISG Art. 19(3) (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

59. Analysis of CISG on battle of the forms Result unclear but appears to adopt traditional view of Roto-Lith decision. However, sufficiently unclear that courts could reach results similar to current UCC 2-207.

60. UNIDROIT Principles Art. 2.1.11(1) Modified Acceptance (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

61. UNIDROIT Principles Art. 2.1.11(2) (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

62. UNIDROIT Principles Art. 2.1.22 Battle of Forms Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

63. Analysis of battle of the forms under UNIDROIT Principles Under 2.1.22 parties reached agreement except on standard terms. Disclaimer not found in both forms. Therefore, disclaimer not part of contract. Buyer could recover if chemical defective.

64. European Principles Art. 2:208(1) Modified Acceptance (1) A reply by the offeree which states or implies additional or different terms which would materially alter the terms of the offer is a rejection and a new offer.

65. European Principles Art. 2:208(2) (2) A reply which gives a definite assent to an offer operates as an acceptance even if it states or implies additional or different terms, provided these do not materially alter the terms of the offer. The additional or different terms then become part of the contract.

66. European Principles Art. 2:208(3) (3) However, such a reply will be treated as a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; or (b) the offeror objects to the additional or different terms without delay; or (c) the offeree makes its acceptance conditional upon the offeror’s assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time.

67. European Principles Art. 2:209(1) Conflicting General Conditions (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance.

68. European Principles Art. 2:209(2) (2) However, no contract is formed if one party: (a) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or (b) without delay, informs the other party that it does not intend to be bound by such contract..

69. European Principles Art. 2:209(3) (3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties.

70. Analysis under European Principles Disclaimer was part of general conditions. Under 2:209(1) contract formed. 2-209(2) does not apply. Disclaimer not found in both forms. Therefore would not be part of contract.

71. Comparison of US and International Law Largely in agreement, except perhaps for CISG. When standard forms used, terms in standard forms only become part of contract when forms agree or when parties actually agree. If no agreement, principles supplied by law govern. Seems to be correct result as matter of policy. When standard forms used, no basis for giving preference to either party’s form.