Occasionally the thesis has been advanced that once parties have entered into negotiations for a contract, neither can break off arbitrarily without compensating the other for his reliance damages. The case law and literature, on the whole, however, have displayed the good sense to reject this idea. If the utility of contract as an instrument of self·government is not to be seriously weakened, parties must be free to break off preliminary negotiations without being held to an accounting.

Tradition has it that absent fraud, misrepresentation, concealment, and duress, parties negotiating for a contract are dealing at arm's length and are under no duty to act in good faith toward each other.

Bargaining in good faith is dealt with neither by the Uniform Commercial Code (§1-203), nor by the Restatement Second (§205). Both "codifications" deal only with good faith in performance.

By contrast, the National Labor Relations Act §8(d)^[46] imposes on both parties a duty to bargain in good faith. But this means only that the parties have to meet at regular times and confer in good faith. This obligation does not compel either party to agree to a proposal or require the making of a concession. (H. Wellington, Labor and the Legal Process, 52-53 (1968)).^[47] The National Labor Relations Board is empowered to promulgate orders enforceable in the courts to implement S8, but although it may order a party to cease and desist from refusing to bargain, it may not order the party to include a particular term in the agreement. H. K Porter Co. v. N.L.R.B., 397 U.S. 99 (1970).

Until fairly recently, it has been argued that a good faith principle like that embodied in the National Labor Relations Act ought not to be carried over into the formative stage of contracts,^[48] except in fiduciary and confidential relationships. A majority of courts have taken and still take the view that a contract to make a contract, or an agreement to agree, is not binding,^[49] thus allowing each party to abandon negotiation with impunity. But it should not be overlooked that this privilege presupposes that the parties have not yet come to an agreement. Consequently, the further negotiations have progressed, the more unsafe it is to withdraw. The Uniform Commercial Code and the progressive case law endorsed by the Restatement Second, as we saw in the previous section, long ago abandoned the idea that a contract presupposes a consensus ad idem.^[50]

The materials that follow, too important to be ignored and often in conflict, show a tendency to tamper with tradition and to recognize good faith duties, even if the contract in the traditional sense never came into existence. The courts are willing to grant damages when the party claiming lack of agreement has invited or encouraged the other's reliance so that non-enforcement would leave the relying party in a disadvantageous position. Some courts have gone even further, developing in appropriate cases what has been called a "contract to bargain."^[51] This happens when the parties have committed themselves in good faith to complete the contract. In this situation neither party may "arbitrarily" back out of the deal. One may do so only if a fair and honest understanding cannot be reached, but not merely because an outsider has offered better terms. There is thus a gray area between a completed bargain and no contract at all. Of course, it may be exceedingly difficult to shape the appropriate remedy in such a case. Unlike most of the cases in this chapter, where the injured party must be satisfied with either restitution or reliance damages, a few cases, like Borg-Warner, infra p. 226, confront the difficult question of specifically enforcing terms calling for future negotiations, or alternatively, of awarding damages with an allowance for the failure of such negotiations.

[46] 61 Stat. 142 (1947), 29 U.S.C. §158(d)(1958).

[47] For the meaning of the term “good faith” see N.L.R.B. v. Insurance Agents’ Int’l Union, 361 U.S. 477 (1960); Cox, The Duty to Bargain in Good Faith, 71 Harv. L. Rev. 1401 (1958).

[48] United States v. Braunstein, 75 F. Supp. 137 (S.D.N.Y. 1947), appeal dismissed, 168 F.2d 749 (2d Cir. 1948); Ruebsamen v. Maddocks, 340 A.2d 31 (Maine 1975); AB.C. Packard, Inc. v. General Motors Corp., 275 F.2d 63, 69 & n.6 (9th Cir. 1960); Woodmont, Inc. v. Daniels, 274 F.2d 132, 137-138 (10th Cir. 1959).

[49] Ansorge v. Kane, 244 N.Y. 395, 155 N.E. 683 (1927); 1 Corbin §29 (1963) discusses the problem in a good deal more guarded way: a contemplated writing, for instance, might not be the final step in the consummation of an agreement, but a "mere" memorial of the agreement already reached. See further Shepard v. Carpenter, 54 Minn. 153, 55 N. W. 906 (1893); Lord Wright in Hillas v. Argos, 147 L.T. 503 (1902).

[50] U.C.C. §§2-204(3), 2-305(1). The distinction, for instance, between an understanding that the price should be reasonable and an agreement to negotiate in a reasonable way to reach such a price can become quite fluid. A good deal may depend on the remedy sought.

[51]  Knapp, Enforcing the Contract to Bargain, 44 N.Y.U. L. Rev. 673 (1969); Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195 (1968); Kessler & Fine, Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1964).

NOTE

Contrast Cronin v. National Shawmut Bank, 306 Mass. 202, 27 N. E. 2d 717 (1940). See further Restatement of Restitution Second §2 (Tent. Draft No.1, 1983).

HEYER PRODUCTS CO. v. UNITED STATES, 135 Ct. Cl. 63, 140 F. Supp. 409 (1956). The Army's Ordnance Tank Automotive Center (OTAC) requested bids for the manufacture of a quantity of low-voltage circuit testers. The plaintiff alleged in a complaint against the United States that the Center had rejected the plaintiff's bid in "bad faith," having decided to retaliate against the plaintiff for testifying against the contracting agency at a senate hearing. The plaintiff claimed in addition to his expenses in preparing the bid ($7,000), a sum of $38,000 to compensate him for his lost profits. The court denied the Government's motion to dismiss.

"The advertisement for bids was, of course, a request for offers to supply the things the Ordnance Department wanted. It could accept or reject an offer as it pleased, and no contract resulted until an offer was accepted. Hence, an unsuccessful bidder cannot recover the profit he would have made out of the contract, because he had no contract.

"But this is not to say that he may not recover the expense to which he was put in preparing his bid.

"It was an implied condition of the request for offers that each of them would be honestly considered, and that that offer which in the honest opinion of the contracting officer was most advantageous to the Government would be accepted. No person would have bid at all if he had known that 'the cards were stacked against him.' No bidder would have put out $7,000 in preparing its bid, as plaintiff says it did, if it had known the Ordnance Department had already determined to give the contract to the Weidenhoff Company. It would not have put in a bid unless it thought it was to be honestly considered. It had a right to think it would be. The Ordnance Department impliedly promised plaintiff it would be. This is what induced it to spend its money to prepare its bid. . . .

"The facts in United States v. Purcell Envelope Co., 249 U.S. 313, 39 S. Ct. 300, 301,63 L. Ed. 620, differ from the facts in this case in that in that case plaintiffs bid was accepted. But after acceptance the head of the department refused to execute the written contract. Plaintiff sued and the Government defended on the ground that discretion rested in the department head to choose with whom it would contract, and that it had chosen not to contract with plaintiff, and, hence, plaintiff had no legal capacity to sue.

"The court held that a contract resulted from the offer and acceptance and that the subsequent signing of a written contract was not required.

