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Contracts

Price Is Right PC manufactures computers. Mart operates electronics stores. On August 1, after some preliminary discussions, PC sent a fax on PC letterhead to Mart stating: We agreeto fill any orders during the next six monthsfor our ModelX computer (maximum of 4,000 units) at $1,500 each. On August 10, Mart responded with a fax stating: We’re pleased to accept your proposal. Our stores will conduct an advertising campaign to introducethe Model X computer to our customers. On September 10, Mart mailed an order to PC for 1,000 Model X computers. PC subsequently delivered them. Martarranged with local newspapersfor advertisements touting the Model X. The advertising was effective, and the 1,000units were sold by the end of October. On November 2, Mart mailed a letter to PC stating: Business is excellent. Pursuant to our agreement,we order 2,000 more units. On November 3, before receiving Mart’s November 2 letter, PC sent the following fax to Mart: We have named Wholesaler as our exclusivedistributor. Allorders must now be negotiated through Wholesaler. After Mart received the fax from PC, it contacted Wholesaler to determine the status of its order. Wholesaler responded that it would supply Mart with all the Model X computers that Mart wanted, but at a price of $1,700 each. On November 15, Mart sent a fax to PC stating: We insiston delivery of our November 2 order for 2,000 units of ModelX at the contractprice of $1,500 each. Wealso hereby exercise our right to purchase the remaining 1,000 units of Model X at that contract price. PC continuesto insist that all orders must be negotiatedthrough Wholesaler, which still refuses to sell the Model X computers for less than $1,700 each. 1. If Mart buys the 2,000Model X computers ordered on November 2 from Wholesaler for $1,700 each, can it recover the $200 per unit price differential from PC? Discuss. 2. Is Mart entitled to buy the 1,000 ModelX computers ordered on November15 for $1,500 each? Discuss.


