Which Promises are Enforced?

2. Which Promises Are Enforced?

Now that we have a better understanding of how courts determine whether someone has made a promise, we can consider which promises are enforced and why. As we will see, doctrines such as indefiniteness and consideration prevent enforcement of some seriously intended promises. But first consider whether there are any influences other than legal enforcement that tend to encourage people to keep their promises.

2.1 Why Enforce Promises?

2.1.1 Alternative Methods of Enforcement

Imagine that you are the proprietor of a specialty auto parts manufacturer. You sell your products to retailers who in turn sell them to car fanciers who use them to customize their rides. What would you do if a production problem threatened your ability to make timely deliveries of a hot new rear spoiler? For example, you might have to decide whether to incur added costs for overtime hours and for expedited delivery of raw materials. Presume for the moment that litigation costs will prevent retailers from suing you for breach.

What factors will affect your choice about these additional expenses? Are there any extra-legal enforcement mechanisms that might lead you to exert yourself to restore supply quickly despite the absence of any effective legal sanction for breach?

Yet another way to shed light on the role of legal enforcement is to examine the problem of instantly retracted promises.

2.1.2 Hypo on Instant Retraction

Suppose that, disappointed with the result in Bailey v. West, poor Mr. Bailey decides to get out of the horse farm business. One morning, he mournfully signs a written agreement to sell his farm to a neighbor and long-time competitor. He walks outside and runs into a dear old friend who convinces him that he should continue in business. Bailey rushes back inside to tell the neighbor that the deal is off, but the neighbor insists that they have a deal. Bailey subsequently refuses to convey the farm.

What do you suppose happens when the neighbor sues Bailey for the farm?

2.1.3 Discussion of Instant Retraction

One possible argument against enforcement in this hypothetical is that it would be inefficient to force Bailey to turn over the farm. He must value the farm more highly than the neighbor because he is willing to give up the purchase price in order to keep it.

Can you see any problems with this reasoning? What exactly does Bailey’s decision tell us about his valuation of the farm in comparison with the neighbor’s valuation of the property?

Another argument is that we enforce promises in order to protect beneficial reliance and to reduce detrimental reliance. Thus, we shouldn’t enforce this instantly retracted promise because the neighbor has not yet relied on the promise.

What would you expect to happen if courts adopted a rule that conditioned enforcement on proof of reliance?

Consider how the parties in our hypothetical might try to prove or disprove reliance.

Would future parties behave any differently in reaction to such a rule? In other words, what are the likely “prospective effects” of a legal rule permitting instant retraction?

2.1.4 Gap Filling

A moment’s thought will reveal that it is impossible to write a complete contract. No contract can possibly deal with every contingency, with every state of the world that might occur, with every change of circumstances that might affect the parties’ willingness and ability to perform the duties they have promised to perform. Indeed, the possibilities are infinite and our time and resources for anticipating situations and drafting appropriate provisions are decidedly finite. Thus, we inevitably draft incomplete contracts.

One important function of contract law is, therefore, to fill the gaps in these incomplete agreements. We will refer to these court-supplied terms as contract “default rules.” Like the default settings in a word processing program for font size, margins, and line spacing, contract defaults apply unless the parties make a contrary agreement.

In order to begin to understand the role of defaults, consider the following hypothetical.

2.1.5 Hypo on Gap Filling

My colleague Paul Mahoney and I agree that I will lease his car for a year while he is on leave to establish a new law office in Russia. We explicitly agree on a rental rate of $100/month and a lease term of one year. Suppose that the car’s clutch fails six months into the lease. How would you expect a court to respond to my claim that Mahoney is obligated to pay for the necessary repairs?

2.1.6 Discussion of Gap Filling

We can array various approaches to gap filling along a continuum. At one extreme are simple majoritarian default rules, a one-size-fits-all solution. At the opposite extreme is a highly tailored default term that tries to capture what these particular parties would have agreed to if they had bargained over the issue.

What would be a good majoritarian rule for the car lease hypothetical?

