Chapter Twelve | Performance And Discharge

Most contractual relations will be terminated or ended according to the provisions or terms of the agreement, i.e., by performance of the parties. However, some contracts will be terminated or ended by certain acts of the parties, by operation of law, by impossibility of performance (an issue discussed previously in the chapter on consideration), mutual rescission or agreement of the parties, or through some legally recognized excuse. When payment of money is called for in a contract, the contract will be completed by the payment of money. If a check is tendered by a debtor or by a purchaser, the payment by the check is a conditional payment and the underlying obligation is not discharged until the check is actually “paid” or honored by the bank. Unless the agreement stipulates otherwise, a creditor can refuse to accept a check because technically a check is not legal tender. Rather, a check is a substitute for money. [See UCC §2 511.] If payment is only to be accepted in cash or in some other form (for example, a barter transaction), this should be clearly stated in the contract. A tender is defined as an “unconditional offer of a debtor to pay to the creditor the exact amount due on the date due.” If a creditor refuses to accept a tender by the debtor, the debt is not discharged, but the refusal to accept the tender stops the running of any interest charges, may lift any liens filed against property held by the debtor, and may also prevent charging court costs and attorney’s fees to the debtor in the event a suit is filed.

Time For Performance

Where a time of performance is stated in the contract and the time is clear and unambiguous, performance must be made on or before that date. When no time is specified in the contract, a party has a reasonable time to perform. Where the nature of the contract is such that time is not an important factor, reasonable delay may be permitted by a court. Where a clause in a contract expressly states “time is of the essence” or the nature of the contract itself is such that time is obviously an important factor (construction contracts or contracts for purchase or sale of perishable goods), the failure to perform on time may be actionable as a breach and may under certain circumstances permit a party to rescind a contract, cancel a contract, seek a substitute performance, seek the remedy of cover or resale, or seek monetary damages.

The Doctrines Of Material Breach And Substantial Performance

When a party fails to perform a promise according to its terms, it is important to determine if the breach is material. If the breach is material, the aggrieved party may sue for “total breach” and the aggrieved party may have the power to cancel the contract. If the breach is not material, the aggrieved party may sue for “partial breach,” but may not cancel the contract. While the rules may seem clear, there is no simple test to determine whether the breach is material. Materiality is ordinarily a question of fact for a jury. Among the factors to be considered are:

To what extent, if any, the contract has been performed at the time of the breach. “A breach which occurs at the very beginning [of a contract] is more likely to be deemed material even if it is relatively small.” (Note, 21 Colum. L. Rev. 358 (1921)).
A willful breach is more likely to be considered as material than a breach caused by negligence or other circumstances.
A quantitatively serious breach is more likely to be considered material.

It is recognized that full performance is required in most cases to discharge a contractual obligation. It is also recognized that some agreements (for example, certain construction contracts) are quite complex. In such cases, a court may apply the doctrine of substantial performance to determine if a breach has occurred. This doctrine permits recovery where there has been substantial performance, subject to an offset (deduction) for a nominal, trifling, or technical breach, or a departure from the strict letter of the contract. In order to apply the substantial performance doctrine, the part of the contract that is unperformed must not destroy the value or the purpose of the contract and the doctrine does not apply where the breach is willful or intentional.

Performance Subject To The Standard Of Satisfaction

When one party to an agreement contracts to “personally satisfy” the promisee, courts will apply one of two tests, depending on the nature of the contract: When a contract involves personal taste, skill or fancy, the promisee has, in effect, the final word and may reject a performance, even if it is alleged that such a rejection is subjectively arbitrary or capricious. However, most courts will require at least a “good faith” standard in the rejection; that is, a court will require an “honest or good faith reason” for the rejection. The interesting case of former Secretary of State Henry Kissinger and his rejection of an official portrait on ground that he “just didn’t like it” provides an application of this rule. Where the subject matter of the contract concerns matters that are not purely personal in nature, the courts will apply an objective standard; that is, if a reasonable person would be satisfied with the performance, the promisor may be permitted to recover under the terms of the contract. This issue would be one for a jury to determine.

Example

A manufacturer of pre-fabricated housing offers the following statement: “All windows, doors, and other parts of the home all made to your satisfaction.”

In this case, most courts would apply the objective or reasonable person standard to judge a rejection of the items described in the contract.Contracts may also contain a provision that completion of the contract “depends upon the satisfaction of a third party” (an architect, a building inspector, an appraiser, etc.). In such a case, the court would apply an objective test and might permit recovery of amounts due under the contract if the court determines that the certificate of approval is unnecessary, or was withheld due to “bad faith,” fraud, mistake, or gross error on the part of the third party. Read the Plante case. What standard did the court apply? Note especially the measure of damages.

Case Study

Plante v. Jacobs

Supreme Court Of Wisconsin, 10 WIS. 2D 567, 103 N.W. 2D 296 (1960)

Overview

The Jacobs’ entered into a written contract with the plaintiff, Plante, to furnish the materials and to construct a house on their lot, in accordance with plans and specifications, for a sum of $26,756. During the course of construction, the plaintiff was paid $20,000. Disputes arose between the parties concerning the work being done. The Jacobs refused to continue paying. The plaintiff did not complete the house. The trial court found that the contract was substantially performed. The Jacobs were told to pay $4,152.90 plus interest and court costs.

Outcome

The appellate court upheld the trial court’s judgment. Although there were some twenty items of incomplete or faulty performance by the builder, none of these was made the essence of the contract. Therefore the court held that substantial performance was evident. The court held, however, that the correct rule for determining damages due to faulty construction amounting to incomplete performance “is the difference between the value of the house as it stands with faulty and incomplete construction, and the value of the house if it had been constructed in strict accordance with the plans and specifications. This is the diminished value rule.”

What standard did the court apply in the Plante case? Note especially the measure of damages.

Discharge By Acts Of The Parties (Conditions)

