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the acceptance will not be effective until it reaches the offeror. The strictest interpretation of this rule (known as the “mailbox rule”) states that any accep- tance at variance with the terms of the offer cannot form a contract even when actually received by the offeror.

Determining whether there has been a valid acceptance is not always easy, as shown by the following case involving Pamela Lee Anderson, of Baywatch and (more recently) Dancing with the Stars, fame.

C A S E 10-4 The Private Movie Company, Inc. v. Pamela Lee Anderson et al. Superior Court of California, County of Los Angeles (1997)

The plaintiff, Private Movie Company (Efraim), sued thedefendant, Pamela Lee Anderson (Lee), for $4.6 million, alleging that she breached both an oral and a written con- tract so that she could work on a different project. The plaintiff claimed that an oral contract existed on November 18, 1994, when the parties agreed on all of the principal terms of a “deal,” at the conclusion of a “business meeting” at the offices of defendant’s personal manager. The plain- tiff claimed that a written contract was entered into on December 21, 1994, when the plaintiff’s lawyer sent the defendant copies of a “long-form” contract. The plaintiff claimed that this contract was a written embodiment of the oral agreement reached on November 18, 1994.

The somewhat confusing facts that were testified to, and disputed, at trial made it difficult for the judge to determine whether a contract existed. The events began in October 1994, when plaintiff’s attorney, Blaha, sent the plaintiff’s script to the defendant’s agent. After several con- versations, an offer was also sent to her agent. At trial, Efraim testified that Lee had said she loved the script and the character, but she was concerned about the nudity and sexual content of the script. Efraim said that he told Lee that the script would be rewritten and he would do what- ever she wished regarding the nudity.

On November 18, a business meeting was held by Efraim, his attorney, the defendant’s agents (Joel and Stevens) and manager (Brody), and the director, to negoti- ate a contract. Those present at the meeting testified that agreement was reached on a specific makeup person, security, trailer to be provided for Lee, start date, and expenses, and per diem. The issue of limiting the amount of nudity used in the theatrical trailer or any of the adver- tising material was raised, and apparently was resolved by an understanding that Brody (defendant’s manager) would provide a list of dos and don’ts and that Private Movie would abide by them. The structure of the agreement was also discussed, with an understanding that there would be two contracts—an acting contract and a consulting contract—thereby allowing Private Movie to save money relating to payment of benefits. The issue of the sexual content or simulated sex in the movie script was not raised at the meeting, nor was the issue of any script rewrites

brought up. At the end of the meeting, Efraim asked the defendant’s agent whether the deal was closed if Lee’s compensation was increased to $200,000. The agent said yes.

A few days later, Efraim had his attorney draft the agreement with the increased compensation. Several drafts were exchanged between the attorney and the defendant’s agent, all containing the following nudity clause:

Nudity. The parties hereto acknowledge that the Picture will include “nude and/or simulated sex scenes.” Player has read the screenplay of the Picture prior to receipt of the Agreement and hereby consents to being photographed in such scenes, provided that such “nude and simulated sex scenes” will not be [handled] nor photographed in a manner different from what has been agreed to unless mutually approved by Artist and producer.

The rewritten script was sent to the defendant on December 27, 1994. The plaintiff’s attorney testified that he called the defendant on December 29, 1994, and she said the script was great, but she wanted a different makeup artist and would split the difference in cost. The defendant testified that she recalled no such phone call. She said that she reviewed the script on January 1, 1995, saw that the simulated sex scenes remained, and called her manager to tell him she would not do the film.

The plaintiff found a less well-known actress to make the film and brought his action against the defendant.

Justice Horowitz When the parties orally or in writing agree that the terms of a proposed contract are to be reduced to writing and signed by them before it is to be effective, there is no bind- ing agreement until a written contract is signed. If the par- ties have orally agreed on the terms and conditions of a contract with the mutual intention that it shall thereupon become binding, but also agree that a formal written agree- ment to the same effect shall be prepared and signed, the oral agreement is binding regardless of whether it is sub- sequently reduced to writing.

C R I T I C A L T H I N K I N G A B O U T T H E L AW

We know that language is not usually clear. Words convey information but not always the information that the speaker or writer intends. Ambiguity characterizes those words and phrases that do not have a clear meaning. These ambigu- ous terms might result in another person’s misinterpreting what the writer or speaker actually meant. In contract law, ambiguity could create problems between an offeror and offeree, as the two parties might not be in agreement on the same terms of the contract if the contract contains ambiguous language. In Case 10-4, the parties thought they under- stood each other. Key ambiguous phrases, however, created confusion in the contract negotiations and, consequently, raised concerns about whether there was actual consent by both parties.