"The facts in the two cases are, therefore, different, but in the course of its opinion the Supreme Court used this language, which is applicable to the present case:

"There must be a point of time at which discretion is exhausted. The procedure for the advertising for bids for supplies . . . to the government would else be a mockery — a procedure, we may say, that is not permissive but required . . . . By it the government is given the benefit of the competition of the market and each bidder is given the chance of a bargain.   It is a provision, therefore, in the interest of both government and bidder, necessarily giving rights to both and placing obligations on both.  And it is not out of place to say that the government should be animated by a justice as anxious to consider the rights of the bidder as to insist upon its own.

"The cases we cited in the beginning of this opinion hold that acts requiring advertising and letting to the lowest responsible bidder confer no right on the bidder to secure the contract, whether or not he is the lowest responsible bidder, and, hence, he may not recover his loss of anticipated profits. We do not understand the Supreme Court in the Purcell Envelope case, supra, to have intended to hold to the contrary, but it did definitely recognize that the bidder had certain rights, and that the Government was under an obligation to respect those rights.

"Among these rights is the right to have his bid honestly considered. The Government is under the obligation to honestly consider it and not to wantonly disregard it. If this obligation is breached and plaintiff is put to needless expense in preparing its bid, it is entitled to recover such expenses."

Two judges dissented from the majority opinion: Judge Madden would have read the Armed Services Procurement Act of 1947 (41 U.S.C.A. §151(b)) as affording plaintiff the right to recover any damages he may have suffered. Judge Laramore, however, regarded the action as one sounding in tort (since it was founded on fraud) and therefore outside the original jurisdiction of the Court of Claims.

NOTE

At the subsequent trial the plaintiff was unable to prove the bad faith alleged. 147 Ct. Cl. 256, 177 F. Supp. 251 (1959). In fact, few Heyer-type plaintiffs have succeeded in claims of the kind the majority in that case put forward. For examples of such failures, see, e.g., Robert F. Simmons & Associates v. United States, 360 F.2d 962 (Ct. Cl. 1966); Edelman v. F.H.A., 251 F. Supp. 715 (E.D.N.Y. 1966). See, in general, Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195, 221 (1968). See further Keco Industries Inc. v. United States, 428 F.2d 1233 (Ct. CI. 1970) and the cases discussed in Grossbaum, Procedural Fairness in Public Contracts: The Procurement Regulations, 57 Va. 1. Rev. 171, 240 et seq. (1971).

Recovery of preparation costs was allowed in Armstrong & Armstrong v. United States, 514 F.2d 402 (9th Cir. 1975); McCurly Corp. v. United States, 490 F.2d 633 (Ct. Cl. 1974). Swinerton & Walberg Co. v. City of Inglewood, 40 Cal. App. 3d 98, 114 Cal. Rptr. 834 (1974), is an example of a state court decision holding for a Heyer-type plaintiff. The court in that case relied on an implied contract or promise that was held enforceable by virtue of Section 90 of the Restatement Second, and on the decision in Drennan v. Star Paving Co., infra p. 326. Note that the court in Swinerton (and possibly the court in Heyer Products, see Grossbaum, supra, at p. 241) had to rely on contract theory to avoid jurisdictional limitations and limitations on governmental liability for tort. In cases involving private auctions, where such limitations are not present, a plaintiff may sue for fraud or deceit instead. See Block v. Tobin, 45 Cal. App. 3d 214, 119 Cal. Rptr. 288 (1975), where the plaintiffs, bidders at a privately held sale under a deed of trust, alleged that the defendants had held a mock auction and sought damages for deceit. The damages were limited by the court to the amount plaintiffs had expended in preparing their bid, but the court left open the possibility that the defendants might be held liable for punitive damages as well.

NOTE

The case is noted in 97 U. Pa. L. Rev. 731 (1949). See also 1 Corbin §205 (1963).

In Prince v. Miller Brewing Co., 434 S.W.2d 232 (Tex. App. 1968) the court refused to follow Goodman or to apply §90 in a case where the franchise agreement in issue granted the franchisor unlimited discretion to terminate. See further the note to Chrysler v. Quimby.

CHRYSLER CORP. v. QUIMBY, 51 Del. 264,144 A.2d 123, 885 (1958). Randall was the President and active executive of Randall Motors, Inc., a Chrysler dealer in Washington, D.C., operating since 1944 under a franchise terminable by Chrysler on 90 days' notice. Quimby, a lawyer and long-standing friend, was a director and secretary of Randall Motors, owning ten shares of the corporation. On Randall's death Quimby told Neely, Chrysler's regional manager, that he wanted to see Randall Motors continue with the business. Neely reported to Chrysler that Quimby was making an effort to obtain the business for himself, and that he (Neely) could under no circumstances recommend that Quimby succeed Randall. On his recommendation, a 90-day notice of termination was given in accordance with the dealer agreement. Neely indicated to Quimby that this was largely a matter of form and that the franchise would be continued if Quimby would purchase the interest of Randall's widow and the rest of the stock from the other stockholders and transfer a 51 percent interest to a qualified person named by Chrysler. Quimby bought the stock of the widow for $38,000 and Randall Motors acquired the shares of the other shareholders so that Quimby became sole stockholder. He was however unable to perform the other condition because the transfer of 51 percent of the stock was prevented by Chrysler's failure to name the transferee. Chrysler gave the franchise to another dealer, thereby greatly reducing the value of the assets of the corporation and of the corporate stock acquired by the plaintiff in reliance on Neely's promise. Quimby sued Chrysler in his own name and as assignee of the corporation.

Assuming that Neely's motives for his assurances to Quimby were to obtain a fair price for the stock for Mrs. Randall, to whom Chrysler felt a moral obligation, is Quimby entitled to recover? If your answer is affirmative, would you decide the issue differently if Neely had not made his recommendation against Quimby succeeding Randall? Assuming, on theactual facts of the case, that plaintiff is entitled to recovery, what should be the measure of his damages?

NOTE

For a parallel case, see Guilbert v. Phillips Petroleum Co., 503 F.2d 587 (6th Cir. 1974). See also Restatement Second §90, illus. 8 & 9. According to the Restatement, the recovery of expectation damages in Chrysler was justified since the defendant had acted willfully, whereas in Goodman the defendant had acted inadvertently. For another explanation see Wheeler v. White, infra p. 225.

Is not the true reason for denying expectation damages in Goodman that such damages would amount to a double recovery? Remember that plaintiffs did not ask for net but for gross profits (out of which their expenses should have been paid). Suppose plaintiffs could have sold three hundred radios at a profit of $10 each. Could they recover $3,000 and ignore their expenses?

B-21873, December 22, 1941, 21 Comp. Gen. 605

Bids - Conditional Acceptance Subject to Execution of Formal Contract - Status as Binding Contract

A "letter of intent" advising a bidder that its bid "is conditionally accepted subject to the execution of a formal contract by the Civil Aeronautics Administration" did not result in a binding agreement so as to obligate the Government, upon its failure to execute a formal contract, to reimburse the bidder for expenses incurred toward the manufacture of the involved articles, and the issuance to the bidder of a "Preference Rating Certificate" is not a representation that a binding contract existed where the certificate indicated to the contrary.