How would a court decide on a tailored default for the same situation?

Which approach to gap filling do you favor? Why?

Can you think of any problems that courts or parties might encounter under your preferred approach?

2.2 Introduction to Indefiniteness Doctrine

As we have discussed, contractual liability requires at least some evidence that a party intended to make a legally enforceable promise. We also have seen that all contracts are necessarily incomplete and that courts create default rules to fill in these inevitable gaps. Indeed, supplying omitted terms is a central function of contract law. However, the question remains how far courts should go to remedy contractual incompleteness. Perhaps there should be certain essential terms that the parties themselves must specify in order to form a contract.

The “indefiniteness” doctrine refers to a legal conclusion that a purported contract contains too many gaps to warrant enforcement. We will explore two competing reasons for refusing to enforce indefinite agreements. First, a court might believe that gaps in an agreement are so fundamental they indicate that the parties lacked the requisite intent to contract. Courts frequently rely on this intent-based reasoning to refuse to enforce so-called “agreements to agree.” Suppose, for example, that Sam tells Wanda that he’ll accept a management position at her high-tech startup company for “a salary to be determined by future negotiations between the parties.” If the parties are subsequently unable to agree on a salary, many courts will refuse to find an enforceable employment contract. Sam and Wanda’s failure to agree on this important contract term shows that they did not intend to be bound to a legally enforceable agreement.

The second argument for refusing to enforce indefinite agreements proceeds on the assumption that the parties intended to form an enforceable contract. Courts taking this approach focus on concerns about judicial capacity and the parties’ lack of care in drafting. For example, in Walker v. Keith, 382 S.W.2d 198 (Ky. Ct. App. 1964), the court explained that:

Stipulations such as the one before us have been the source of interminable litigation. Courts are called upon not to enforce an agreement or to determine what the agreement was, but to write their own concept of what would constitute a proper one. Why this paternalistic task should be undertaken is difficult to understand when the parties could so easily provide any number of workable methods by which rents could be adjusted. As a practical matter, courts sometimes must assert their right not to be imposed upon.

As you read the indefiniteness cases that follow (Varney, Corthell, D.R. Curtis, and Schumacher), try to determine what judgment underlies the court’s decision to refuse enforcement.

2.3 Principal Case – Varney v. Ditmars

Varney v. Ditmars

Court of Appeals of New York

217 N.Y. 223, 111 N.E. 822 (1916)

Chase, Judge

[1] This is an action brought for an alleged wrongful discharge of an employee. The defendant is an architect employing engineers, draftsmen and other assistants. The plaintiff is an architect and draftsman. In October, 1910, he applied to the defendant for employment and when asked what wages he wanted, replied that he would start for $40 per week. He was employed at $35 per week. A short time thereafter he informed the defendant that he had another position offered to him and the defendant said that if he would remain with him and help him through the work in his office he thought he could offer him a better future than anybody else. He continued in the employ of the defendant and became acquainted with a designer in the office and said designer and the plaintiff from time to time prior to the 1st of February, 1911, talked with the defendant about the work in his office. On that day by arrangement the two remained with the defendant after the regular office hours and the defendant said: “I am going to give you $5 more a week; if you boys will go on and continue the way you have been and get me out of this trouble and get these jobs started that were in the office three years, on the first of next January I will close my books and give you a fair share of my profits. That was the result of the conversation. That was all of that conversation.” The plaintiff was given charge of the drafting. Thereafter suggestions were made by the plaintiff and said designer about discharging many of the defendant’s employees and employing new men and such suggestionswere carried out and the two worked in the defendant’s office over time and many Sundays and holidays. At least one piece of work that the defendant said had been in his office for three years was completed. The plaintiff on his cross-examination told the story of the employment of himself and said designer as follows: “And he says at that time ‘I am going to give you $5 more a week starting this week.’ This was about Thursday. He says ‘You boys go on and continue the work you are doing and the first of January next year I will close my books and give you a fair share of my profits.’ Those were his exact words.”