The legal distinction between a covenant and a condition is very important. A covenant is a promise and determines what must be performed in order to discharge a contractual duty. Conditions determine when and if a duty must be performed at peril of breach of contract. The failure of a promisor to perform a covenant may be a breach of contract. If circumstances arise which leave a condition unsatisfied, the legal consequence is that the dependent promise does not become a matter of any contractual duty. Failure to satisfy a condition, on the other hand, is never a breach of contract. Many contracts contain conditions, either express or implied, that control performance. A condition is traditionally defined as an act or an event, other than a lapse of time, which affects a duty to render a promised performance. These conditions are termed concurrent, precedent, or subsequent. Concurrent conditions are those conditions that require that the performance of both parties take place at the same time. Thus, neither party can demand that the other party perform first. Most bilateral contracts contain concurrent conditions (i.e., the sale of goods, which requires both payment and delivery to occur simultaneously; or a real estate transaction where the buyer tenders the money and the seller tenders the deed). A condition precedent is an act, an event, circumstance, or contingency that must occur according to the express or implied terms of the agreement or be satisfied or excused before a duty of performance is required under a contract. A non-technical formulation of a condition precedent might be: “I am not liable to perform this promise unless _______________.” In the case of a unilateral contract, Smith’s performance is a condition precedent to Jones’ duty of payment. As an example, an insurance policy may require that an insured driver must give notice of a loss within a certain specified period after the occurrence of the loss. Failure to provide the insurance carrier with the required notice may permit the insurer to deny liability or coverage. A second example occurs in many real estate contracts: “This contract is contingent upon the buyer securing a suitable mortgage….” A condition subsequent is any fact, the existence or occurrence of which by agreement of the parties, operates to discharge or terminate an existing duty of performance. For example, a contract may provide that a party will be released from “any and all obligations” upon the happening of a certain event (for example, “if interest rates rise to 10% or more by June 1, 2012, the borrower may withdraw from this transaction”). A simple example can be found in the following: “I am liable to perform this promise until or unless __________ [a factual circumstance will be inserted].” Parties to a contract may mutually agree to terminate or rescind an agreement and place each other in their original positions. The surrender of rights under the original agreement by each party is the consideration for the mutual agreement of rescission. It should be noted that the mutual rescission of a contract to sell or buy land would be required to be in writing under the Statute of Frauds.

Other Acts Of Termination

Novation

The abandoning of a prior contract and substituting a new contract in its place is termed a novation. A novation is accomplished by an agreement to discharge a previous contractual duty or to release the party who was originally bound to a contract and substitute a new party who agrees to undertake performance and to be bound by the contract. A novation may never be presumed (even from the passage of a significant amount of time) and must always be affirmatively proven by the party who is claiming a release from a prior contract. If the original contract was required to be in writing under the Statute of Frauds, so too must the novation be in writing. This is sometimes called the “equal dignity” doctrine.

Accord And Satisfaction

An accord is an agreement to substitute performance in satisfaction of an original debt or obligation. When the agreement is executed and satisfaction has been made, it is called an accord and satisfaction (discussed earlier in the case of A. G. King Tree Surgeons v. Deeb).

Anticipatory Breach

At common law, a breach of contract could not occur until the time for performance had arrived. However, since the English case of Hochester v. DeLaTour (1853), courts have recognized that a total breach of a contract may occur if a party unequivocally repudiates the contract—even prior to the date stipulated in the contract. A repudiation is a “positive statement to the promisee or other person having a right under the contract, indicating that the promisor will not or cannot substantially perform his contractual duties.” (Martin v. Kavanewsky, 157 Conn. 514 (1969)). The facts of Hochester v. DeLaTour (118 Eng. Rep. 922 (1853)) are illuminating. In April of 1852, the plaintiff and defendant entered into a contract under which the plaintiff was to work for a fixed period of time commencing on June 1, 1852. On May 11, 1852, the defendant stated he would not perform. The plaintiff filed suit for breach of contract. The defendant contended that no breach could occur until the time for performance (June 1, 1852) had arrived. The court disagreed and in so doing created the doctrine of anticipatory breach. Under the common law, when an anticipatory breach occurs, the aggrieved party has the right to elect between two remedies. An aggrieved party may:

Wait until the time for performance and sue for the actual breach; or
Treat the repudiation as an anticipatory breach and sue immediately.

The UCC incorporated the common law rule concerning anticipatory repudiation in UCC §2-610. The UCC notes that the aggrieved party may “for a commercially reasonable time await performance by the repudiating party” or “may immediately resort to any remedy for breach.” As we will see in the discussion on sales, the Code also provides that when reasonable grounds for insecurity arise, a party may demand “adequate assurances of performance,” and in the interim, may suspend his performance until he receives such assurances. (UCC §2-609). The Code further provides that

“After receipt of a justified demand, failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.” Grounds for insecurity will be judged according to “reasonable commercial standards” of “good faith” and “honesty in fact.”

Operation Of Law

A contract may be discharged by operation of law when a statute has made the subject matter of the agreement unlawful, where the contract is judged to be in a violation of public policy, or where a statute may excuse performance. Chapter 12 discusses the area of the legality of the subject matter of a contract. For example, a discharge in bankruptcy is the result of a proceeding in which the debtor is released from an obligation to pay a debt. By law, the discharge, properly granted, terminates the obligation to pay the debt.

Impossibility

Review the materials presented earlier on the termination of offers relating to objective and subjective impossibility. Here is another “dance lesson” case. It is far less dramatic than the Vokes case!

Case Summary

Parker v. Arthur Murray, Inc.

Appellate Court Of Illinois, 2D Div., 1St Dis.

10 Ill. App. 3D 1000, 295 N.E. 2D 487 (1973)

BACKGROUND AND FACTS Plaintiff Parker, a thirty seven year old college educated bachelor who lived alone, contracted over two years for a total of 2,734 hours of dance lessons for which he had paid $24,812.80. Each contract, and each extension, contained the same boldface words, “NON CANCELABLE CONTRACT,” and some included a statement that no refunds would be made. Parker was seriously injured in an automobile accident and rendered incapable of continuing his dance lessons. Parker sued Arthur Murray to recover money paid for unused lessons. DECISION AND RATIONALE The trial court’s ruling that impossibility of performance was grounds for rescission was upheld, and despite the contract provisions Parker was allowed to recover the prepaid sums of money for unused lessons. The appellate court held that the plaintiff never contemplated waiving the right to invoke the doctrine of impossibility of performance. “Although neither party to a contract should be relieved from performance on the ground that good business judgment was lacking, a court will not place upon language a ridiculous construction. We conclude that plaintiff did not waive his right to assert the doctrine of impossibility.” The modern doctrine of impossibility can be traced to the 1863 case of Taylor v. Caldwell (122 Eng. Rep. 309 (K.B. 1863). In this case, the defendant had promised to allow the plaintiff to use his music hall for giving concerts. Prior to the time of performance, a fire destroyed the music hall. The English court held that the defendant was excused from performance and that his failure to perform did not constitute a breach of contract. Since this case, American courts have held that objective impossibility is an excuse for non-performance of a contract where there has been a destruction, material deterioration, or unavailability of the subject matter or means of performance of the contract through no fault of a party seeking the excuse. In some cases, a court will require the parties to have contemplated a particular source of supply or the condition when the parties entered into an agreement. It is interesting to note that the principle of impossibility is well illustrated by a number of cases involving the closing of the Suez Canal in 1956 and in 1967. (See 23 Rutgers L. Rev. 41 (1969). Because a substitute route around Africa was available, the court held that canal closings neither excused performance nor were grounds for the recovery of additional compensation under the theory of unforeseen difficulties. Finally, the Restatement, Section 281, basically mirrors Section 2-615 of the Uniform Commercial Code and has introduced the concept of “commercial impracticability” into the discussion. It suggests that increases in costs “well beyond the normal range” that create “extreme and unreasonable difficulty” or “expense” could trigger the application of the doctrine of commercial impracticability, thus excusing performance or permitting a party to seek additional consideration.