Comptroller General Warren to the Secretary of Commerce, December 22, 1941:

There was received your letter of November 13, 1941, as follows:

There are transmitted herewith for your consideration the following papers:

(1) Bid of the Collins Radio Company, Cedar Rapids, Iowa, on our Proposal 1109, for furnishing high frequency radio transmitters.

(2) Letter of August 14 from the Civil Aeronautics Administration to Collins Radio Company conditionally accepting the bid.

(3) A draft of the formal contract, with bond, unsigned by the Government.

(4) A copy of Preference Rating Certificate No. VG 89775.

(5) A telegram of September 19 from the Civil Aeronautics Administration to Collins Radio Company.

(6) A telegram and letter, each dated September 23, from the Collins Radio Company to Civil Aeronautics Administration.

Collins Radio Company was the only bidder on this proposal. As indicated by the enclosures, the bid was conditionally accepted subject to the signing of the contract. The Civil Aeronautics Administration also furnished to the bidder a Preference Rating Certificate to enable him to furnish the transmitters and secure the necessary materials for manufacturing purposes. The bidder has signed the contract and furnished bond, but the Government has not signed the contract and does not propose to do so because of a change in its requirements.

This office has no reason to doubt the ability and willingness of the Collins Radio Company to furnish the materials called for in Proposal 1109. Furthermore, at the time the bid was accepted the Civil Aeronautics Administration fully expected to enter into the contract, but used the usual form of acceptance which was intended to be conditional and intended not to obligate the Government until the contract was actually signed. After the contract had been signed by the Collins Radio Company and returned to this office, a condition arose under which the Government will have no need for the transmitters described in Proposal 1109, and in lieu thereof a different type of radio equipment will have to be purchased and installed. If we were to permit the contractor to proceed and furnish the transmitters, the Government would not only be purchasing equipment for which it now has no need but equipment which would cost considerably more than that which is now required.

Collins Radio Company contends that a contract was created by the acceptance of the bid; that this was further confirmed by the issuance of the Preference Rating Certificate; and that by this acceptance and certificate the bidder was authorized to proceed with the production of the transmitters and did incur considerable expense toward that end, prompt action being necessary in order to secure the manufacturing materials under the present emergency conditions.

Preference Rating Certificates, in order to be authentic must be identified with a contract or order, but at the time the certificate was issued there was no contract or order number with which it could be identified. Therefore, the proposal number was given in the certificate and the letter of August 14 conditionally accepting the bid was referred to as a "letter of intent."

Your decision is respectfully requested as to whether, by the form of acceptance given and the issuance of a Preference Rating Certificate, a contract was created obligating the Government.

If it is your opinion that the Government has entered into a contract, it is proposed to terminate the contract and if a reasonable settlement can be agreed upon to enter into a supplemental agreement for the amount to be paid for work already performed, et cetera, in full and final settlement of all rights incident to or arising out of the original and supplemental contracts.

The following facts are furnished in order that you may understand the necessity of abandoning the idea of purchasing the THQ transmitters, specified on Proposal 1109, in favor of units of a different design:

At the time consideration was given to making award on Proposal 1109, the Civil Aeronautics Administration had based its conception of the equipment requirements for Alaska for the forthcoming year on information supplied by its regional office at anchorage. That information was of necessity compiled in great haste by that office. By the time the contract forms had been signed by the bidder a representative from the regional office had arrived in Washington, whereupon the Civil Aeronautics Administration engineers had an opportunity to discuss with him the requirements in greater detail. As a result of these discussions it appeared that the interests of the Government would be best served by not making award on Proposal 1109, for the following reasons---

The THQ transmitter has a nominal output of 500 watts. The proposed expansion program for Alaska is predicated upon automatic reception and transmission. In order to most successfully accomplish this automatic feature it is highly desirable that the highest practicable power be used.

The THQ transmitters incorporate provision for a3 (voice) transmission. This feature is expensive and probably involves thirty percent of the cost of the unit. Since a3 transmissions will not be required of the equipment except in approximately seven instances, it appeared unwise to proceed with the purchase of modulators for all RF units. In the more powerful units which the Government now intends to buy this feature will be included in only seven units.

The THQ equipment provides transmission on any one of ten preselected frequencies. It is, however, impossible to transmit simultaneously on two or more of these frequencies. If we have to use the THQ transmitters in order to provide the necessary simultaneous operation of circuits emanating from any station it would be necessary to provide from two to five units of this type at the several stations in the expansion program. This would entail such a high equipment cost as to make it impossible for the Civil Aeronautics Administration to accomplish the proposed expansion program with the funds available.

By using the type of transmitter which we now propose to purchase, only one would be required for each station, as each transmitter would be equipped with one rectifier and as many RF units as there are frequencies used at the station where the transmitter would be located.

In other words, the use of units designed for the simultaneous operation of circuits will reduce the number of units required and greatly reduce the total cost of the equipment to be purchased, and at the same time provide equipment which will better serve the Government's needs.

It appears from the enclosures forwarded with your letter that pursuant to invitation No. 1109, dated July 1, 1941, the Collins Radio Company submitted a bid dated July 14, 1941, by which it agreed to furnish and deliver, f.o.b. common carrier, bidder's shipping point, a total of 60 high-frequency radio transmitters, in accordance with attached specifications as modified, at a unit price of $4,890 each, plus such additional crystals as the Government might order prior to July 1, 1942, at a price of $54 each. It was provided in standard proposal condition attached to and made part of the invitation, in pertinent part, as follows:

Performance Bond and Formal Contract.--- The successful bidder agrees that if his bid is accepted and the amount of the contract awarded to him exceeds $5,000.00, he will enter into a contract with the Government on Government Standard Form No. 32 and will furnish a performance bond on Standard Form No. 25 in an amount equal to 25 percent of the total contract price.

By letter of August 14, 1941, from the Civil Aeronautics Administration, the contractor was notified that award had been made to it under invitation No. 1109, which letter is as follows:

Your bid on proposal No. 1109 for furnishing sixty transmitters and twenty-four additional crystals is conditionally accepted subject to the execution of a formal contract by the Civil Aeronautics Administration. Your attention is invited to article 1 on page 2 of the contract form wherein it is stated that no additional transmitters may be purchased under this contract.

The contract and performance bond are enclosed herewith in quadruplicate. All copies should be executed by you and returned to this office within ten days.

In the execution of the contract and bond your attention is invited to the instructions on page 6 of forms nos. 32 and 25. Care should be taken that the date of the bond is not prior to the date of the contract.

