Indefinite Contracts Introduction | Kessler, Gilmore & Kronman | August 28, 2012


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by Kessler, Gilmore & Kronman

"It is a commonplace of the law," Williston informs us, "that mutual assent is necessary for the formation of contracts, at least unless they are under seal." Mutual Assent in the Formation of Contracts, 14 Ill. L. Rev. 85, 85 (1919). There is no contract without assent. But once the objective manifestations of assent are present, their author is bound, even if he did not read the contract or understand the meaning of its terms. Cf. Restatement Second §26. Otherwise, to paraphrase Holmes, no rational theory of contract can be constructed. And, to paraphrase Corbin, since a court cannot enforce an agreement without knowing what the agreement is, its terms must be certain or at least susceptible of being made certain. 1 Corbin §95 (1963 & Supp. 1984). An agreement, therefore, by the parties"to enter into negotiations, and agree upon the terms of a contract, if they can, cannot be made the basis of a cause of action." Shepard v. Carpenter 54 Minn. 153, 156, 55 N.W. 906, 906 (1893). In their search for an agreement, the courts habitually use an offer and acceptance approach. This assumes that every contract can be analyzed into offer and acceptance. On this view, an agreement is said to be made when one party accepts an offer made by the other party. Restatement Second §§22, 23. The first step is to determine the addressee of the offer and to find out whether he communicated an acceptance that matches the offer. Within the framework of this analysis, it is quite important to determine whether the person who took the initiative "really" made an offer or merely invited the other party to make an offer, so that what looks like an acceptance is in reality an offer which itself needs an acceptance. Restatement Second §§24, 26, 33, 50. It is the purpose of this and several other sections to test the range of these statements.


Anxious not to incur the reproach of being a destroyer of bargains, modern contract law has abandoned the idea advanced during the last century that a contract presupposes a meeting of minds in full and final agreement, a consensus of mind. All that is required is the mutual. manifestation of assent. The law, furthermore, permits the parties to keep the arrangement flexible[39] and takes into account that businessmen often "record the most important agreements in crude and summary fashion. Hillas & Co. v. Arcos, Ltd., 147 L.T.R. (n.s.) 503, 514 (H.L. 1932). In consummating a contract, parties frequently do not make express provision for all its essential terms. Without stating so explicitly, they often expect that the express terms of their contract are to be supplemented by terms based on the "surrounding circumstances." This is particularly true in fields that are governed by trade custom and usage. In general, courts have been well aware of this way of doing business and, on the whole, they have successfully carried out the intention of the parties with the help of the device of "interpretation." Upon being satisfied that an agreement was intended or that one party justifiably relied on the deal and the other party ought to have known that he would so rely, the courts have been ready to supply missing terms and to give concrete meaning to indefinite terms, provided (it is often said), that objective criteria for establishing terms are available in the agreement itself, or that such terms can be inferred from a prior or subsequent course of dealing, or accepted business practices. To be sure, the mere fact that the parties thought they had a contract is not enough to turn an agreement utterly lacking in definiteness into a contract, but before courts are ready to strike down a bargain, "indefiniteness must reach the point where construction becomes futile." Cohen & Sons, Inc. v. Lurie Woolen Co., 232 N.Y. 112, 114, 133 N.E. 370, 371 (1921).


Before courts take this step, however, and abandon hope of discovering the intentions of the parties, they frequently resort to using the “hypothetical intentions" of the parties, if this technique of filling gaps and preserving the contract can be reconciled with notions of fairness and justice. This is particularly true for long-term contracts where the parties have it. In the language of L. Hand, J., “[a]s courts become increasingly sure of themselves, interpretation more and more involves imagination protection of the express purpose upon situations for which the parties did not provide and which they did not have in mind.”[40]


The attitude of modern law was anticipated if not reflected in a passage written by Corbin more than fifty years ago:


The legal relations consequent upon offer and acceptance are not wholly dependent, even upon the reasonable meaning of the words and acts of the parties. The law determines these relations in the light of subsequent circumstances, these often being totally unforeseen by the parties. In such cases it is sometimes said that the law will create that relation which the parties would have intended had they foreseen. The fact is, however, that the decision will depend upon the notions of the court as to policy, welfare, justice, right and wrong, such notions often being inarticulate and subconscious.[41]


Both the Uniform Commercial Code and the Restatement Second have attempted to consolidate the gains made by progressive case law towards flexibility and fairness. See U.C.C. §§1-201(3), 1-205, 2-204, 2-207, 2-208, 2-305. For parallel and more elaborate provisions of the Restatement Second, see §§22, 33, 34, 202, 204, 205, 221, 362.