As business managers, it is imperative that you demand clear definitions in the contracts that you offer and accept. The following questions pertaining to Case 10-4 prompt you to consider the importance of ambiguity in contract law.

1. What key ambiguous phrases did the court discuss?

Clue: Find the legal term in dispute that the judge defined. Also, look for ambiguity in the specific elements of the contractual negotiations between the plaintiff and the defendant.

2. How did the ambiguity in the alleged contract affect the court’s reasoning?

Clue: Do you think the court would have ruled differently in Case 10-4 had the ambiguity not existed?

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Whether it is the intention of the parties that the agree- ment should be binding at once, or when later reduced to writing, or to a more formal writing, is an issue to be deter- mined by reference to the words the parties used, as well as all of the surrounding facts and circumstances.

One of the essential elements to the existence of a con- tract is the consent of the parties. This consent must be freely given, mutual, and communicated by each party to the other.

Consent is not mutual unless the parties all agree upon the same thing in the same sense. Ordinarily, it is the out- ward expression of consent that is controlling. Mutual con- sent arises out of the reasonable meaning of the words and acts of the parties, and not from any secret or unexpressed intention or understanding. In determining if there was mutual consent, the Court considers not only the words and conduct of the parties, but also the circumstances under which the words are used and the conduct occurs.

Parties may engage in preliminary negotiations, oral or written, before reaching an agreement. These negotiations only result in a binding contract when all of the essential terms are definitely understood and agreed upon even though the parties intend that formal writing including all of these terms shall be signed later.

An acceptance of an offer must be absolute and uncondi- tional. All of the terms of the offer must be accepted without change or condition. A change in the terms set forth in the offer, or a conditional acceptance, is a rejection of the offer.

Plaintiff has presented no testimony that Lee, on 11/18/94, the date [on] which Plaintiff alleged that an oral contract was created, personally agreed to perform in the movie Hello, She Lied; Plaintiff, therefore, has the burden of proving that Joel and/or Stevens, her “agent” and “manager,” had the authority to bind her to an oral written contract.

The parties do not and did not agree on the definition of “simulated sex.” Clearly the performance of simulated sexual scenes in the film was important and material to both Lee and Efraim. Efraim stated that he would abide by whatever Lee wanted in this regard.

Nudity and sexual content are material deal points that must be resolved before there can be a binding contract. An agreement concerning sexual content or simulated sex was not reached in this instance. Lee did not agree to the terms relating to simulated sex or to the script offered by the Plaintiff.

Plaintiff’s letter of 1/13/95 to Lee claims she “agreed to perform simulated sex scenes, and the exact type of nudity had been agreed upon in detail.” Efraim claimed in deposi- tion that Lee agreed to perform simulated sex scenes and agreed to the draft contract to confirm that fact. Blaha testified that Paragraph 9 was a correct statement of the agreement. In deposition he stated it was a mistake. The rewritten script has three or four scenes that depict simu- lated sex. It is obvious that the “offer” made by Plaintiff concerning this issue was not complete and unqualified, nor was there any acceptance of this issue that was com- plete and unqualified.

Brody and Joel testified to their opinion that they thought they had “closed the deal” on 11/18/94 or shortly thereafter. Such perceptions have very little legal rele- vance. Brody testified that he had authority to negotiate this contract. Joel never spoke with Lee concerning the transaction and did not negotiate points such as script rewrite or sexual content.

Plaintiff has failed to prove by a preponderance of the evidence that Lee entered into an oral or written contract to perform in the movie Hello, She Lied.

Judgment in favor of Defendant, Lee.

Satisfying, or “Mirroring,” the Terms of the Offer. Under the common law, to be valid, the acceptance must satisfy, or “mirror,” the terms of the offer. For example, if Jones offers to sell Smith his Cutlass for $2,000 and Smith responds by saying, “I’ll give you $1,800,” this is not a legal acceptance but a counteroffer by Smith, which then must be accepted by Jones in order for the terms of the counteroffer to be satisfied and a contract to arise. Under UCC Section 2-207, acceptance does not have to be a mirror image of the offer. Terms can be added to the contract without constituting a counteroffer if they meet one of the three conditions listed in the section on methods of termination of an offer.

Internet and E-Contracts: Acceptance Online. Parties now enter into many agreements online. Section 2-213 of the UCC deals with electronic communica- tion of an acceptance by an offeree. This UCC section provides that “receipt of an electronic communication has a legal effect; it has that effect even though no individual is aware of its receipt,” but “in itself does not establish that the content sent corresponds to the content received.” Thus, receipt is required for acceptance by electronic communication, and receipt occurs when the e-mail or other message arrives, even if the receiver does not know it has arrived. Also, the parties are left to use other means of proof to establish that all of the e-mail or messages made it from one party to another. The company or offeror must list all the terms of the offer that the offeree is about to enter into. The offeree (buyer) must click on “I agree” or “I agree to the terms.” Usually, terms set out by the offeror (seller) include cost, payment, warranties, arbitration provisions, and other substantive terms. As “click-on,” “click-through,” or “click-warp” agreements have become customary in many industries, there is little dispute between parties as to the formation of a contract thereby.