On August 28, 1941, Preference-Rating Certificate No. Vg-89775, covering the radio transmitters to be furnished, and signed on behalf of the Civil Aeronautics Administration by c. M. Estep, contract and service officer, was issued to the contractor. Said certificate stipulated, in pertinent part, that:

1. Preference rating a-1-0 is hereby assigned to the item/s) described below covered by U.S. Government Contract No. (letter of intent Aug. 14, 1941.) Proposal 1109 * * *:

It appears further that the contractor executed and returned the formal contract and performance bond forms, which were transmitted to it with the letter of August 14, 1941, but, for the reasons stated in your letter of November 13, 1941, supra, it was decided by the Government that the radio transmitters were not required; and, accordingly, the formal contract was not executed by the Civil Aeronautics Administration. Moreover, by telegram dated September 19, 1941, the Civil Aeronautics Administration notified the contractor that due to a change in Government requirements, the transmitters covered by proposal No. 1109 would not be needed, and that the formal contract which had been submitted by the contractor would not be accepted by the Government. By telegram of September 23, 1941, and letter of the same date, the contractor protested the refusal of the Civil Aeronautics Administration to execute the formal contract, contending, in substance, that the letter of August 14, 1941, constituted an expression of intent on the part of the Government to purchase the radio transmitters, and, therefore, that a binding agreement was formed which the Government had no right to refuse to carry out. Also, the contractor urged that by the issuance of Preference-Rating Certificate No. Vg-89775, the Government represented that a valid contract for the purchase of the radio transmitters existed. Therefore, the contractor contended that in reliance on the letter of August 14, 1941, and the Preference-Rating Certificate of August 28, 1941, it had a right to proceed with the manufacture of the radio transmitters even though the formal contract had not been executed by the Civil Aeronautics Administration.

The rule appears to be established that, generally, the acceptance of a contractor's offer or proposal by an authorized contracting officer of the Government results in the formation of a valid and binding contract between the parties even though it may be contemplated at the time that the negotiations between the parties are to be incorporated subsequently into a formal written agreement. See Garfield v. United States, 93 U.S.. 242; United States v. New York and Porto Rico Steamship Company, 239 U.S. 88; United States v. Purcell Envelope Company, 249 U.S.. 313; American Smelting and Refining Company v. United States, 259 U.S. 75; Waters v. United States, 75 Ct.Cls. 126, and 18 Comp. Gen. 54. However, it is equally well settled that in such event the acceptance of the contractor's offer by the Government must be clear and unconditional; and it also must appear that both parties intended to make a binding agreement at the time of the acceptance of the contractor's bid. See Rocky Brook Mills Company v. United States, 70 Ct.Cls. 646; United States v. P. J. Carlin Construction Company, et al. ( c.c.a.2d), 224 fed. 859; Elkhorn-Hazard Coal Company, et al. V. Kentucky River Coal Corporation (C.C.A. 6th), 20 f.(2d) 67, 70.

In passing on the question as to whether parties to a contract, who reach an agreement by negotiating, are bound from the time an agreement as to terms is reached, or whether a binding agreement is not formed until the terms of the negotiations are reduced to a formal contract and signed by the parties, the court, in the case of Elkhorn-Hazard Coal Company, et al. V. Kentucky River Coal Corporation, supra, stated, at page 70, as follows:

* * * Whether a contract results from an exchange of definite communications, when a formal contract is intended later to be prepared and executed, is a question which has received much consideration. Whether one so results is mainly a question of intention. The law is well stated in Mississippi and Dominion Steamship Co. V. Swift, 86 me. 248, 29 a. 1063, 41 Am.St.Rep. 545, 553, as follows:

"if the party sought to be charged intended to close a contract prior to the formal signing of a written draft, or if he signified such an intention to the other party, he will be bound by the contract actually made, though the signing of the written draft be omitted. If, on the other hand, such party neither had nor signified such an intention to close the contract until it was fully expressed in a written instrument and attested by signatures, then he will not be bound until the signatures are affixed. The expression of the idea may be attempted in other words: if the written draft is viewed by the parties merely as a convenient memorial, or record of their previous contract, its absence does not affect the binding force of the contract; if, however, it is viewed as the consummation of the negotiation, there is no contract until the written draft is finally signed. * * *" (italics supplied.)

Considering the facts in the present case in the light of the above principles, it appears that while the contractor was notified by an officer of the Civil Aeronautics Administration, in the letter of August 14, 1941, supra, that award had been made to it under invitation No. 1109, it cannot be said that the letter, in itself, was a clear and unconditional acceptance of the contractor's bid so as to bind the Government in the matter from the date of the issuance of said letter. The contrary, the letter of August 14, 1941, expressly advised the contractor that your bid on proposal No. 1109 "* * * is conditionally accepted subject to the execution of a formal contract by the Civil Aeronautics Administration." in other words, the letter of August 14, 1941, expressly negatived any intent of the Government to be bound in the transaction by the issuance thereof and definitely put the contractor on notice that there would be no binding agreement between the parties until a formal contract had been executed by the Civil Aeronautics Administration. Hence, it appears that the letter of August 14, 1941, was not an unconditional acceptance of the contractor's bid nor can it be considered as evidencing an intention on the part of the Civil Aeronautics Administration to enter into a binding agreement at that time to purchase the radio transmitters from the contractor.

Furthermore, it cannot be said that by the issuance of Preference Rating Certificate No. Vg-89775 on August 28, 1941, the Government considered that a binding contract to purchase the radio transmitters had been made between the parties as a result of the issuance of the letter of August 14, 1941. No reference was made in said certificate to any existing contract between the parties and, in the space provided in the Preference Rating Certificate for the insertion of the applicable contract, it was expressly stipulated that the only agreement between the parties was proposal No. 1109 and the letter of August 14, 1941, which is specifically referred to as "letter of intent." therefore, the Preference Rating Certificate shows clearly that, while at the time of its issuance the Government had intended to enter into a contract for the radio transmitters, the Civil Aeronautics Administration considered that the contract had not been consummated.

Accordingly, I have to advise that neither the issuance of the letter of August 14, 1941, nor of the Preference Rating Certificate of August 28, 1941, resulted in the formation of a binding contract between the parties and, therefore, since no valid contract exists, there is no authority for entering into any agreement to reimburse the contractor for any work which may have been performed by it in connection with the matter. See Rocky Brook Mills Company v. United States, supra.

The papers are returned herewith.

NOTE

1. Compare Briggs & Turivas v. United States, 83 Ct. Cl. 664 (1936), cert. denied, 302 U.S. 690 (1937).

2. Mississippi & Dominion Steamship Co. v. Swift, quoted in the opinion, contains (at 259) a most helpful discussion of the circumstances to be considered in determining the intention of the parties:

In determining which view is entertained in any particular case, several circumstances may be helpful, as: whether the contract is of that class which are usually found to be in writing; whether it is of such nature as to need a formal writing for its full expression; whether it has few or many details; whether the amount involved is large or small; whether it is a common or unusual contract; whether the negotiations themselves indicate that a written draft is contemplated as the final conclusion of the negotiations.  If a written draft is proposed, suggested or referred to, during the negotiations, it is some evidence that the parties intended it to be the final closing of the contract.