[2] Thereafter the plaintiff was paid $40 a week. On November 6, 1911, the night before the general election in this state, the defendant requested that all of his employees that could do so, should work on election day. The plaintiff told the defendant that he wanted to remain at home to attend an election in the village where he lived. About four o’clock in the afternoon of election day he was taken ill and remained at his house ill until a time that as nearly as can be stated from the evidence was subsequent to December 1, 1911. On Saturday, November 11, the defendant caused to be delivered to the plaintiff a letter in which he said: “I am sending you herewith your pay for one day’s work of seven hours, performed on Monday, the 6th inst. On Monday night, I made it my special duty to inform you that the office would be open all day Election Day and that I expected you and all the men to report for work. Much to my surprise and indignation, on Tuesday you made no appearance and all the men remained away, in obedience of your instructions to them of the previous evening. An act of this kind I consider one of extreme disloyalty and insubordination and I therefore am obliged to dispense with your services.”

[3] After the plaintiff had recovered from his illness and was able to do so he went to the defendant’s office (the date does not appear) and told him that he was ready, willing and able to continue his services under the agreement. The defendant denied that he had any agreement with him and refused to permit him to continue in his service. Thereafter and prior to January 1, 1912, the plaintiff received for special work about $50.

[4] The plaintiff seeks to recover in this action for services from November 7, 1911, to December 31, 1911,inclusive, at $40 per week and for a fair and reasonable percentage of the net profits of the defendant’s business from February 1, 1911, to January 1, 1912, and demands judgment for $1,680.

[5] At the trial he was the only witness sworn as to the alleged contract and at the close of his case the complaint was dismissed.

[6] The statement alleged to have been made by the defendant about giving the plaintiff and said designer a fair share of his profits is vague, indefinite and uncertain and the amount cannot be computed from anything that was said by the parties or by reference to any document, paper or other transaction. The minds of the parties never met upon any particular share of the defendant’s profits to be given the employees or upon any plan by which such share could be computed or determined. The contract so far as it related to the special promise or inducement was never consummated. It was left subject to the will of the defendant or for further negotiation. It is urged that the defendant by the use of the word “fair” in referring to a share of his profits, was as certain and definite as people are in the purchase and sale of a chattel when the price is notexpressly agreed upon, and that if the agreement in question is declared to be too indefinite and uncertain to be enforced a similar conclusion must be reached in every case where a chattel is sold without expressly fixing the price therefor.

[7] The question whether the words “fair” and “reasonable” have a definite and enforceable meaning when used in business transactions is dependent upon the intention of the parties in the use of such words and upon the subject-matter to which they refer. In cases of merchandising and in the purchase and sale of chattels the parties may use the words “fair and reasonable value” as synonymous with “market value.” A promise to pay the fair market value of goods may be inferred from what is expressly agreed by the parties. The fair, reasonable or market value of goods can be shown by direct testimony of those competent to give such testimony. The competency to speak grows out of experience and knowledge. The testimony of such witnesses does not rest upon conjecture. The opinion of this court in United Press v. N. Y. Press Co. (164 N. Y. 406) was not intended to assert that a contract of sale is unenforceable unlessthe price is expressly mentioned and determined.

[8] In the case of a contract for the sale of goods or for hire without a fixed price or consideration being named it will be presumed that a reasonable price or consideration is intended and the person who enters into such a contract for goods or service is liable therefor as on an implied contract. Such contracts are common, and when there is nothing therein to limit or prevent an implication as to the price, they are, so far as the terms of the contract are concerned, binding obligations.

[9] The contract in question, so far as it relates to a share of the defendant’s profits, is not only uncertain but it is necessarily affected by so many other facts that are in themselves indefinite and uncertain that the intention of the parties is pure conjecture. A fair share of the defendant’s profits may be any amount from a nominal sum to a material part according to the particular views of the person whose guess is considered. Such an executory contract must rest for performance upon the honor and good faith of the parties making it. The courts cannot aid parties in such a case when they are unable or unwilling to agree upon the terms of theirown proposed contract.