Ethical Considerations

Time Is Of The Essence

Contracts frequently contain a “time is of the essence” clause. Are there any circumstances where a court should ignore such a clause and refuse to enforce it?

Debt Discharge

Sonny owes his Dad $10,000. One night, Sonny offers his Dad $5,000 to completely settle the debt and Dad accepts this offer. Later, Dad brings suit against Sonny for the remaining $5,000. Should Dad’s acceptance of the $5,000 discharge Sonny’s debt?

Questions

Explain the doctrine of substantial performance.
How do courts address performance subject to the satisfaction of one of the parties?
Many contracts contain conditions. Explain conditions concurrent, precedent, or subsequent.
What are the requirements for the creation of a novation?
What is required to create an accord and satisfaction (refer to A.G. King Tree Surgeons v. Deeb)?
In the case of anticipatory breach of contract, an aggrieved party may select from which two options?
Explain how the doctrine of impossibility was applied in Parker v. Arthur Murray, Inc.

Chapter Fourteen | Agency

Introduction

Agency is an important area of the law that involves a special relationship between two parties: a principal and the person, who represents the principal, termed the agent. In the Restatement (Third) of Agency, agency is defined as a “fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” In essence, the agent “steps into the shoes” of the principal in a business transaction.

The principal hires an agent to act on his or her behalf who is subject to the principal’s instructions and control. The agent is the individual authorized to act for and on behalf of a principal. This legal arrangement creates a fiduciary relationship (a relationship of trust and confidence) in which the agent has the duty to act primarily for the principal’s benefit. For example, a fiduciary relationship exists between the client (the principal) and an attorney (the agent); or the owner of a piece of property (the principal) and a rental or sales agent (the agent).

Each state enacts its own laws concerning agency, many of which are similar in scope and import. However, some differences do exist. The application of agency law is especially important for U.S. interests doing business in other countries. Numerous American businesses are entering international markets through joint ventures or foreign direct investment activities. To avoid problems that arise from language differences and unfamiliarity with foreign laws and customs, many U.S. companies hire agents who are knowledgeable in these matters resulting in smoother operation of the business in the foreign market.

Creating The Agency Relationship

The extent of the authority in an agency relationship may be governed by an express agreement between the parties or may be implied from the circumstances of the agency. Like any contractual relationship, an agency relationship can only be created for a legal purpose. Further, the formation of an agency must meet two requirements: The principal must not be a minor or be incompetent; likewise, the agent cannot be a minor or be incompetent. If these basic requirements are met, an agency relationship may be created in any of four ways: 1) by agreement; 2) by implied authority; 3) by estoppel (called apparent agency) or 4) by ratification. The agency contract is not required to be found in writing, unless a provision of the Statute of Frauds stipulates that the contract must be written—for example, a real estate broker’s contract to sell real property. The contract need not follow any special format, or even involve payment to the agent.

Agency By Agreement

The relationship that is created pursuant to a written or oral contract is termed an agency by agreement or an express agency, under which the principal gives the agent the authority to act on his or her behalf. If the principal does not hire an additional party to carry out the same or similar duties, the principal and agent have formed an exclusive agency contract.

A specific legal document, called a power of attorney, gives an agent the power to sign legal documents on behalf of the principal. A power of attorney creates an agency relationship. A power of attorney may be general or special. A general power of attorney is very broad in the authority it gives to the agent. A special power of attorney gives an agent limited powers to act in specific ways for specific purposes or for a specified period of time as enumerated in the document creating the agency relationship. The agent is called an attorney-in-fact, although the agent does not have to be an attorney.

A special type of a power of attorney, called a “medical power of attorney” or “advance directive,” is commonly used in relation to health care matters. If the principal is unable to make health-related decisions, the agent will have the legal power to act on his or her behalf.

Agency By Implied Authority

An agency relationship can also be created by the conduct of the parties, similar to the creation of an implied-in-fact contract. The specific circumstances surrounding the relationship determine the extent to which an agent may conduct business on behalf of the principal. In general, an agency by implied authority may not conflict with an agency by agreement. Courts will permit an agent to receive payments owed to the principal, hire and discharge employees, buy equipment and supplies, and enter into contracts. Case law demonstrates how far various courts will allow implied authority to stretch. If the express agency does not provide sufficient details to cover the many contingencies that might arise during the course of the agency relationship, the agent is said to possess certain implied authority to act on behalf of the principal. This implied authority is referred to as incidental authority. In addition, under certain circumstances where the agent is unable to contact the principal for specific instructions, the agent has implied emergency authority to take “all reasonable actions to protect the principal’s property and rights.”

Case Study

Helene A. Gordon Et Al, v. Andrew Tobias

Supreme Court Of Connecticut, 262 CONN. 844; 817 A.2D 683 (2003)

Overview:

Plaintiff landowners filed an action to quiet title on the subject property in their favor. The Superior Court in the Judicial District of New Haven (Connecticut) entered judgment for the landowners after finding that payments made to the original mortgagee on the property constituted payment to defendant assignee, and consequently discharged the landowners’ obligation under the mortgage. The assignee appealed.

The landowners purchased a condominium subject to a mortgage in favor of the original mortgagee. The mortgage was later assigned, but the landowners continued to make payments to the original mortgagee. The original mortgagee received full payment from the landowners but continued to make periodic payments to the assignee until the original mortgagee’s president died, after which the assignee refused to release the mortgage. On appeal, the assignee claimed that there was insufficient evidence in the record to support the trial court’s finding that the original mortgagee was an agent of the assignee for the purposes of collecting payments on the mortgage that he held on the subject property. The supreme court held that the trial court properly found that the mortgagee had apparent authority to collect the mortgage payment due on the mortgage held by the assignee. The assignee collected payments for more than two years knowing that the loan had matured, yet he neither objected to nor demanded full payment on the amount due. Rather, the assignee requested invocation of a higher interest rate to provide the landowners incentive to pay off the loan. 

Outcome:

The trial court’s judgment was affirmed.

Regarding whether the agency relationship that was created was an implied agency, the court stated, “Implied authority is actual authority circumstantially proved. It is the authority which the principal intended his agent to possess. . . Implied authority is a fact to be proven by deductions or inferences from the manifestations of consent of the principal and from the acts of the principal and [the] agent.” Connecticut National Bank v. Giacomi, 242 Conn. 17, 70, 699 A.2d 101 (1997). The court found that the defendant had authorized Mutual to collect monthly payments on the note secured by the mortgage on the plaintiffs’ property and remit those payments to him. The court stated, “Apparent authority is that semblance of authority which a principal, through his own acts or inadvertences, causes or allows third persons to believe his agent possesses. . . Consequently, apparent authority is to be determined, not by the agent’s own acts, but by the acts of the agent’s principal. . . The issue of apparent authority is one of fact to be determined based on two criteria. . . First, it must appear from the principal’s conduct that the principal held the agent out as possessing sufficient authority to embrace the act in question, or knowingly permitted [the agent] to act as having such authority. . . Second, the party dealing with the agent must have, acting in good faith, reasonably believed, under all the circumstances, that the agent had the necessary authority to bind the principal to the agent’s action” Tomlinson v. Board of Education, 226 Conn. 704, 734-35, 629 A.2d 333 (1993).