See further Llewellyn, Our Case Law of Contract, Offer and Acceptance, I, 48 Yale L.J. 1, 14 n.29 (1938); Massee v. Gibbs, 169 Minn. 100, 210 N.W. 872 (1926); Schwartz v. Greenberg, 304 N.Y. 250, 107 N.E.2d 65 (1952); Ryan v. Schott, 109 Ohio App. 317, 159 N.E.2d 907 (1959)

3. The predicament that confronted the supplier in the Collins Radio case was dealt with during World War II by so-called Letters of Intent issued by the government. The Letter of Intent used by the Navy Department, Bureau of Supplies and Accounts (5 February 1942) contained the following pertinent provisions:

The Secretary of the Navy finds that in the interest of National Defense it is necessary that production be not delayed awaiting the placing of the aforesaid order. You are hereby authorized to purchase such materials as are necessary for the production of the airplanes and spare parts and to proceed with the production thereof in anticipation of the placing of the order, subject to the receipt by the Purchasing Officer of notification of the items to be purchased and the estimated maximum prices and confirmation by the Purchasing Officer of authorization to proceed with such purchases.

You will agree in connection with the purchase of such material as aforesaid that you will comply with all laws pertaining or relating to the purchase of such material. All applicable contract clauses required by Federal Law to be incorporated in contracts for articles of the kind herein contracted for are hereby incorporated herein by reference. Your attention is invited to the National Defense clause included in present classified contracts.

In the event that the order for the airplanes and spare parts is not placed with you prior to 1 April 1942, the Government will, upon demand made prior to 1 May 1942, reimburse you for the cost incurred by you and will assume your obligation for any commitment which you have made in this connection. Upon payment and assumption. by the Government, title to such material, including rights under commitments assumed, will vest In the Government.

For the modern Letter of Intent (letter contract), see 41 C.F.R. §1-3.408 (as of July, 1984).

235 N.Y. 338, 139 N.E. 470 (1923)

Court of Appeals of New York.

Sun Printing & Publishing Assn. v. Remington Paper & Power Co., 201 App. Div. 3, reversed.

(Argued March 1, 1923; decided April 17, 1923.)

APPEAL, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered April 24, 1922, which reversed an order of Special Term denying a motion by plaintiff for judgment on the pleadings and granted said motion.

The following question was certified: "Does the complaint state facts sufficient to constitute a cause of action?"

Nathan L. Miller for appellant. No exclusive option was given to respondent under the agreement. (2 Williston on Cont. § 601.) The language used in the agreement set forth in the complaint does not sufficiently define the price to create an enforcible obligation. (1 Williston on Cont. § 45; United Press v. N. Y. Press Co., 164 N. Y. 406; Varney v. Ditmars, 217 N. Y. 234; Harper v. Hassard, 113 Mass. 187; Peacock v. Cummings, 46 Penn. St. 434; Mayer v. McCreery, 119 N. Y. 434.) In the absence of prices and terms agreed upon by the parties as provided for in the agreement, the court will not determine prices and terms for them. (1 Williston on Cont. § 92; Miles v. Gery, 14 Ves. 408.) The case at bar shows a contract with express contemplation of a further agreement to fix the price and the term and until such further agreement was made there could be no breach of obligation and no damages assessable. (Mayer v. McCreery, 119 N. Y. 434; Penn Lubricating Co. v. Wilhelm, 255 Penn. St. 390; Petze v. Morse D. D. & R. Co., 125 App. Div. 267; 195 N. Y. 584; Todd v. Gamble, 148 N. Y. 382.)

Archibald R. Watson, John M. Harrington and Ralph O. Willguss for respondent. By virtue of the agreement in suit, the plaintiff acquired, for a valuable consideration, an option to purchase from the defendant 1,000 tons of newsprint paper per month during the year 1920 at a readily ascertainable price, namely, the co tract price for newsprint paper charged by the Canadian Export Paper Company to the large consumers. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Staples v. O' Neal, 64 Minn. 27; Carney v. Pendleton, 139 App. Div. 152; Bullock v. Cutting, 155 App. Div. 825; Lewis v. Bollinger, 115 Misc. Rep. 221; Matter of Hunter, 1 Edw. Ch. 1; Hawralty v. Warren, 18 N. J. Eq. 124; Heyward v. Willmarth, 87 App. Div. 125.) The agreement in suit prescribes the criterion whereby the maximum price for paper deliverable during each month of the year 1920 was definitely ascertainable; and thereby the defendant irrevocably agreed upon a price to the extent of fixing the maximum price at which it would make deliveries during 1920. (Ehrnworth v. Stuhmer & Co., 229 N. Y. 210; Mis v. Miller, 164 N. Y. 434; G. N. Paper Co. v. N. Y. Times Co., 184 App. Div. 26; McConnell v. Hughes, 29 Wis. 537; Vinton Petroleum Co. v. Sun Co., 230 Fed. Rep. 105; Luetkemeyer Co. v. Murdoch, 267 Fed. Rep. 158.) Courts favor a construction that " renders contracts operative rather than that which nullifies them; and in order to justify disregarding a promise on the ground of uncertainty, indefiniteness must reach the point where construction becomes futile. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Ellis v. Miller, 164 N. Y. 434; Foley v. New York Mutual Benevolent Society, 141 App. Div. 180, 186; Ward v. Whitney, 8 N. Y. 442, 446; Bank of Montreal v. Recknagel, 109 N. Y. 482; United States Fidelity & G. Co. v. Board of Commissioners, 145 Fed. Rep. 144; Archibald v. Thomas, 3 Cow. 284; Minnesota Lumber Co. v. Coal Co., 160 111. 85, 94.) The agreement in suit, when construed in accordance with its legal meaning, conferred upon the plaintiff the right, at its election, to demand of the defendant the delivery of 1,000 tons of newsprint paper per month during the year 1920 at a definitely ascertainable price, namely, the maximum price provided for in the agreement. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Luetkemeyer Co. v. Murdock, 267 Fed. Rep. 158; Vinton Petroleum Co. v. Sun Co., 230 Fed. Rep. 105; St. Regis Paper Co. v. H. & H. Paper Co., 201 App. Div. 402; Wood Co. Grocery Co. v. Frazer, 204 Fed. Rep. 601; Highlands C. & M. Co. v. Matthews, 76 N. Y. 145; De Grasse Paper Co. v. Northern N. Y. Coal Co., 190 App. Div. 227; Southern Pub. Assn. v. Clements Paper Co., 139 Tenn. 429; Farquhar Co. v. N. R. Mineral Co., 87 App. Div. 329.) The plaintiff having, in the exercise of its option, duly demanded the delivery of the paper, the parties thereupon became mutually bound, the defendant to deliver, and the plaintiff to pay for, the paper at the maximum price provided for in the agreement. (Conlcy Camera Co. v. Multiscope & Film Co., 216 Fed. Rep. 892; Hoogendorn v. Daniel, 178 Fed. Rep. 765; Grossman v. Schenker, 206 N. Y. 466; O'Brien v. Bolan, 166 Mass. 481; Hey ward v. Willmarth, 87 App. Div. 125; Wood County Grocer Co. v. Frazer, 284 Fed. Rep. 691.)