[10] It is elementary in the law that, for the validity of a contract, the promise, or the agreement, of the parties to it must be certain and explicit and that their full intention may be ascertained to a reasonable degree of certainty. Their agreement must be neither vague nor indefinite, and, if thus defective, parol proof cannot be resorted to. (United Press v. N. Y. Press Co., supra, and cases cited; Ruling Case Law, vol. 6, 644.)

[11] The courts in this state, in reliance upon and approval of the rule as stated in the United Press case, have decided many cases involving the same rule. Thus, in Mackintosh v. Thompson (58 App. Div. 25) and again in Mackintosh v. Kimball (101 App. Div. 494) the plaintiff sought to recover compensation in addition to a stated salary which he had received and which additional amount rested upon a claim by him that while he was employed by the defendants he informed them that he intended to leave their employ unless he was given an increase in salary, and that one of the defendants said to him that they would make it worth his while if he would stay on, and would increase his salary, and thathis idea was to give him an interest in the profits on certain buildings that they were then erecting. The plaintiff further alleges that he asked what would be the amount of the increase and was told, “You can depend upon me; I will see that you get a satisfactory amount.” The court held that the arrangement was too indefinite to form the basis of any obligation on the part of the defendants.

[12] In Bluemner v. Garvin (120 App. Div. 29) the plaintiff and defendant were architects, and the plaintiff alleged that he drew plans for a public building in accordance with a contract held by the defendant and pursuant to a special agreement that if the plans were accepted the defendant would give him a fair share of the commissions to be received by him. The court held that a good cause of action was stated on quantum meruit, but that the contract was too vague and indefinite to be enforced.

[13] A similar rule has been adopted in many other states. I mention a few of them. In Fairplay School Township v. O’Neal (127 Ind. 95) a verbal contract between a school trustee and a teacher, in which the latter undertook to teach school for a term in the district, and the trustee promisedto pay her “good wages,” it was held that the alleged contract was void for uncertainty as to compensation, and that the school township was not liable for its breach.

[14] In Dayton v. Stone (111 Mich. 196) the plaintiff had sold to the defendant her stock of goods and fixtures, and by the contract of sale the undamaged goods were to be inventoried and taken at cost price, and the damaged goods at prices to be agreed upon. In an action for breach of contract it was held that the contract was an entire one, and that so far as it left the price of the damaged goods to be fixed and determined it was uncertain and incomplete, and not one which could be enforced against the defendant.

[15] In Wittkowsky v. Wasson (71 N. C. 451) it was held that where the price of certain property was to be fixed by agreement between the parties after the time of the agreement and they did not agree upon the price that the title to the property did not pass.

[16] In Adams v. Adams (26 Ala. 272) a promise by a defendant for a valuable consideration to give his daughter a “full share of his property” which then and there was worth $ 25,000 was held to be too indefinite and uncertainto support an action.

[17] In Van Slyke v. Broadway Ins. Co. (115 Cal. 644) a contract between an insurance agent and the insurance company for a contingent commission of 5% which did not give the facts upon which the contingency depended nor state the sum on which the 5% was to be computed was held unenforceable and also that it could not be aided by parol.

[18] In Marvel v. Standard Oil Co. (169 Mass. 553) a contract by which the defendant agreed to sell the plaintiff its oil on such reasonable terms as to enable him to compete successfully with other parties selling in the same territory was held to be too indefinite and too general to be enforceable as a contract.

[19] In Burks v. Stam (65 Mo. App. 455) a contract for the sale of two race horses for a specified sum and providing for a further payment of a fixed sum by the purchaser if he did well and had no bad luck with the horses was held too vague to admit of enforcement.

[20] In Butler v. Kemmerer (218 Pa. St. 242) the plaintiff was in the employ of the defendant at a regular salary and the defendant promised him that if there were any profits in the business he would divide them withthe plaintiff “upon a very liberal basis.” The action was brought to recover a part of the profits of the business and the court held that the contract was never made complete and that there was no standard by which to measure the degree of liberality with which the defendant should regard the plaintiff.