Agency By Estoppel (Apparent Agency)

Agency by estoppel or apparent agency arises when the principal creates the “appearance of an agency” that in actuality does not exist in fact. When an apparent agency is created, the principal will be estopped from denying the existence of the agency relationship and will be bound to any contracts entered by the apparent agent while acting within the scope of the apparent agency.

Case Study

Robert M. Bailey v. Richard Worton D/B/A Worton Asphalt & Paving

752 SO.2D 470 (2000)

Procedural Posture:

Appellant developer appealed from ruling of the DeSoto County (Mississippi) Chancery Court deeming appellee’s construction lien enforceable against appellant on grounds appellant’s agent had the apparent authority to act for appellant in dealings with appellee.

Overview:

Appellant developer, Bailey, hired general contractor Ray and Associates to build and sell a house on appellant’s property (with the proceeds divided between them); in the course of building the house, the contractor hired appellee, Worton – an asphalt company – to pave the driveway. When financial problems resulted in the contractor being unable to pay appellee for services rendered, appellee (Worton) sought and was granted a construction lien on appellant’s property. Appellant objected, arguing he had not entered into any agreement with appellee, but to no avail in trial court. On appeal, the state intermediate appellate court affirmed; the court reasoned that application of three-prong test for an agent’s apparent authority – acts or conduct of the principal indicating the agent’s authority, reliance thereon by a third person, and a change of position by the third person to his detriment – showed that contractor, Ray Associates, appeared to be acting on appellant’s behalf, and thus his (Ray’s) contract with appellee bound appellant. 

Outcome:

Judgment affirmed; application of three-prong test governing apparent authority by an agent established that appellant was bound by agent’s agreement with appellee, and thus was liable for payment.

The court noted, looking at the facts in a light most favorable to the decision of the court below, it is not unreasonable to conclude that Worton relied on Ray and no one else because of her apparent authority. So far as third persons are concerned, the apparent powers of an agent are his real powers. The power of an agent to bind his principal is not limited to the authority actually conferred upon the agent, but the principal is bound if the conduct of the principal is such that persons of reasonable prudence, ordinarily familiar with business practices, dealing with the agent might rightfully believe the agent to have the power he assumes to have. The agent’s authority as to those with whom he deals is what it reasonably appears to be. Where the relationship of principal and agent exists, if the principal places his agent in a position where he appears, with reasonable certainty, to be acting for the principal, and his acts are within the apparent scope of his authority, such acts bind the principal. On principles of estoppel, a principal, having clothed an agent with semblance of authority, will not be permitted, after others have been led to act in reliance on appearances thus produce, to deny, to the prejudice of such others, what he has theretofore tacitly affirmed as to the agent’s powers. Where an agent, with the knowledge and consent of his principal, holds himself out as having certain powers and transacts business with a third person, the principal is estopped from denying the authority of the agent. Under Mississippi agency law, a principal is bound by the actions of its agent within the scope of that agent’s real or apparent authority. Finding no error, we affirm the judgment of the chancellor.

Agency By Ratification

In a case where a person misrepresents him or herself to be an agent when in fact he or she is not, and the purported principal later accepts the benefits of or ratifies the unauthorized acts, the principal is said to have ratified the agency relationship. The ratification is tantamount to the principal authorizing the agent’s acts on the principal’s behalf in the first instance. In order for ratification to occur, the principal must have complete knowledge of the agent’s action. In addition, at the time the agent’s unauthorized acts occur, the third party with whom the agent dealt must know of the existence of the principal.

Duties Created by the Agency Relationship

Extensive case law on the subject and the Restatement 3rd of Agency recognize that an agency relationship creates duties, or legal obligations, on the part of both the principal and the agent. If either the principal or the agent breaches the agency agreement, the non-breaching party can sue to enforce these duties, seek monetary damages for breach of the agreement, or seek suitable remedies in a Court of Equity.

Duties Of An Agent To A Principal

An agent owes certain duties to the principal. The duties of the agent to the principal may be set forth in the agency agreement itself or may be implied by law. On the most basic level, the agent has a duty to notify the principal of information that the agent learns from a third party or from another source that will help effect the purposes of the relationship. This is known as the duty of notification.

An agent owes the principal certain duties of performance in which the agent must meet the standards of “reasonable care, skill, competence, and diligence.” An agent who does not perform his or her express duties, or who fails to exercise the standard of care, diligence, and skill, or who acts in a negligent or intentional manner will be liable to the principal for breach of the agency contract.

The primary duty the agent owes the principal arises from the agent’s fiduciary duty to act loyally for the principal’s benefit in all matters connected to the agency relationship and not to act adversely to the interests of the principal.

An agent might breach this duty of loyalty by acting in the following ways:

Undisclosed self-dealing;
Usurping an obligation that belongs to the principal;
Competing with the principal without the consent of the principal during the course of the agency relationship;
Improperly disclosing or misusing confidential information;
Engaging in a dual agency relationship without consent of all parties.

In normal circumstances, the agent owes a duty to the principal to maintain a complete and accurate record of all transactions undertaken on behalf of the principal. This is referred to as the duty of accountability, which encompasses the following:

Keeping records of all property and money received and expended during the course of the agency relationship;
Maintaining a separate account (no commingling) for the principal; and
Using the property of the principal is a manner authorized by the agency contract.

If an agent breaches the agency agreement, the principal may seek monetary damages, including asking a court to impose a constructive trust on any profits the agent earned as a breach of the duty of loyalty. A principal may also seek to rescind a transaction entered into with third parties because of the breach of loyalty by an agent.

Case Summary

Carl Shen v. Leo A. Daly Company

222 F.3D 472 (2000)

Carl Shen, was a former employee and designated agent of Leo A. Daly Company’s (Daly) Republic of China (Taiwan) office. When Daly refused to pay taxes assessed by the Taiwanese government, the government restricted Shen’s travel, forbidding him from leaving the country. Shen then sued Daly on multiple theories of liability for damages and injunctive relief. Shen prevailed in part in the district court. Both he and Daly appeal the judgment. We affirm in part and reverse in part.