CARDOZO, J. Plaintiff agreed to buy and defendant to sell 1,000 tons of paper per month during the months of September, 1919, to December, 1920, inclusive, 16,000 tons in all. Sizes and quality were adequately described. Payment was to be made on the 20th of each month for all paper shipped the previous month. The price for shipments in September, 1919, was to be $3.73% per 100 pounds, and for shipments in October, November and December, 1919, $4 per 100 pounds. " For the balance of the period of this agreement the price of the paper and length of terms for which such price shall apply shall be agreed upon by and between the parties hereto fifteen days prior to the expiration of each period for which the price and length of term thereof have been previously agreed upon, said price in no event to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the seller to receive the benefit of any differentials in freight rates."

Between September, 1919, and December of that year, inclusive, shipments were made and paid for as required by the contract. The time then arrived when there was to be an agreement upon a new price and upon the term of its duration. The defendant in advance of that time gave notice that the contract was imperfect, and disclaimed for the future an obligation to deliver. Upon this, the plaintiff took the ground that the price was to be ascertained by resort to an established standard. It made demand that during each month of 1920 the defendant deliver 1,000 tons of paper at the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the defendant to receive the benefit of any differentials in freight rates. The demand was renewed month by month till the expiration of the year. This action has been brought to recover the ensuing damage.

Seller and buyer left two subjects to be settled in the middle of December and at unstated intervals thereafter. One was the price to be paid. The other was the length of time during which such price was to govern. Agreement as to the one was insufficient without agreement as to the other. If price and nothing more had been left open for adjustment, there might be force in the contention that the buyer would be viewed, in the light of later provisions, as the holder of an option {Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112). This would mean that in default of an agreement for a lower price, the plaintiff would have the privilege of calling for delivery in accordance with a price established as a maximum. The price to be agreed upon might be less, but could not be more than " the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers." The difficulty is, however, that ascertainment of this price does not dispense with the necessity for agreement in respect of the term during which the price is to apply. Agreement upon a maximum payable this month or to-day is not the same as an agreement that it shall continue to be payable next month or to-morrow. Seller and buyer understood that the price to be fixed in December for a term to be agreed upon, would not be more than the price then charged by the Canadian Export Paper Company to the large consumers. They did not understand that if during the term so established the price charged by the Canadian Export Paper Company was changed, the price payable to the seller would fluctuate accordingly. This was conceded by plaintiff's counsel on the argument before us. The seller was to receive no more during the running of the prescribed term, though the Canadian maximum was raised. The buyer was to pay no less during that term, though the maximum was lowered. In brief, the standard was to be applied at the beginning of the successive terms, but once applied was to be maintained until the term should have expired. While the term was unknown, the contract was inchoate.

The argument is made that there was no need of an agreement as to time unless the price to be paid was lower than the maximum. We find no evidence of this intention in the language of the contract. The result would then be that the defendant would never know where it stood. The plaintiff was under no duty to accept the Canadian standard. It does not assert that it was. What it asserts is that the contract amounted to the concession of an option. Without an agreement as to time, however, there would be not one option, but a dozen. The Canadian price to-day might be less than the Canadian price to-morrow. Election by the buyer to proceed with performance at the price prevailing in one month would not bind it to proceed at the price prevailing in another. Successive options to be exercised every month would thus be read into the contract. Nothing in the wording discloses the intention of the seller to place itself to that extent at the mercy of the buyer. Even if, however, we were to interpolate the restriction that the option, if exercised at all, must be exercised only once, and for the entire quantity permitted, the difficulty would not be ended. Market prices in 1920 happened to rise. The importance of the time element becomes apparent when we ask ourselves what the seller's position would be if they had happened to fall. Without an agreement as to time, the maximum would be lowered from one shipment to another with every reduction of the standard. With such an agreement, on the other hand, there would be stability and certainty. The parties attempted to guard against the contingency of failing to come together as to price. They did not guard against the contingency of failing to come together as to time. Very likely they thought the latter contingency so remote that it could safely be disregarded. In any event, whether through design or through inadvertence, they left the gap unfilled. The result was nothing more than "an agreement to agree" (St. Regis Paper Co. v. Hubbs & Hastings Paper Co., 235 N. Y. 30, 36). Defendant "exercised its legal right" when it insisted that there was need of something more (St. Regis Paper Co. v. Hubbs & Hastings Paper Co., supra; 1 Williston Contracts, § 45). The right is not affected by our appraisal of the motive (Mayer v. McCreery, 119 N. Y. 434, 440).

We are told that the defendant was under a duty, in default of an agreement, to accept a term that would be reasonable in view of the nature of the transaction and the practice of the business. To hold it to such a standard is to make the contract over. The defendant reserved the privilege of doing its business in its own way, and did not undertake to conform to the practice and beliefs of others (United Press v. N. Y. Press Co., 164 N. Y. 406, 413). We are told again that there was a duty, in default of other agreement, to act as if the successive terms were to expire every month. The contract says they are to expire at such intervals as the agreement may prescribe. There is need, it is true, of no high degree of ingenuity to show how the parties, with little change of language, could have framed a form of contract to which obligation would attach. The difficulty is that they framed another. We are not at liberty to revise while professing to construe.

We do not ignore the allegation of the complaint that the contract price charged by the Canadian Export Paper Company to the large consumers "constituted a definite and well defined standard of price that was readily ascertainable." The suggestion is made by members of the court that the price so charged may have been known to be one established for the year, so that fluctuation would be impossible. If that was its character, the complaint should so allege. The writing signed by the parties calls for an agreement as to time. The complaint concedes that no such agreement has been made. The result, prima facie, is the failure of the contract. In that situation, the pleader has the burden of setting forth the extrinsic circumstances, if there are any, that make agreement unimportant. There is significance, moreover, in the attitude of counsel. No point is made in brief or in argument that the Canadian price, when once established, is constant through the year. On the contrary, there is at least a tacit assumption that it varies with the market. The buyer acted on the same assumption when it renewed the demand from month to month, making tender of performance at the prices then prevailing. If we misconceive the course of dealing, the plaintiff by amendment of its pleading can correct our misconception. The complaint as it comes before us leaves no escape from the conclusion that agreement in respect of time is as essential to a completed contract as agreement in respect of price. The agreement was not reached, and the defendant is not bound.

The question is not here whether the defendant would have failed in the fulfillment of its duty by an arbitrary refusal to reach any agreement as to time after notice from the plaintiff that it might make division of the terms in any way it pleased. No such notice was given so far as the complaint discloses. The action is not based upon a refusal to treat with the defendant and attempt to arrive at an agreement. Whether any such theory of liability would be tenable we need not now inquire. Even if the plaintiff might have stood upon the defendant's denial of obligation as amounting to such a refusal, it did not elect to do so. Instead, it gave its own construction to the contract, fixed for itself the length of the successive terms, and thereby coupled its demand with a condition which there was no duty to accept (Rubber Trading Co. v. Manhattan R. Mfg. Co., 221 N. Y. 120; 3 Williston Contracts, § 1334). We find no allegation of readiness and offer to proceed on any other basis. The condition being untenable, the failure to comply with it cannot give a cause of action.