[21] The only cases called to our attention that tend to sustain the appellant’s position are Noble v. Joseph Burnett Co. (208 Mass. 75) and Silver v. Graves (210 Mass. 26). The first at least of such cases is distinguishable from the case under consideration, but in any event the decisions therein should not be held sufficient to sustain the plaintiff’s contention in view of the authorities in this state.

[22] The rule stated from the United Press case does not prevent a recovery upon quantum meruit in case one party to an alleged contract has performed in reliance upon the terms thereof, vague, indefinite and uncertain though they are. In such case the law will presume a promise to pay the reasonable value of the services. Judge Gray, who wrote the opinion in the United Press case, said therein: “I entertain no doubt that, where work has been done, or articleshave been furnished, a recovery may be based upon quantum meruit, or quantum valebat; but, where a contract is of an executory character and requires performance over a future period of time, as here, and it is silent as to the price which is to be paid to the plaintiff during its term, I do not think that it possesses binding force. As the parties had omitted to make the price a subject of covenant, in the nature of things, it would have to be the subject of future agreement, or stipulation.” (p. 412.)

[23] In Petze v. Morse Dry Dock & Repair Co. (125 N.Y. App. Div. 267, 270) the court say: “There is no contract so long as any essential element is open to negotiation.” In that case a contract was made by which an employee in addition to certain specified compensation was to receive 5% of the net distributable profits of a business and it was further provided that “the method of accounting to determine the net distributable profits is to be agreed upon later when the company’s accounts have developed for a better understanding.” The parties never agreed as to the method of determining the net profits and the plaintiff was discharged before the expiration of theterm. The court in the opinion say that “the plaintiff could recover for what he had done on a quantum meruit, and the employment must be deemed to have commenced with a full understanding on the part of both parties that that was the situation.” The judgment of the Appellate Division was unanimously affirmed without opinion in this court. (195 N. Y. 584.)

[24] So, this case, while I do not think that the plaintiff can recover anything as extra work, yet if the work actually performed as stated was worth more than $40 per week, he having performed until November 7, 1910, could, on a proper complaint, recover its value less the amount received. (See Bluemner v. Garvin, supra; S. C., 124 App. Div. 491; King v. Broadhurst, 164 App. Div. 689.)

[25] The plaintiff claims that he at least should have been allowed to go to the jury on the question as to whether he was entitled to recover at the rate of $40 per week from November 7, 1911, to December 31, 1911, inclusive. He did not perform any services for the defendant from November 6 until some time after December 1st, by reason of his illness. He has not shown just when he offered to return. It appears that betweenthe time when he offered to return and January 1st he received $50 for other services.

[26] The amount that the plaintiff could recover, therefore, if any, based upon the agreement to pay $40 per week would be very small, and he did not present to the court facts from which it could be computed. His employment by the defendant was conditional upon his continuing the way he had been working, getting the defendant out of his trouble and getting certain unenumerated jobs that were in the office three years, started. There was nothing in the contract specifying the length of service except as stated. It was not an unqualified agreement to continue the plaintiff in his service until the first of January, and it does not appear whether or not the special conditions upon which the contract was made had been performed. Even apart from the question whether the plaintiff’s absence from the defendant’s office by reason of his illness would permit the defendant to refuse to take him back into his employ, I do not think that on the testimony as it appears before us it was error to refuse to leave to the jury the question whether the plaintiff was entitled to recover anything[at] the rate of $40 per week.

[27] The judgment should be affirmed, with costs.

Cardozo, Judge ([concurring in the judgment in part and] dissenting [in part]).