BACKGROUND

Shen, a United States citizen with dual Taiwanese citizenship moved to Taiwan in 1989 to become managing director of Daly’s operation there. To conduct business in Taiwan, Daly was required to designate a “responsible person,” or legal representative in the country, and Shen was so designated. In November 1992, Daly decided to withdraw from Taiwan because of business setbacks. As a result, Daly terminated Shen, but Shen chose to remain in Taiwan. Daly, however, failed to remove Shen as its responsible person and failed to inform Shen that he was still registered as the company agent.

In December 1993, Shen received a notice from the Taiwan Tax Authority that it wanted to audit Daly’s 1992 Taiwan tax returns. Shen, in turn, notified Daly’s accounting firm in Taiwan and informed them he was concerned he could be held responsible for any deficiency because his “chop,” the Taiwanese equivalent of a signature, was affixed to the returns. Daly responded that it was “inconceivable” any tax could be owed because Daly had suffered large losses in Taiwan. In January 1994 through mid-October 1995, Shen requested Daly to indemnify him should the Taiwan Tax Authority impose the tax liability on him directly, to resolve the tax dispute and remove him as the responsible person. In May 1994, the Taiwan Tax Authority assessed a tax liability of approximately $80,000 against Daly for 1991 and 1992. Daly did not appeal the assessment, and it became final in June 1995. In October 1995, the Taiwan Ministry of Finance and the Bureau of Entry and Exit forbid Shen from leaving the country until resolution of the Daly tax issue. Daly’s attempt to extricate Shen through diplomatic channels failed. Shen sued for a declaratory judgment in Taiwan to remove himself as Daly’s responsible person. Although the court recognized Shen was no longer an employee of Daly, it denied relief because Daly had not replaced him as the responsible person. The Ministry of Finance also denied an appeal by Shen.

In 1997, Shen sued Daly in the United States District Court for the District of Nebraska. He requested a preliminary injunction to force Daly to pay the taxes. The district court entered such an injunction on December 31, 1997. We assume Daly then paid the taxes because Taiwan lifted the travel restriction. The district court held a bench trial in February 1999 on the issue of a permanent injunction and damages. The district court found a violation of the implied covenant of good faith and fair dealing and granted a permanent injunction. Shen was also awarded attorney’s fees and $4,760 in damages on his contractual claims. Both sides now appeal and we affirm in part and reverse in part.

The district court held that Daly breached the implied covenant of good faith and fair dealing based on the agency relationship between Daly and Shen. We agree. Under Nebraska law, whether a person is an agent is a question of fact. The existence of an agency relationship does not depend on the terminology the parties use to characterize their relationship, but depends on the facts underlying the relationship. An agency relationship can be implied from words, conduct or circumstances that evidence an intent to create on. For example, under agency principles, an agent can be given apparent or ostensible authority to act if the “alleged principal affirmatively, intentionally, or by lack of ordinary care causes third persons to act upon the apparent authority.” That is what happened in this case. After Daly terminated Shen in December 1992, Daly did not remove Shen as its responsible person.

A principal and an agent are in a fiduciary relationship. Because of the fiduciary relationship, the principal owes the agent a duty of good faith and fair dealing in the incidents of their relationship. Moreover, “‘[c]orrelative with the duties of the agent to serve loyally and obediently are the principal’s duties of compensation, indemnity, and protection.’ ” Daly breached its duty as a fiduciary in the following ways: (1) Daly did not pay the tax when it was assessed; (2) it chose not to appeal the assessment through proper channels; and (3) Daly did not find a replacement for Shen as responsible person.

Duties Of A Principal To An Agent

The principal likewise owes duties to an agent arising either from the agency contract or which are implied by law. These duties include:

A duty to cooperate and to deal with the agent fairly and in good faith;
A duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work, but which are unknown to the agent.
A duty to compensate the agent for services provided either according to the terms of the agency contract or, in the absence of an express agreement, a customary fee ordinarily paid, reflecting the reasonable value of the agent’s services based on a theory of quantum meruit;
A duty to reimburse the agent for all expenses, provided they were authorized by the principal, were incurred “within the scope of the agency relationship,” and were necessary to carry out the purpose of the agency relationship;
A duty to indemnify the agent for any losses the agent might suffer because of the actions of the principal.

Principal And Agent – Liability To Third Parties

Liability For Contracts

A major purpose of the agency relationship is to provide a principal with the means to conduct or perhaps expand their business dealings. An agent is authorized to contact third parties on behalf of their principal, enter into contracts on behalf of the principal with third parties, and figuratively put the principal in several places at one time.

While generally a principal who authorizes an agent to enter into a contract with a third party is liable on the contract, the agent may be held liable on the contract under certain circumstances, depending upon whether the agency is classified as fully disclosed, partially disclosed, or undisclosed. The status of the principal will determine the extent of any liability.

A disclosed principal is one whose identity a third party knows at the time he or she enters into an agreement; i.e., the third party knows the agent with whom he or she is dealing is acting on behalf of a known principal. A disclosed principal operates in a fully disclosed agency. In a fully disclosed agency, the contract is between the principal and the third party; thus, the fully disclosed principal and not the agent is liable on the contract unless the agent has guaranteed that the principal will perform on the contract in what is sometimes known as a suretyship.

A partially disclosed principal is an individual whose identity is unknown to the third party at the time an agreement is reached; however, the third party does know the agent is representing some principal. A partially disclosed principal operates in a partially disclosed agency. Under Section 321 of the Restatement (Second) of Agency, in a partially disclosed agency, both the principal and the agent are liable on third-party contracts. In this case, the third party is relying on the reputation, integrity and credit of the agent because the principal is unidentified. If an agent is required to “pay on the contract,” the agent can seek indemnification from the principal.

An undisclosed principal operates in an agency relationship when a third party is unaware of either the existence of the agency or the identity of the principal. An undisclosed principal operates in an undisclosed agency. In an undisclosed agency, both the principal and the agent are liable on the contract with a third party. In essence, by not divulging that he or she is acting as an agent, the agent has become a principal to the contract. The third party is essentially relying exclusively on the reputation and credit of the agent in entering into the contract. However, should an agent be held liable and be required to “pay on the contract,” the agent can seek indemnification from the principal.

Tort Liability

In general, the principal and the agent are each personally liable for their own tortuous conduct. However, a principal may be held liable for the negligent or intentional acts their agent if the actions of the agent are committed within the scope of the agent’s employment under a doctrine known as Respondeat Superior, providing for what is termed as vicarious liability.

The following are factors a court will employ in order to determine whether an agent’s conduct occurred “within the scope of employment”:

Was the act specifically requested or authorized by the principal?
Was the act the kind of act that the agent was employed to perform?
Did the act occur substantially within the time period of employment authorized by the principal?
Did the act take place substantially within the location of employment authorized by the principal?
Was the agent “advancing the principal’s purpose” when the act took place?