CONSIDERATION Consideration is defined as a bargained-for exchange of promises in which a legal detriment is suffered by the promisee. For example, Smith promises Jones that if she gives up her job with Stone Corporation, he will employ her at Brick Corporation. The two requirements of consideration are met: (1) Smith (promisor) has bargained for a return promise from Jones (promisee) that she will give up her job; (2) when Jones gives up her job, she has lost a legal right, the contractual right to her present job with Stone Corporation. The reader should note that legal detri- ment (giving up a legal right or refraining from exercising a legal right) must take place. Economic detriment is not necessary. For example, a student agrees not to go to any bars during fall semester in exchange for his mother’s promise to give him $500. The student’s giving up his right to go to bars is a legal detriment because he now cannot do something he previously could legally do.

Adequacy of Consideration. In general, the courts have not been concerned with the amount of consideration involved in a contract, especially in a business context. Even if one party makes a bad deal with another party—that is, if the con- sideration is inadequate—the courts will usually refuse to interfere. Unless a party can show fraud, duress, undue influence, or mistake, the court will not intervene on behalf of a plaintiff. However, sufficiency of consideration, as opposed to ad- equacy, will be examined by the court. Sufficiency of consideration requires both a bargained-for exchange of promises and legal detriment to the promisee.

Preexisting Duty Rule. In defining consideration, we said that a legal detriment to a promisee requires the giving up of a legal right or the refraining from exercis- ing a right. Logically, the courts have then declared that if a party merely agrees to do what he or she is required to do, there exists no detriment to the promisee. For example, Smith contracted with Jones for Jones to build him a house by April 1, 1988, for $150,000. On February 1, 1988, Jones came to Smith and said that, because

C H A P T E R 1 0 ! The Law of Contracts and Sales—I 273

consideration A bargained- for exchange of promises in which a legal detriment is suffered by the promisee.

274 P A R T T W O ! Private Law and the Legal Environment of Business

of the number of jobs he had, he would not be able to finish by April unless Smith agreed to a bonus of $10,000. Smith agreed to the bonus, and the house was com- pleted by April 1. Smith then refused to pay the bonus, claiming that there was a preexisting duty on the part of Jones because he had a contractual duty to finish by April 1. Jones took him to court, but lost the suit because no consideration existed for the bonus agreement. There is an important exception to the preexisting duty rule: The UCC, which applies to the sale of goods, states that an agreement modi- fying the original contract needs no consideration to be binding.

Promises Enforceable without Consideration. The courts have enforced cer- tain contracts when the requirements of consideration were not met, using the doc- trine of promissory estoppel to do so. This doctrine requires (1) a promise justifiably relied on by the promisee, (2) substantial economic detriment to the promisee, and (3) an injustice that cannot be avoided except by enforcing the contract.

Consider this hypothetical example. An elderly couple pledged in writing to leave $1 million to their family church for a building fund if the church raised another $1 million. The church accepted the offer, raised the matching funds, and contracted with an architect and builder. The couple died and, in their will, left the money to another church. When the family church sued the deceased’s estate on the basis of the promissory estoppel doctrine, the court awarded it the full amount pledged, even though a bargained-for exchange of promises did not exist. The family church justi- fiably relied upon the couple’s promise, causing substantial economic injury to the church, and injustice could not be avoided in any other way.

Liquidated and Unliquidated Debts. A liquidated debt exists when there is no dispute about the amount or other terms of the debt. If A owes B and C $500,000, and B and C agree to accept $100,000 as settlement for the debt, they are not precluded from suing A later on for the balance. The courts reason that the first agreement by A to pay a particular amount ($500,000) to B and C was supported by consideration. The second agreement to pay $100,000 was not because A had a preexisting duty to pay $500,000, and there was, therefore, no legal detriment on A’s part to support B and C’s agreement to accept the lesser amount.

An unliquidated debt exists when there is a dispute between the parties as to the amount owed by the debtor. If there is an agreement similar to the preceding one, except that the amount A originally owed B and C is in dispute, the general rule is that consideration exists for the second agreement, and the creditors cannot come back and sue for the balance of what they thought they were owed. B and C would have no claim for the full $500,000, but would be limited to $100,000. The rationale is that new consideration was given for the second agreement. There exists a legal detriment because B and C are giving up a legal right to sue for an unspecified debt. The debtor is also giving up a legal right because there is uncer- tainty as to what he or she owes in an unliquidated debt situation.