[28] I do not think it is true that a promise to pay an employee a fair share of the profits in addition to his salary is always and of necessity too vague to be enforced (Noble v. Joseph Burnett Co., 208 Mass. 75; Silver v. Graves, 210 Mass. 26; Brennan v. Employers Liability Assurance Corp., Ltd., 213 Mass. 365; Joy v. St. Louis, 138 U.S. 1, 43). The promise must, of course, appear to have been made with contractual intent (Henderson Bridge Co. v. McGrath, 134 U.S. 260, 275). But if that intent is present, it cannot be said from the mere form of the promise that the estimate of the reward is inherently impossible. The data essential to measurement may be lacking in the particular instance, and yet they may conceivably be supplied. It is possible, for example, that in some occupations an employee would be able to prove a percentage regulated by custom. The difficulty in this case is not so much in the contract as in the evidence. Even if the data required for computation might conceivably have been supplied, theplaintiff did not supply them. He would not have supplied them if all the evidence which he offered, and which the court excluded, had been received. He has not failed because the nature of the contract is such that damages are of necessity incapable of proof. He has failed because he did not prove them.

[29] There is nothing inconsistent with this view in United Press v. N. Y. Press Co. (164 N. Y. 406). The case is often cited as authority for the proposition that an agreement to buy merchandise at a fair and reasonable price is so indefinite that an action may not be maintained for its breach in so far as it is still executory. Nothing of the kind was decided, or with reason could have been. What the court did was to construe a particular agreement, and to hold that the parties intended to reserve the price for future adjustment. If instead of reserving the price for future adjustment, they had manifested an intent on the one hand to pay and on the other to accept a fair price, the case is far from holding that a jury could not determine what such a price would be and assess the damages accordingly. Such an intent, moreover, might be manifested not only through expresswords, but also through reasonable implication. It was because there was neither an express statement nor a reasonable implication of such an intent that the court held the agreement void to the extent that it had not been executed.

[30] On the ground that the plaintiff failed to supply the data essential to computation, I concur in the conclusion that profits were not to be included as an element of damage. I do not concur, however, in the conclusion that he failed to make out a case of damage to the extent of his loss of salary. The amount may be small, but none the less it belongs to him. The hiring was not at will (Watson v. Gugino, 204 N. Y. 535; Martin v. N. Y. Life Ins. Co., 148 N. Y. 117). The plain implication was that it should continue until the end of the year when the books were to be closed. The evidence would permit the jury to find that the plaintiff was discharged without cause, and he is entitled to damages measured by his salary for the unexpired term.

[31] The judgment should be reversed and a new trial granted, with costs to abide the event.

2.3.1 Discussion of Varney v. Ditmars

What terms in Varney’s employment agreement are uncertain?

What is the basis for Justice Cardozo’s “dissent”? Does he agree or disagree with the majority’s ruling on a “fair share of profits”?

Do you see any evidence that the court doubts the parties intended to form a contract?

Is there any hint of the drafting concern?

What is the basis for the many cases cited by the majority? Can you tell by reading the court’s description of those cases whether they rest on doubt about the parties’ intent to contract or defects in their contractual drafting?

2.3.2 Corthell v. Summit Thread Co.

In Corthell v. Summit Thread Co., 132 Me. 94 (1933), an employee promised to turn over future inventions in return for “reasonable recognition” from his employer. A written agreement provided that “the basis and amount of recognition [shall] rest entirely with Summit Thread Company at all times … to be interpreted in good faith on the basis of what is reasonable and not technically.” In upholding the enforceability of this agreement, the court said:

There is no more settled rule of law applicable to actions based on contracts than that an agreement, in order to be binding, must be sufficiently definite to enable the Court to determine its exact meaning and fix exactly the legal liability of the parties. Indefiniteness may relate to the time of performance, the price to be paid, work to be done, property to be transferred or other miscellaneous stipulations of the agreement. If the contract makes no statement as to the price to be paid, the law invokes the standard of reasonableness, and the fair value of the services or property is recoverable. If the terms of the agreement are uncertain as to price, but exclude the supposition that a reasonable price was intended, no contract can arise. … [T]he contract of the parties indicates that they both promised with “contractual intent,” the one intending to pay and the other to accept a fair price for the inventions turned over. “Reasonable recognition” seems to have meant what was fair and just between the parties, that is, reasonable compensation.