In analyzing these factors, Restatement Third of Agency Sec. 7.07 provides the following practical guidelines:

“the extent of control that the agent and the principal have agreed the principal may exercise over details of the work; whether the agent is engaged in a distinct occupation or business; whether the type of work done by the agent is customarily done under a principal’s direction or without supervision; the skill required in the agent’s occupation; whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it; the length of time during which the agent is engaged by a principal; whether the agent is paid by the job or by the time worked; whether the agent’s work is part of the principal’s regular business; whether the principal and the agent believe that they are creating an employment relationship; and whether the principal is or is not in business. Also relevant is the extent of control that the principal has exercised in practice over the details of the agent’s work.”

Example

Joe, a mechanic for ABC Transmissions, owned by Mr. Carville, goes to Bob’s house on behalf of Mr. Carville to pick up Bob’s car and return it to the shop. On the way back to the shop, Joe stops at a bar, has two drinks and then hits another car parked legally in the bar’s parking lot. Bob sues ABC Transmissions and Joe for damages to his car. Are either or both ABC Transmissions and Bob liable?

Example

Joe, while on a sales trip to South Dakota for his employer, ABC Transmission, gets into a car accident when he stops at Mount Rushmore to sightsee. Might either or both ABC Transmissions liable under these circumstances? Might a court apply what is known as the “frolic and detour” doctrine to determine liability?

Criminal Liability

A principal is not generally liable for the criminal conduct of an agent for such crimes as murder, robbery, bribery, etc. It may be too difficult or even impossible to prove the requisite intent (“mens rea”) on the part of a principal. Several exceptions exist. If a principal participates directly in an agent’s crime, or if a principal knows or has reason to know his agent or employee is violating a law, the principal may incur criminal liability as an abettor to the criminal activity. Several environmental statutes or actions under the Foreign Corrupt Practices Act have provided for the criminal responsibility of “responsible parties” under limited circumstances as a matter of public policy.

Termination Of An Agency Relationship

The agency relationship may end in two ways, by agreement or by operation of law.

Termination by Agreement

Either a principal or an agent may terminate the agency relationship. Termination may occur mutually by agreement; upon notice by either the principal or the agent to the other party; upon expiration (lapse) of the time period stated in the agency agreement time; or upon completion of the purpose of the agency relationship. When the relationship is terminated, the principal should provide actual notice to all third parties who dealt with the agent that the termination has occurred. Constructive notice may be provided to other parties by placing appropriate advertisements in publications located where the agency relationship operated; or otherwise providing notice to “the world” that the agency relationship was terminated by appropriate means.

Termination By Operation Of Law

An agency relationship may also be terminated by operation of law. Circumstances include the death of either the principal or agent; insanity of either the principal or the agent; bankruptcy of the principal; impossibility of performance of the agency relationship (such as through a change in the law; absence of qualification through a failure to obtain a regulatory-type license required to perform duties or the revocation of a required regulatory license; or the loss or destruction of the subject matter of the relationship); and the outbreak of war, where the principal or agent is located in a nation at war and where the agent’s country terminates the agency relationship between the parties.

Certain types of agency relationships created for the benefit of an agent are termed “an agency coupled with an interest.” An “agency coupled with an interest” typically occurs in a security interest to secure a loan. The principal may not legally terminate the agency relationship during the term of the agency relationship without the consent of the agent if the agent has provided the security (funding) to effectuate the loan. Should the principal terminate the agency unlawfully, the principal may be required to pay damages to an agent that has been wrongfully terminated.

Ethical Considerations

Limiting Compensation

In the arena of sports, agents are often limited in their compensation to an amount determined by the League’s collective bargaining agreement. At the same time, a lawyer’s compensation may be four to five times higher. Should a collective bargaining agreement between players and their sports league have the ability to limit the compensation of a sports agent who is not a party to that agreement?

Dancing

Maria Aripova runs a dance studio and frequently acts as an agent for booking recitals in the field of modern dance. She has two “up-and-coming” dancers in her studio. Should Maria be permitted to represent both dancers at the same time even though their interest may be quite different and even adverse on occasion? Upon what showing?

Questions

How is an agency relationship created?
Explain the legal principle of agency by estoppel.
What are the duties of a principal to an agent? An agent to a principal?
Under what circumstances might an agent be liable to a third party?
What is the difference between a disclosed and undisclosed principal?
Describe how an agency relationship may terminate or be terminated?
Give an example of an “agency coupled with an interest.”
Research Questions
What is an independent contractor?
What is CERCLA?
What are the two most important aspects of the Foreign Corrupt Practices Act?

Chapter Six | The Agreement

A contract is an agreement that consists of an offer and acceptance.

The Offer

An offer will be judged on the basis of three criteria:

There must be serious intent on the part of the offeror to be bound by the terms of the offer;
The terms of the offer must be definite or reasonably certain; and
The offer must be communicated to the offeree.

Intention is measured by what is termed the “objective” or “reasonable man” test, which is exemplified in the classic English common law case, Carlill v. Carbolic Smoke Ball (holding that
an advertisement was considered as an offer for a unilateral contract that could be accepted by anyone who performed its terms). The objective test states that an offer will be judged by the objective or reasonable meaning of the words used—whether a “reasonable man would conclude that an offer had been made.” Under this criteria, the subjective intention of the parties is ordinarily irrelevant. However, an offer that is made in obvious anger, jest, or as the result of excitement will not generally meet the requirement of a serious offer. Likewise, an offer must be distinguished from mere statements of intention to be bound at a later date, preliminary negotiations or discussions, inquiries, or invitations (solicitations) to make an offer.
Let us consider a classic case that deals with the application of the “objective test.”

Case Summary

Lucy v. Zehmer

196 Va. 493 (1954)

BUCHANAN, Justice.

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

A. H. Zehmer admitted that * * * W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.
The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three beefers.

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.
The defendants insist that * * * the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

It is an unusual, if not bizarre, defense. * * *

In his testimony, Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. * * * The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. * * *

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

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

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. (Emphasis added.) The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

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

JUDGMENT AND REMEDY:

The Supreme Court of Virginia determined that the writing was an enforceable contract and reversed the decision of the lower court.

Mr. and Mrs. Zehmer were required by court order to carry through with the sale of the Ferguson Farm to W.O. Lucy. What remedy do you think would be appropriate in this case? Why?

Definiteness requires that the terms of an offer must be clear enough so that the offeree is able to make a decision whether to accept or reject the offer. In addition, if the terms of an agreement are indefinite, a court will not be able to enforce the contract or to determine what would be an appropriate remedy for its breach.

Generally, the common law required that an agreement should contain the following terms: (1) identification of the parties; (2) identification of the subject matter of the contract; (3) a quantity; (4) the consideration to be paid; and (5) the time for performance.

Media Offers And Advertisements

At common law, an advertisement, a circular or flier, or a radio or TV spot were not considered as offers; rather, these forms of communications were considered as statements of an intention to sell or a preliminary proposal inviting an offer to buy. Although most advertisements and the like were treated as invitations to negotiate and not offers, this does not mean that an advertisement could never be considered as an offer, binding a seller to a contract.