The order of the Appellate Division should be reversed and that of the Special Term affirmed, with costs in the Appellate Division and in this court, and the question certified answered in the negative.

CRANE, J. (dissenting). I cannot take the view of this contract that has been adopted by the majority. The parties to this transaction beyond question thought they were making a contract for the purchase and sale of 16,000 tons rolls news print. The contract was upon a form used by the defendant in its business, and we must suppose that it was intended to be what it states to be, and not a trick or device to defraud merchants. It begins by saying that in consideration of the mutual covenants and agreements herein set forth the Remington Paper and Power Company, Incorporated, of Watertown, state of New York, hereinafter called the seller, agrees to sell and hereby does sell and the Sun Printing and Publishing Association of New York city, state of New York, hereinafter called the purchaser, agrees to buy and pay for and hereby does buy the following paper, 16,000 tons rolls news print. The sizes are then given. Shipment is to be at the rate of 1,000 tons per month to December, 1920, inclusive. There are details under the headings consignee, specifications, price and delivery, terms, miscellaneous, cores, claims, contingencies, cancellations.

Under the head of miscellaneous comes the following:

"The price agreed upon between the parties hereto, for all papers shipped during the month of September, 1919, shall be $3.73 and 3/4 per hundred pounds gross weight of rolls on board cars at mills.

"The price agreed upon between the parties hereto for all shipments made during the months of October, November and December, 1919, shall be $4.00 per hundred pounds gross weight of rolls on board cars at mills.

"For the balance of the period of this agreement the price of the paper and length of terms for which such price shall apply shall be agreed upon by and between the parties hereto fifteen days prior to the expiration of each period for which the price and length of term thereof has been previously agreed upon, said price in no event to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the seller to receive the benefit of any differentials in freight rates.

"It is understood and agreed by the parties hereto that the tonnage specified herein is for use in the printing and publication of the various editions of the Daily and Sunday New York Sun, and any variation from this will be considered a breach of contract."

After the deliveries for September, October, November and December, 1919, the defendant refused to fix any price for the deliveries during the subsequent months, and refused to deliver any more paper. It has taken the position that this document was no contract, that it meant nothing, that it was formally executed for the purpose of permitting the defendant to furnish paper or not, as it pleased.

Surely these parties must have had in mind that some binding agreement was made for the sale and delivery of 16,000 tons rolls of paper, and that the instrument contained all the elements necessary to make a binding contract. It is a strain upon reason to imagine the paper house, the Remington Paper and Power Company, Incorporated, and the Sun Printing and Publishing Association, formally executing a contract drawn up upon the defendant's prepared form which was useless and amounted to nothing. We must, at least, start the examination of this agreement by believing that these intelligent parties intended to make a binding contract. If this be so, the court should spell out a binding contract, if it be possible. I not only think it possible, but think the paper itself clearly states a contract recognized under all the rules at law. It is said that the one essential element of price is lacking; that the provision above quoted is an agreement to agree to a price, and that the defendant had the privilege of agreeing or not, as it pleased; that if it failed to agree to a price there was no standard by which to measure the amount the plaintiff would have to pay. The contract does state, however, just this very thing. Fifteen days before the first of January, 1920, the parties were to agree upon the price of the paper to be delivered thereafter, and the length of the period for which such price should apply. However, the price to be fixed was not "to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to large consumers." Here surely was something definite. The 15th day of December arrived. The defendant refused to deliver. At that time there was a price for newsprint charged by the Canadian Export Paper Company. If the plaintiff offered to pay this price, which was the highest price the defendant could demand, the defendant was bound to deliver. This seems to be very clear.

But while all agree that the price on the 15th day of December could be fixed, the further objection is made that the period during which that price should continue was not agreed upon. There are many answers to this.

We have reason to believe that the parties supposed they were making a binding contract; that they had fixed the terms by which one was required to take and the other to deliver; that the Canadian Export Paper Company price was to be the highest that could be charged in any event. These things being so, the court should be very reluctant to permit a defendant to avoid its contract. (Wakeman v. Wheeler & Wilson Mfg. Co., 101 N. Y. 205.)

On the 15th of the fourth month, the time when the price was to be fixed for subsequent deliveries, there was a price charged by the Canadian Export Paper Company to large consumers. As the defendant failed to agree upon a price, made no attempt to agree upon a price and deliberately broke its contract, it could readily be held to deliver the rest of the paper, a thousand rolls a month, at this Canadian price. There is nothing in the complaint which indicates that this is a fluctuating price, or that the price of paper as it was on December 15th was not the same for the remaining twelve months. Or we can deal with this contract, month by month. The deliveries were to be made 1,000 tons per month. On December 15th 1,000 tons could have been demanded. The price charged by the Canadian Export Paper Company on the 15th of each month on and after December 15th, 1919, would be the price for the thousand ton delivery for that month.

Or again, the word as used in the miscellaneous provision quoted is not "price," but "contract price" — "in no event to be higher than the contract price." Contract implies a term or period and if the evidence should show that the Canadian contract price was for a certain period of weeks or months, then this period could be applied to the contract in question.

Failing any other alternative, the law should do here what it has done in so many other cases, apply the rule of reason and compel parties to contract in the light of fair dealing. It could hold this defendant to deliver its paper as it agreed to do, and take for a price the Canadian Export Paper Company contract price for a period which is reasonable under all the circumstances and conditions as applied in the paper trade.

To let this defendant escape from its formal obligations when any one of these rulings as applied to this contract would give a practical and just result is to give the sanction of law to a deliberate breach. (Wood v. Duff-Gordon, 222 N. Y. 88; Moran v. Standard Oil Co., 211 N. Y. 187; United States Rubber Co. v. Silverstein, 229 N. Y. 168.)

For these reasons I am for the affirmance of the courts below.

HISCOCK, Ch. J., POUND, MCLAUGHLIN and ANDREWS, JJ., concur with CARDOZO, J.; CRANE, J., reads dissenting opinion with which HOGAN, J., concurs.

Order reversed, etc. 

NOTE

The plaintiff subsequently amended his complaint in accordance with Cardozo's suggestions. It was dismissed at Special Term. No appeal was taken because of a settlement. Shientag, The Opinions and Writings of Judge Benjamin N. Cardozo, 30 Colum. L. Rev. 597, 629 (1930).

In his Growth of the Law 110-111 (1924), a series of lectures given a short while later, Cardozo defended his position as follows:

Here was a case where advantage had been taken of the strict letter of a contract to avoid an onerous engagement. Not inconceivably a sensitive conscience would have rejected such an outlet of escape. We thought this immaterial. The court subordinated the equity of a particular situation to the overmastering need of certainty in the transactions of commercial life. The end to be attained in the development of the law of contract is the supremacy, not of some hypothetical, imaginary will, apart from external manifestations, but of will outwardly revealed in the spoken or the written word. The loss to business would in the long run be greater than the gain if judges were clothed with power to revise as well as to interpret. Perhaps, with a higher conception of business and its needs, the time will come when even revision will be permitted if it is revision in consonance with established standards of fair dealing, but the time is not yet. In this department of activity, the current axiology still places stability and certainty in the forefront of the virtues. ''The field is one where the law should hold fast to fundamental conceptions of contract and of duty, and follow them with loyalty to logical conclusions." [Imperator Realty Co. v. Tull, 228 N. Y. 447, 455.]