Id. at 99.

2.3.3 Reconciling Varney and Corthell

Is it possible to reconcile the holdings of Varney and Corthell?

What might explain the differences between the courts’ reaction to language that appears equally vague in the two agreements?

2.4 Sources of Contract Law

Our discussion to this point has focused on what is known as the common law of contracts. Originating in judge-made English common law, the U.S. common law has developed and in some respects diverged from the English model in the two centuries since independence. The only fully authoritative statement of common law rules are the judicial decisions applying those rules. However, the American Law Institute (ALI) – a prestigious organization of prominent attorneys, judges and academics – has periodically published a Restatement of the Law of Contracts and of other subjects such as torts, agency law, etc. The most recent edition for contracts, the Restatement (Second), was completed in 1981. Though formally non-binding, the Restatement (Second) exerts a powerful influence on judges throughout the country and provides attorneys with an invaluable compendium of prevailing legal doctrines.

In addition to the common law, it is also essential for a contemporary contracts lawyer to be knowledgeable about the Uniform Commercial Code (“the UCC” or “the Code”). The UCC was originally drafted as a joint project of the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the ALI. These organizations offered the UCC to the states for adoption and every state has since enacted legislation largely incorporating the provisions of Article 2 concerning the sale of goods.

The driving force and principal architect of the Code was Professor Karl Llewellyn. He sought to modernize and update the law by encouraging courts to discover the commercial norms that he thought were imminent in each transaction and industry. As a result, UCC provisions often make legal rules depend on determining what is “reasonable” in the circumstances. Thus, we have provisions that refer to a “reasonable price,” to a “reasonable time for delivery,” and to “reasonable limitations of damages.” One challenge for students and practitioners is to give content to these apparently amorphous concepts.

For the purposes of our study of contract law, we need only be concerned with Article 2, which defines its coverage in § 2-102:

Unless the context otherwise requires, this Article applies to transactions in goods;it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

The application of the UCC thus depends crucially on the meaning of the term “goods,” which §2-103(1)(k) defines as follows:

“Goods” means all things that are movable at the time of identification to a contract for sale. The term includes future goods, specially manufactured goods, the unborn young of animals, growing crops, and other identified things attached to realty as described in Section 2-107. The term does not include information, the money in which the price is to be paid, investment securities under Article 8, the subject matter of foreign exchange transactions, or choses in action.

Section 2-107 elaborates on the coverage of goods to be severed from realty:

(1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this Article if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.

(2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this Article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

(3) The provisions of this section are subject to any third party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer’s rights under the contract for sale.

It is important to understand that the statutory provisions of the UCC take precedence over the common law for transactions in goods. Thus, when goods are involved your first thought should be to determine whether there is an applicable Code provision. Only if no statutory provision addresses the issue should you consider resort to the background principles of the common law of contracts. In contrast, the UCC is inapplicable to transactions that do not involve goods. The most common examples are contracts for services, real estate, and intangible rights such as intellectual property.

2.5 Principal Case – D.R. Curtis Co. v. Mathews

Now try applying your developing understanding of indefiniteness doctrine to the following case.

D.R. Curtis, Company v. Matthews

Court of Appeals of Idaho

103 Idaho 776; 653 P.2d 1188 (1982)

Walters, C.J.

[1] This case involves the enforceability of a contract for the sale of goods where the parties left a factor in the price term to be agreed upon and failed to subsequently agree on the factor left open. Grant Mathews, a grain farmer, appeals a judgment holding him in breach of a contract for the sale of hard red spring wheat, and ordering him to pay $12,450 damages to D.R. Curtis Company. We affirm the judgment.