In the following case, the court had to decide whether a newspaper advertisement announcing a “special sale” in a department store should be construed as an offer, the acceptance of
which would complete a contract. Take special note of the test enunciated in Lefkowitz v. Great Minneapolis Surplus Store, Inc. It can be applied more broadly to decide if a party has truly made an offer to sell or buy. This test is also used to determine if a party has made an acceptance of an offer. It is an important formulation of the objective test.

Case Summary

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

251 Minn. 188, 86 N.W. 2d 689 (1957)

Background and Facts

Plaintiff Lefkowitz read a newspaper advertisement offering certain items of merchandise for sale on a first come first served basis. Plaintiff went to the store twice and was the first person to demand the merchandise and indicate a readiness to pay the sale price. On both occasions, the defendant department store refused to sell the merchandise to the plaintiff, saying that the offer was intended for women only, even though the advertisement was directed to the general public. The plaintiff sued the store for breach of contract, and the trial court awarded him damages.

MURPHY, Justice

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

On April 13, the defendant again published an advertisement in the same newspaper as follows:

The record supports the findings of the court that on each of the Saturdays following the publication of the above described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

* * * The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms.

*** [However] *** there are numerous authorities which hold that a particular advertisementinanewspaperorcircularletter relating to a sale of articles may be construed by the court as constituting an offer, accep- tance of which would complete a contract.

The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.”

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. * * *

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by thebadvertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.

JUDGMENT AND REMEDY

The Supreme Court affirmed the trial court’s judgment, awarding the plaintiff the sum of $138.50 ($139.50 for the Lapin stole less the $1 purchase price) in damages for breach of contract against the defendant department store.

Even under the common law, courts began to relax rigid standards relating to indefiniteness and would imply or insert reasonable terms in a contract wherever possible, especially where both parties had manifested a clear intention to enter into a contract.

Uniform Commercial Code

Under UCC §2-204, for example, a contract will not fail for indefiniteness if the parties clearly intend to enter into a contract and if a “reasonably certain basis” exists for granting an appropriate remedy by a court. What are some of the terms a court will imply in a contract?

Open price: If nothing is said as to price, or the price is left to be agreed by the parties and they fail to agree, or the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded, “the price is a reasonable price at the time for delivery” [§2-305].
If no place of delivery is specified, then delivery is to occur at the seller’s place of business [§2- 308(a)], thus obligating the buyer to pay for freight, insurance, and delivery charges.
If the time for shipment or delivery is not stated, then the time shall be a reasonable time after the contract is formed [§2-309].
If the time for payment is not specified, then payment is due at the time and place of delivery [§2-310 (a)] and no credit arrangements are implied. Payment of a reasonable charge for interest may be implied.

While these terms may be found in the UCC, and thus apply to contracts involving the sale of goods (“movable and tangible” items), their application is equally important in many other types of contracts.

In addition, terms that are omitted or unclear may be supplied by custom and usage of trade or by prior or contemporaneous dealings between the parties, subject to the parol evidence which will be discussed in the materials on the “writing and form” of contracts.

Under the third criteria, the offer must be communicated to the offeree so that the offeree knows of the terms of the offer. An offer cannot be accepted by an offeree who is unaware of the offer or who has not become apprised of it.

Termination Of An Offer

It should be recognized that an offer creates a power or right in the offeree to transform the offer into a binding contract through an acceptance. However, an offer will not remain in existence indefinitely. The offer can be terminated through the operation of law, actions of the parties, the occurrence of a stated condition, or by its own terms, normally through the lapse of a period of time stipulated in the contract.

Lapse Of Time

Where the time specified in the contract for an acceptance to be made has passed or an event or condition stipulated in the contract which would terminate an offer has occurred, the offer is terminated. For example, Freddy agrees to sell his stamp collection to Franky if Franky accepts by a certain date. Franky must accept this offer within the period stated. If he does not do so, the offer will have lapsed.

Should no time be specified in the offer itself, the offer will terminate at the end of a reasonable time, determined by such factors as the subject matter of the contract (an offer to buy or sell perishable goods would involve a relatively short period of time) and other relevant market and business conditions and circumstances.

Operation Of Law

An offer may also be terminated through operation of law. For example, the destruction of the subject matter of the contract through no fault of the party will terminate an offer.

The death or incompetency of the offeror or offeree in a personal service contract also terminates an offer. Since an offer is considered personal to both the offeror and the offeree, an offer will be automatically terminated if the offeror or offeree dies, becomes incapacitated, or is ruled incompetent by a court of law.

Where a statute or court decision makes an offer illegal, the offer will be terminated. These circumstances—destruction of the subject matter of the contract, death or incompetency of a contracting party, or the operation of a statute—are sometimes viewed under the doctrine of “objective impossibility” and may also be used as a defense to a claim of breach of contract or as an excuse for non-performance on the part of a party.

Action Of The Parties

An offer may also be terminated by actions of the parties.

Revocation of the offer by the offeror is a withdrawal of the offer by the offeror before the offeree accepts the offer. A revocation is not generally effective until it is actually received by the offeree or by the offeree’s agent. Generally speaking, an offer made to the general public or to a number of persons whose specific identity is unknown to the offeror (for example, an offer made in newspaper advertisement or in a TV or radio ad), may be revoked only by using the same medium or at least by using “the best means of notice reasonably available under the circumstances” that would give equal publicity to the communication of the revocation as the communication of the original offer. Certain types of offers, called “firm offers,” may not be revoked by the offeror under certain circumstances – one of these circumstances being where the offeree has paid consideration for an option or where the promise has been made in a “signed writing” under UCC §2-204 (the “Firm Offer Rule”).

An offer is terminated if the offeree rejects it or if the offeree makes a counter offer.

Example

Suppose that Berra offers to sell his new speedboat to Rizzuto for $10,000. Rizzuto responds, “$10,000 is too high; I’ll give you $8,500.” What is the legal effect of Rizzuto’s com- munication? First, it is clearly not an acceptance. Secondly, it is a rejec- tion of Berra’s offer to sell the boat for $10,000 and a counteroffer by Rizzu- to to buy the boat for $8,500. Now, if Berra agrees on $8,500, a contract will be formed based on this agreement. However, what happens if Berra re- jects the offer to purchase the boat at $8,500 and the price of such speed- boats skyrockets to $15,000? Can Rizzuto compel Berra to sell the boat to him at the original $10,000 price?

The answer is “no” because Rizzuto’s counteroffer legally termi- nated the original offer. Berra’s offer is no longer “on the table.”