Answer 2

This answer provided by National Bar Review, (888) 634-9099, www.nationalbarreview.com. 1. If Mart buys the 2000 Model X computers ordered on November 2 from Wholesaler for $1700 each, can it recover the $200 per unit price differential from PC? APPLICABLE LAW-UCC GOVERNS The contract between PC and Mart is governed under Article II of the Uniform Commercial Code because the subject matter of the contract involves the sale of goods. MUTUAL ASSENT EXISTS BETWEEN PC AND MART For a contract to be validly created the two parties (PC and Mart) must have a meeting of the minds in the sense that they agree to the same bargain at essentially the same time. Courts use an objective measure by which each party is bound to the apparent intention which he manifested to other. Mutual assent may be express (oral or written words) or implied by the parties’ conduct. AUGUST 1 FACIMILE MAY CONSTITUTE AN OFFER On August 1, after some preliminary discussions, PC sent a fax to Mart stating that they would agree to fill any orders during the next six months for the Model X computer at $1500 each with a maximum out put of 4000 units. In order to qualify as a valid offer there must exist the manifestation of willingness to enter into a bargain, so made as to justify another person (the offeree) in understanding that his assent to that bargain invited and will conclude it. PC must manifest their present intent to enter into a contract and this appears to be apparent given the language “agree to fill any orders over the next six months.” VALID OUTPUT CONTRACT Under UCC Section 2-206 output contracts (a promise to sell “all that I manufacture”) are enforceable. Consideration exists as the promisor is suffering a legal detriment; i.e. he has parted with the legal right to buy or sell the goods he may need or manufacture from or to another source. Here PC is willing to fill any orders that Mart may require for a specified period of six months. STATUTE OF FRAUDS REQUIREMENT MET Under the UCC a contract for the sale of goods for a price of $500 or more must be a signed writing and contain a quantity term. In addition, between merchants the signature of one acts as the signature of other for SOF purposes unless the other merchant objects within 10 days. CERTAINTY AND DEFINITENESS OF TERMS The modern test for certainty is if the terms provide a basis for determining the existence of a breach and for giving an appropriate remedy. Commonly, four terms have been considered essential: 1. parties 2. subject matter 3. time for performance and 4. price. Clearly the terms of the contract between PC and Mart are satisfactory to form the basis of a valid contract. AUGUST 10 FACSIMILE OPERATES AS A VALID ACCEPTANCE TO TERMS OF CONTRACT Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. If the manner of acceptance is not specified, then the offeree must accept in the same manner as that in which the offer was made or accept in a reasonable manner. Mart’s August 10 communication manifests assent by using the language “we are pleased to accept” and by introducing an advertising campaign to introduce the subject matter of the contract — the Model X computer. SEPTEMBER 10 ORDER-PERFORMANCE The September 10 order of 1000 computers satisfies the performance requirement for a valid contract and subsequent actions by PC will operate as a breach and will allow Mart to seek appropriate damages. BREACH A party is in breach of contract when he owes an absolute duty to perform under the contract and fails to do so. Where the breach is material, it has the effect of suspending or discharging the other party’s duty to perform and of affording the wronged party the right to sue for expectation damages on the contract. In the case of a minor breach the other party is not relieved from her duty to perform. That party may sue immediately for the damages resulting from the breach. DAMAGES Mart may recover Expectation damages if it purchases the computers at $1700 per unit. In most breach of contract cases the court will attempt to give the plaintiff the benefit of his bargain by putting him in the position he would have held had the contract been performed, plus consequential damages, if applicable, less mitigation of damages, plus incidental costs incurred in mitigating damages. By failing to supply Mart with the computers at $1500 per unit, PC will have to pay the $200 differential if Mart chooses to purchase at the inflated price. CONSEQUENTIAL DAMAGES The UCC allows recovery of consequential damages which are defined as any loss resulting from the breach. It does not appear, based on the facts, that any consequential damages were incurred. MITIGATION Under the UCC, where the seller fails to deliver, the buyer must minimize her damages before recovering. Further, a buyer must attempt to “cover” by attempting to purchase substitute goods from another supplier. After doing so, the buyer is entitled to damages amounting to the difference between the cost of cover and the contract price. It is unclear whether Mart attempted to secure computers from an alternate supplier. If so, Mart will recover the per unit price differential. 2. Is Mart entitled to buy the 1000 Model X computers ordered on November 15 for $1500 each? RULES OF REVOCABILITY Even when the offeror expressly promised not to revoke the offer for a given period of time, he/she may revoke the offer at any time until it is accepted. It is arguable that PC revoked the offer made to Mart on August 1 when Wholesaler (see discussion below on delegation of duties) stated that it would only sell the Model X computers at a price of $1700 each. Before the offeree accepts an offer, the offeror may terminate the offer by communicating the intention to revoke to the offeree. The intention here is sufficiently clear given the refusal to fill the computer order at the original contracting price of $1500 per unit. There are, however, exceptions to the general rules of revocability which will operate in favor of Mart. DELEGATION OF DUTIES While no formalities are required, to effectively delegate contract duties the delegator must adequately describe the duties that the delegate is to perform and the delegatee must promise that he will perform the duties. There are legal consequences of operable delegation that will apply to PC: 1, Obligee must accept delegate’s performance 2. Delegatee becomes directly liable to obligee as intended creditor beneficiary 3. Delegator remains personally liable to obligee for performance of duties On November 3, before receiving Mart’s November 2 letter, PC named Wholesaler as their exclusive distributor with instructions that all orders must be negotiated through Wholesaler. This delegation of duties by PC still makes PC primarily liable for performance on all duties owed to Mart. MERCHANT’S FIRM OFFERS UCC Section 2-205 makes a signed written offer made by a merchant which states it will be held open for a specified term is irrevocable during the stated term, but not to exceed 90 days without additional consideration. Herein lies the problem. On August 10 by and through their fax communication, Mart accepted the offer made by PC on August 1. The language “We agree to fill any orders during the next six months” operates as Merchant’s firm offer whereby any orders placed by November 10 must be filled at the contract price of $1500. After November 10, however, (at the expiration of the 90 days) any orders could be construed as a new contract thereby allowing Wholesaler to increase its price. DETRIMENTAL RELIANCE Where the offeror could reasonably expect that the offeree would rely to his detriment on the offer, it will be held irrevocable for a reasonable length of time. On September 10 Mart arranged with local newspapers for advertisements touting the Model X. The advertising was so successful that 1000 units were sold by the end of October. Further, on November 2, Mart indicated to PC that business was excellent and ordered 2000 more units. Clearly by placing advertisements and securing additional orders Mart relied on the original contract which offered the computers at $1500 each. Even though the option effectively was terminated on November 10, Mart relied to its detriment on the contract, and therefore Mart is entitled to buy the 1000 Model X computers ordered on November 15 for $1500 each.

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