In a footnote, Cardozo makes the following qualification: "Of course, a different result may be reached if the omitted term is of subsidiary importance (1 Williston, Contracts §48), but ordinarily the price to be paid, if reserved for subsequent agreement, is to be ranked as fundamental." In contrast to the Court of Appeals, the Appellate Division had treated the arrangement as an enforceable option and held that the contract was no longer indefinite as to the price as soon as the buyer agreed to pay the maximum provided in the contract. For a further discussion of the case see Notes, 23 Colum. L. Rev. 783 (1923); 27 Colum. L. Rev. 708 at 711, n.11 (1927); Corbin, Mr. Justice Cardozo and the Law of Contracts, 39 Colum. L. Rev. 56, 58 (1939); 52 Harv. L. Rev. 408, 410 (1939); 48 Yale L.J. 426, 428 (1939). The Wood v. Duff-Gordon case is reprinted infra p. 451.

What does the reference to arbitrary refusal mean?

Suppose the contract had contained the following clause: "If any disputes or differences shall arise on the subject matter or construction of this agreement the same shall be submitted to arbitration." Same result? Foley v. Classique Coaches, Ltd., [1934] 2 K.B. 1 (C.A.). See Note, 44 Yale L.J. 684 (1935).

HOFFMAN v. RED OWL STORES, INC., 26 Wis. 2d 683, 133 N.W.2d 267 (1965). Hoffman and his wife, the plaintiffs, owned and operated a bakery in Wautoma, Wisconsin. Wanting to expand his operations, Hoffman contacted the District Manager of Red Owl Stores to inquire about obtaining a franchise. Hoffman mentioned that $18,000 was all the capital he had to invest, and was repeatedly assured that this was enough. On the recommendation of the manager, Hoffman bought the inventory and fixtures of a small local grocery store to gain experience. The store made a profit, but Hoffman sold it within three months on the insistence of the manager, who promised that Red Owl would find him a larger store in another city. The manager then advised Hoffman to spend $1000 on an option on a piece of land costing $6000 in Chilton, where the future store would be. After spending $1000 for the option, Hoffman, again on the advice of the manager, sold his bakery business and the bakery building, which he and his wife owned. Hoffman rented a house in Chilton on the assurance that "everything would be set" after the sale of the bakery. He never moved to Chilton, however, Red Owl having advised him to get experience at a Red Owl store in Neenah. The family moved to Neenah, but Hoffman never got the job.

Having done all this on the advice of the District Manager, Hoffman was informed that he would have to invest $34,000, not $18,000. Negotiations were abandoned when the parties were unable to agree on the terms of the financing agreement.

The Hoffmans sued Red Owl to recover the losses incurred in reliance on defendant's representations and assurances.

The court, relying on §90, upheld a damage award to plaintiffs for losses on the sale of the bakery, the rental and moving expenses, and the down payment on the Chilton property. The court also sustained an order for a new trial on the issue of damages incurred in the sale of the grocery store fixtures and inventory, since the damages awarded by the jury were not sustained by the evidence. On this latter issue, the court followed the trial court in ruling that damages for the sale of the grocery store be "limited to the difference between the sales price received and the fair market value of the assets sold, giving consideration to any goodwill attaching thereto by reason of the transfer of a going business." The court rejected the plaintiff's contention that the damages should include loss of profits. When the plaintiffs sold the store they were concerned about the loss of large profits during the ensuing summer months (profits that the buyer of the store subsequently realized). After noting that this was not a breach of contract action, the court said that [w]here damages are awarded in promissory estoppel instead of specifically enforcing the promisor's promise, they should be only such as in the opinion of the court are necessary to prevent injustice .... At the time Hoffman bought the equipment and inventory of the [grocery store] he did so in order to gain experience in the grocery store business .... Thus Hoffman made this purchase more or less as a temporary experiment. Justice does not require that the damages awarded him, because of selling those assets at the behest of defendants, should exceed any actual loss sustained measured by the difference between the sales price and the fair market value." The court, however, did point out that evidence of past profits would be admissible to aid in determining the fair market value of the assets in question.

NOTE

1. The promises and assurances made by the defendant in Hoffman were not "so comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted by the promisee." 26 Wis. 2d at 698, 133 N.W.2d at 275. But as the court pointed out, §90 does not require an offer.

Rather the conditions imposed are:

(1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee?

(2) Did the promise induce such action or forbearance?

(3) Can injustice be avoided only by enforcement of the promise?

Id. at 698, 133 N. W.2d at 275.

The Hoffman court went on to point out that "it would be a mistake to regard an action grounded on promissory estoppel as the equivalent of a breach of contract action."

2. If promissory estoppel is not an action for breach of contract, what is it? Promissory estoppel has been called "a peculiarly equitable doctrine." Henderson, Promissory Estoppel and Traditional Contract Doctrine, 78 Yale L.J. 343, 379-380 (1969). From this, the California Supreme Court, misreading Henderson and over the strong dissent of Newman, J., drew the inference that there could be no right to a jury trial in an action based on promissory estoppel. C & K Engineering Contractors v. Amber Steel Co., 23 Cal. 3d 1, 587 P.2d 1136, 151 Cal. Rptr. 323 (1978). The Hoffman court did not go so far. Of the three issues set forth above, the first two were left to the jury.

3. If promissory estoppel is not based on contract, how should the jurisdictional and government liability questions noted in connection with Heyer Products, supra p. 207, be resolved when a plaintiff bases his claim on Section 90?  Note that under both Restatements an action based on Section 90 is an action for breach of contract.  See §1.  Which statute of limitations should apply in promissory estoppel actions?  See Huhtala v. Travelers Ins. Co., 401 Mich. 118, 257 N.W.2d 640 (1977).

4. Goodman, Chrysler, and Hoffman have all been explained in terms of bad faith. Although the bad faith in Chrysler was clear, it was more subtle in Goodman and Hoffman. In the latter cases, bad faith has been found in the failure promptly to withdraw a "rash promise" and post-promise assurances about future performance. Goetz & Scott, Enforcing Promises: An Examination of the Basis of Contract, 89 Yale L.J. 1261, 1319-1320 (1890). Is the use of promissory estoppel in this context filling a gap left by the tort law of fraud and deceit? Can a connection be made between the bad faith in these three cases and the bad faith doctrine in the insurance cases described in Chapter 4, Section 3? See Holmes, Is There Life After Gilmore's Death of Contract? - Inductions from a Study of Commercial Good Faith in First-Party Insurance Contracts, 65 Cornell L. Rev. 330, 369-370 (1980).