Promises That Lack Consideration

Type of Consideration Description

Illusory promises A contract providing that only one of the parties need perform, only if he or she choose to do so; the contract is not supported by consideration.

Moral obligation Contracts based on love or affection lack consideration. A majority of the states hold that deathbed promises may constitute moral obligation but lack legal binding consideration.

Preexisting duty A promise lacks consideration if a person promises to perform an act or do something she already has an obligation to do. For example, many states have statutes that prevent law enforcement officers from collecting rewards when apprehending a criminal who has a reward on his or her head. Also, as noted earlier, the original terms of a contract cannot be changed or modified unless unforeseen difficulties exist. Also, some exceptions are granted by the UCC.

Illegal consideration A contract is not supported by consideration if the promise is supported by an illegal act. “I agree to pay you $10,000 if you burn my house down.” Arson is unlawful and a promise to do such an act is unsupported by legal consideration.

C H A P T E R 1 0 ! The Law of Contracts and Sales—I 275

genuine assent Assent to a contract that is free of fraud, duress, undue influence, and mutual mistake.

GENUINE ASSENT When two parties enter into a legally enforceable contract, it is presumed that they have entered of their own free will and that the two parties understand the content of the contract in the same way. If fraud, duress, undue influence, or mutual mistake exists, genuine assent, or a “meeting of the minds,” has not taken place, and grounds for rescission (cancellation) of the contract exist. Table 10-1 lists the factors that prevent genuine assent.

Fraud. Fraud consists of (1) a misrepresentation of a material (significant) fact, (2) made with intent to deceive the other party, (3) who reasonably relies upon the misrepresentation, (4) and as a result is injured. For example, Smith enters into a contract to sell a house to Jones. The house is 12 years old, and Smith knows that the basement is sinking. She fails to tell Jones. After Jones moves in, she finds that the house is sinking about two feet a year. In this case, there was a misrepresentation of a material fact, because Smith had a duty to disclose the fact that the house was sinking, but did not do so. Furthermore, there existed knowledge of the fact with intent to deceive. The law does not require that an evil motive exist, but only that the selling party (Smith) knew and recklessly dis- regarded the fact that the house was sinking. Reliance existed on the part of Jones, who thought the house was habitable, and of course injury to Jones took place because the house was not worth what she paid for it. The cost of pre- venting further sinking of the house would be part of the damages involved. Note that this example illustrates fraud based on a unique set of facts.

Duress. Another factor that prevents genuine assent of the parties is duress, defined as any wrongful act or threat that prevents a party from exercising free will when executing a contract. The state of mind of the party at the time of en- tering into the contract is important. If Smith, when executing a contract with Jones to sell a house, holds a gun on Jones and threatens to shoot Jones if he refuses to sign the contract, grounds exist for rescission of the contract. Duress is not limited to physical threats, however. Threats of economic ruin or public embarrassment also constitute duress.

fraud Misrepresentation of a material fact made with intent to deceive the other party to a contract, who reasonably relied on the misrepresentation and was injured as a result. See also criminal fraud.

duress Any wrongful act or threat that prevents a party from exercising free will when executing a contract.

“Unconscionability, Just Laws and Genuine (Mutual) Assent”

Genuine assent requires a “meeting of minds.” Historically, at common law, the parties were thought to have free- dom to contract. Certain conditions were important for such freedom to contract to exist. First, it was thought that parties were usually most knowledgeable of the terms; second, the parties had equal bargaining power; third, the legislature was unable to anticipate the details for all situations regarding which contracts were negotiated. If any or all of these conditions did not exist, courts created exceptions to the freedom-to-contract rule; thus, un- conscionability came into existence.

At Roman law (civil), covering much of Europe, Asia, and Latin America, the just price is the market price for similar goods. For example, German and French laws relieve a party from its obligation under contract law if there is not a just price. Such just price has its origin in early Roman law; and today it is defined as a contract for goods whose price may not deviate by more than half from the “just price.”

The importance of unconscionability at common law and just price at Roman law remains today. Contracts of nations and regions are to be enforced in courts with special interpretations of terms that have different mean- ing. When billions of dollars are at stake, unconscionability and just price are terms that become significant in forming contracts, as well as in enforcing them.

Source: See J. Gordley, “Equality in Exchange,” California Law Review 69 (1981): 1887.

C O M PA R AT I V E L AW C O R N E R

• Fraud • Duress • Undue influence • Bilateral mistake • Unilateral mistake

TABLE 10-1

FACTORS PREVENTING GENUINE ASSENT