Precontractual Liability

Contracts – Prof. Merges

Feb. 24, 2011

Unconscionability

§ 1.11 Unconscionability

(a) If the court as a matter of law finds the agreement or any term of the agreement to have been unconscionable at the time it was made, the court may refuse to enforce the agreement, or it may enforce the remainder of the agreement without the unconscionable term, or it may so limit the application of any unconscionable term to avoid any unconscionable result.

(b) When it is claimed or appears to the court that the agreement or any term thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.

“Precontractual Liability”

• Mapping common law onto commonplace business transactions

Drennan v. Star Paving

Drennan v. Star Paving

Roger J. Traynor (1900-1983) served as an Associate Justice of the California Supreme Court from 1940 until 1964, and as the Chief Justice of California from 1964 until his retirement in 1970. He graduated from the University of California, Berkeley, where, in 1927, he taught political science and served as the Editor-in-Chief of the California Law Review, while simultaneously earning his J.D. degree and a Ph.D. in Political Science

“One hesitates to plead for reforms in the name of common sense... for we belong to a profession that prides itself on not throwing chaos lightly to the winds.”

-- Traynor, Comment on the Courts and Lawmaking, in Legal Institutions Today and Tomorrow 48, 56 (M. Paulsen ed. 1959), quoted in Armstrong, Family Law: Order out of Chaos, Law: Order out of Chaos, Law: Order out of Chaos, Law: Order out of Chaos, 53 CALIF. L. REV. 121 (1965).

Friendly, Henry J. "Ablest judge of his generation." California Law Review 71, no. 4 (July 1983): 1039-1044

true strict liability in tort for defective products (see product liability) in Greenman v. Yuba Power Products, Inc., 59 Cal. 2d 57 (1963) [4], which a 1996 panel of tort law experts subsequently ranked as the top development in tort law of the past 50 years [5];

the cause of action for negligent infliction of emotional distress (NIED) in State Rubbish Collectors Ass'n v. Siliznoff, 38 Cal. 2d 330 (1952) [6];

the "moderate and restrained interpretation" doctrine for resolving conflict-of-laws problems, in Bernkrant v. Fowler, 55 Cal. 2d 588 (1961) [7];

the rule that majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders, in Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93 (1969) [8];

the rule that extrinsic evidence of trade usage or custom is admissible where relevant to prove a meaning to which the language of a contract is reasonably susceptible, in Pacific Gas & Elec. Co. v. G. W. Thomas Drayage Co., 69 Cal. 2d 33 (1968)

Drennan v. Star Paving

• Facts

• History

Drennan

• What were the damages in the trial judgment below?

• What does this represent?

Continuous review!

• Expectation measure of damages

Drennan

• What did Hoon (Sub) say to Drennan on morning of July 29, 1955?

Drennan

• What did Hoon (Sub) say to Drennan on morning of July 29, 1955?

• What if he had said “I revoke”?

Drennan

• What did Hoon (Sub) say to Drennan on morning of July 29, 1955?

• What if he had said “I revoke”?

• What if π had said “I accept”?

What if defendant’s bid had been revocable?

• P. 224

What if defendant’s bid had been revocable?

• Clearly could have revoked it

• What might plaintiff do then?

What if there was consideration for offer being

irrevocable?

• Is that permissible?

What if there was consideration for offer being

irrevocable?

• Yes! An option K, as we have seen

Traynor’s analysis

• What analogy does he use?

Traynor’s analysis

• What analogy does he use?

• Rest. 2d 45 – unilateral K offer, part performance

Reliace on an offer instead of a promise – R2 § 45

“Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option K is created when the offeree tenders or begins or tenders a beginning of it . . .”

The role of reliance here

• What was the holding?

Drennan - holding

• GC could rely on sub’s bid, which was therefore an irrevocable offer upon which GC could rely in preparing its general bid

Two issues

• Mistake – how to compare to Kastorff?

• Tort-like analysis

– Negligence; relative risk point

– P. 226

§ 87. Option Contract

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

§ 87. Option Contract

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

Precontractual Liability Generally

• Why is this an issue?

Precontractual Liability Generally

• What theories have aggrieved negotiating parties relied on?

Precontractual Liability Generally

• What theories have aggrieved negotiating parties relied on?

Reliance

Restitution

• Merges, “A Transactional View of Property Rights”

• 20 Berkeley Tech L J 1477 (2005)

A Contract Represents a Direct “Node to Node” Connection

Between Seller (S) and Buyer (B)

S

S

S

B

B

B

Proposals to resolve the problem

• Common law

• Novel pre-K liability schemes

Omri Ben-Shahar, Essay: Contracts Without Consent: Exploring A New Basis For Contractual Liability, 152 U. Pa. L. Rev. 1829 (2004). See also Symposium: Freedom from Contract, 2004 Wis. L. Rev. 261 et seq. (2004)

Consider 2 sets of cases --

• Negotiations to sell/acquire a business

• Negotiations in advance of a technology license or joint venture agreement

Examples

• International, Inc v. Clorox Co., .3d 1316 (5th Cir.), cert. denied, 115 S. Ct. 71 (1994).

• Online Technologies, Inc. v. Bodenseewerk Perkin-Elmer GMBH, 386 F.3d at 1135, 1138 (Fed. Cir. 2004).

The caselaw shows that property rights – again, primarily patents – facilitate disclosure of three primary types of information: (1) information contained in patent applications, which are kept secret for a substantial time after filing; (2) details beyond what is disclosed in a patent or patent application; and (3) valuable but unpatented information beyond the boundaries of the patent

Property Rights Create a Legal “Field” Around an Information Asset (i), Protecting Seller (S)

During Buyer’s (B) Precontractual Evaluation

BS i

S B

Contract

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