Rejection by the offeree terminates an offer. There may be a very fine line between a rejection of an offer and an inquiry about trading on different terms than those contained in the original offer. Suppose that Freddy were to respond to a friend’s offer to buy his antique car: “That seems a bit low; I’ll just bet that you can do a lot better than that.” Is this communication a rejection of his friend’s offer or a mere inquiry which will not terminate (destroy) his friend’s offer?

A counteroffer by the offeree also terminates the original offer. Generally, a counteroffer is a rejection of the original offer and the making of a new offer by the offeree.

The Acceptance

An acceptance is an unconditional assent by either words or conduct by an offeree that manifests agreement to the terms of the offer. The acceptance is usually made in the manner requested in the offer where the offeror has stipulated an express, authorized means of acceptance. The acceptance must be unequivocal—that is, it may not impose or add new terms or conditions or tamper with the terms of the offer or (as we have seen) a court might conclude that a rejection and a counter offer has taken place. A unilateral contract can only be accepted by the offeree’s performance of the required act. A bilateral contract can be accepted by an offeree who promises to perform the act or the actual performance of the requested act.

Example

Igor Wells joins the “fruit of the month club.” Because he is on vacation during the month of May, Igor neglects to return the card for May’s fruit—the guava. Igor must now pay for the (spoiled) guava because his failure to return the card (silence) amounted to an acceptance of the offer to ship based on the express terms of the membership agreement.

A second circumstance where silence may amount to an acceptance occurs where prior dealings between the parties give the reasonable expectation of a reply.

Generally speaking, silence is not considered as acceptance of an offer even if the offeror has stated “your silence indicates your acceptance of this offer.” There are, however, circumstances where an offeree’s silence may constitute acceptance of an offer. Such situations arise where there is an affirmative “duty to speak” on the part of the offeree. A court might impose a duty to speak where a duty arises out of a contract itself (i.e., record or book club contracts frequently require that a member send back a card with a rejection of the month’s selection or the selection will be automatically shipped and an obligation to pay will arise).

Example

Berman, a retailer, has ordered snowshoes from Trotsky, the manufacturer, on numerous occasions and paid for them when they arrived. Out of convenience, Trotsky then began to ship snowshoes on a recurring basis, simply sending Berman a “confirmatory invoice,” noting that the snowshoes would be shipped on the eighth of each month. Whenever Berman received a shipment of the goods from Trotsky, he would simply sell them at retail and send a check to Trotsky for the amount due. Trotsky would only hear from Berman if Berman did not wish to place an order for that month. The last shipment of snowshoes (of course) is the subject of controversy as Berman now refuses to pay for them, claiming that his “silence” on the matter cannot create a contract. Because of the prior dealings between the parties, Berman’s silence (failure to notify Trotsky) will be construed as an acceptance of Trotsky’s offer to ship. Berman will be bound by contract and must pay for the last shipment of snowshoes.

Acceptance-Upon-Dispatch Rule

Read Morrison v. Thoelke and notice the application of the deposited acceptance or “mail box” rule which states that an acceptance is effective when it is dispatched (mailed) even if it is lost in transmission.

The problem of a “lost transmission” can be minimized by the parties by expressly altering the mailbox rule by stating that an acceptance is effective only upon actual receipt of the acceptance.

Case Summary

Morrison v. Thoelke

155 So. 2d 889 (Fla. 1963)

BACKGROUND AND FACTS

Defendants (Morrison) made an offer to buy real property owned by the plaintiffs, Thoelkes. They executed a contract for sale and purchase and mailed it to the plaintiffs for their acceptance and signature. The latter signed the contract and mailed it to the defendants. Before it was received by the defendants, the plaintiffs repudiated the contract by telephone. Nonetheless, when defendants received the contract they recorded it, thereby establishing their interest in the property as a matter of public record. Claiming that no contract existed, plaintiffs brought this suit to “quiet title” to the property – to remove the defendants’ claim of an interest in it from the record. Defendants counterclaimed, seeking specific performance of the contract. The lower court entered a summary decree for the plaintiffs and defendants appealed.

Allen, J.

* * * The question is whether the contract is complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror, or when the letter of acceptance is received, thus permitting repudiation prior to receipt. Appellants argue that posting the acceptance creates the contract; appellees contend that only receipt of the acceptance bars repudiation.

* * * In short, both advocates and critics muster persuasive arguments. As indicated, there must be a choice made (by the legal system) and such choice may, by the nature of things, seem unjust in some cases. Weighing arguments with reference not to specific cases but toward a rule of general application and recognizing the general and traditional acceptance of the rule as well as the modern changes in effective long- distance communication, it would seem that the balance tips towards accepting the notion that this case is controlled by the general rule that insofar as the mail is an acceptable medium of communication, a contract is complete and binding upon posting of the letter of acceptance.

The rule that a contract is complete upon mailing or the deposit of the acceptance in the mails, hereinbefore referred to as the “deposited acceptance rule.” * * * This rule, although not entirely compatible with ordered, consistent and sometime artificial principles of contract advanced by some theorists, is in our view, in accord with the practical considerations and essential concepts of contract law. Outmoded precedents may on occasion be discarded and the function of law should not be the perpetuation of error, but by the same token, traditional rules and concepts should not be abandoned save on compelling ground.

* * * We are constrained by factors hereinbefore discussed to hold that an acceptance is effective upon mailing and not upon receipt. Necessarily, this decision
is limited to circumstances involving the mails and does not purport to determine the rule possibly applicable to cases involving other modern means of communication.

* * * However, adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails, the repudiation was equally invalid…

Summary decree is reversed and the case remanded for further proceedings.

Ethical Considerations

Warren Boat Works v. Weaver

Fritz Weaver entered into a verbal contract with the Warren Boat Works whereby Fritz would assume the payments on a boat lease that had originally been entered into by Fritz’s neighbor, Jackson Limus with Warren. Unfortunately, the Boat Works burns down and Fritz’s boat is destroyed. To his surprise, Fritz is now being sued because he has now refused to continue to make the monthly payment on the boat which had been destroyed. Should Fritz be required to continue to make the payments under these circumstances?

Questions

Lucy v. Zehmer

What remedy was Lucy seeking? Why?
What was the defense raised by the defendants? Was it credible?
When might the defense of intoxication be valid?
What test did the court apply? Why couldn’t this court, or for that matter any court, apply the subjective test to contracts?
Explain the objective test. Which test do you support? Why?

Lefkowitz v. Great Minneapolis Surplus Store

What test did the court apply here to this “media offer?”
How did the facts fit this test?
What about the defendant’s “house rule?” What was the legal effect of the “house rule?”

Morrison v. Thoelke

What is recording? What is the effect of recording?
What is the purpose of a suit to “quiet title?”
What remedy did the plaintiffs seek? Why?
What rule did the court cite?
According to the court, what is the role of precedents? When can or should a prece- dent be changed?
What is a summary decree?
What case did the court cite in support of its decision?
What is the basis for holding that an acceptance is valid once it has been posted even if it has been lost in the mail?