The attitude with regard to the offer and acceptance paradigm is reflected in U.C.C. §2-204, which reads as follows:


(1) A contract for sale of goods may be made in any manner sufficient to the show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be found even though the movement of its making is undetermined.

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.[42]


Subsection 3 has found further elaboration in U.C.C. §2-305, dealing with open-price of terms.[43]


Section 204 of the Restatement Second contains a parallel provision. It provides that when the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term that is essential to a determination of their rights and duties, the court will supply a term that is reasonable in the circumstances. See further §§33, 34, which deal with the requirement of certainty.[44]


For a criticism of U.C.C. §2-204(3), see Williston, The Law of Sales in the Proposed Uniform Commercial Code, 63 Harv. L. Rev. 561, 576 (1950), advocating that the rule should be limited to the omission of "minor" terms: "If the parties choose to leave important terms open and nevertheless 'intend a contract' I think their only reliance should be on business honor." This position has been rejected in Pennsylvania Co. v. Wilmington Trust Co., 39 Del. Ch. 453, 166 A.2d 63 (1960); aff'd, 40 Del. Ch. 140, 172 A.2d 63 (1961), a bill for specific performance by plaintiff-buyer against the trustee-seller of corporate stock. Motions of both parties for summary judgment were denied by the chancellor since the submitted writings did not clearly show intention to contract. The decision was affirmed by the higher court. Since both courts indicated that the question of intention was a triable fact, the defendant settled with the plaintiff. But the defendant was later held liable to the beneficiaries of the trust for the amount of the settlement. Wilmington Trust Co. v. Coulter, 40 Del. Ch. 548, 260 A.2d 441 (1964). We owe this reference to Knapp, Enforcing a Contract to Bargain, 44 N.Y.U. L. Rev. 673, 718 n.159 (1969). U.C.C. §2-204 and its comment were the basis of the decision in the Pennsylvania Co. case. The comment to subsection (3) is worth reading:


Subsection (3) states the principle as to "open terms" underlying later sections of the Article. If the parties intend to enter into a binding agreement, this subsection recognizes that agreement is valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms are left to be agreed upon enough of itself to defeat an otherwise adequate agreement. Rather, commercial standards on the point of "indefiniteness" are intended to be applied, this Act making provision elsewhere for missing terms needed for performance, open price, remedies and the like.


Furthermore, an agreement of the parties to reduce their formal understanding to a writing does not necessarily mean that until this has been done either party can back out with impunity. The writing envisaged may, according to the intention of the parties as interpreted, constitute a mere memorial whose absence will not prevent the formation of a contract. Restatement Second §27. Llewellyn, Our Case-Law of Contracts (pt. 1), Offer and Acceptance, 48 Yale L.J. 1, 30-40 (1938).


[39] On flexible pricing, see U.C.C. §2-305, infra p. 182.


[40] But, the sentence immediately following ends on a note of caution. "Out of the rivers of ink that have been spilled upon that subject I know nothing that has emerged which enlightens us beyond the caution that departure from the text — necessary as it is — must always be made with circumspection;" L. Hand dissenting in L. N. P. Jackson & Co. v. Royal Norwegian Government, 177 F.2d 694, 702 (2d Cir. 1949).  See further the discussion in E. Farnsworth, Contracts 7, 16 (1982) (In long-term contracts, unforeseeability is endemic).


[41] Corbin, Offer and Acceptance, and Some of the resulting Legal Relations, 26 Yale L.J. 169, 206 (1917); Atiyah, Contract and Fair Exchange, 35 U. Toronto L.J. (1985).


[42] See Restatement Second §§22, 23, 33, 34, 362.  The requirement of certainty laid down in §33 “may be affected by the dispute which arises and by the remedy sought” as Comment 6 points out.  Section 34 deals with certainty and choice of terms and effect of performance or reliance.


[43] Section 2-305 reads as follows:


(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if

(a) nothing is said as to price; or

(b) the price is left to be agreed by the parties and they fail to agree; or

(c) The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.

(3)  When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price.

(4) Where, however, the parties intended not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.


[44] For the rationale behind the U.C.C. rule, see E. Farnsworth, Contracts 202-204 (1982). Should it be extended by analogy? To a renewal option in a lease? Consult Joseph Martin, Inc. Delicatessen v. Schumacher, 52 Misc. 2d 105, 436 N.Y.S.2d 247, 417 N.E.2d 541 (1982).


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