[2] The respondent, D.R. Curtis Company, is a brokerage firm in the farm commodity market. As a “middleman” between producers and exporters of farm commodities, Curtis Company buys crops directly from a farmer and then sells the crop to the exporter. Thus, for each contract to purchase grain from a producer, Curtis Company makes an interrelated, but independent, agreement to sell the grain to a grain exporter. When the company deals with hard red springwheat for export, the grain is generally sold to large export companies in the Portland, Oregon (“North Coast”), exchange. Grain sold in this exchange is delivered to and shipped from Portland.

[3] In April, 1978, Raleigh Curtis, a grain broker for Curtis Company, contacted Mathews by telephone to discuss the purchase of Mathews’ hard red spring wheat crop. Mathews had never before sold his grain to Curtis Company, although he had sold other crops to the company. Nor had he ever before dealt in the Portland grain export market. His experience was limited to the procedures in the domestic grain market at Ogden, Utah. Raleigh Curtis informed Mathews that the then current price of hard red spring wheat at the Portland grain terminal was $3.58 per bushel. That price was attractive, so Mathews orally agreed to sell 30,000 bushels to Curtis Company.

[4] Both Mathews and Curtis Company, from prior dealings in the hard red spring wheat market, realized that although an express price per bushel is agreed upon, the price actually to be paid for the grain is not fixed until the grain is delivered to market. The actual price is determined, with respect to the expressed contract price term, bythree factors: the protein content of the grain, the protein “basis” figure, and the protein “scale.” The protein content, i.e., the actual percentage of protein in the grain, is commonly determined in the grain market at the time of delivery. The protein “basis” is a figure ordinarily agreed upon between the broker and the exporter, at the time they contract, in advance of delivery. The protein “scale” is commonly determined by the grain exporter on the day the wheat is delivered to the grain terminal.

[5] Protein “basis” is a standard against which the actual protein content is compared. If the protein content coincides with the fixed protein “basis” figure, then the price paid per bushel coincides with the price expressed in the contract. When protein content and protein “basis” do not coincide, the actual price paid for the grain is determined on the protein “scale,” which runs up and down from the protein “basis.” The “scale” is expressed as cents-per-bushel for each one-quarter-percent by which the protein content exceeds, or falls short of, the protein “basis” figure.

[6] Mathews testified that he expected the “basis” figure in his agreement with Curtis Company to be established by mutual agreement with Curtis Company. Because Curtis was unable to ascertain a protein “basis” figure while negotiating with Mathews, and because protein “scale” was commonly set by the grain export company on the day the grain was delivered, protein “basis” and protein “scale” were left open, to be established later.

[7] On the day after their oral agreement, Raleigh Curtis signed and mailed a written memorandum to Mathews. It stated the terms of the agreement as follows: “$3.58 per bushel. Delivered Rail North Coast… . Hard Red Spring Wheat — Protein scale to be established.” No reference to a protein “basis” term or to a means of establishing the term was made. Mathews later testified that because protein “basis” was not mentioned he understood the written terms of the contract to mean that a protein “basis” figure was either not required or was still mutually to be agreed upon. He signed and returned the memorandum. Curtis Company sold the quantity of grain commensurate with this purchase to exporters within twenty-four hours of the purchase.

[8] In September, at harvest time, Curtis Company informed Mathews that fourteen percent was the protein”basis” figure for the grain contract. The company had known that a “basis” of fourteen was required at the time they sold the grain to the grain export companies. It is not clear why Curtis Company waited until September to inform Mathews of the fourteen percent protein “basis” figure. Mathews replied he could not meet that figure, and he disavowed any contract. Thereafter, the parties continued to communicate, with Curtis Company trying to assure itself that Mathews had arranged to deliver the grain to Portland.

[9] Curtis Company employees went to Mathews’ farm in November to test the protein content of his hard red spring wheat and to check his progress in arranging to deliver the grain. When they arrived, Mathews informed them that he had already sold his grain through the Ogden domestic market. Curtis Company then filed this suit for breach of contract.

[10] The trial court determined that the parties had entered into the oral agreement and had executed the written memorandum with the intent to enter into a binding contract. Because Mathews failed to deliver the grain as required by the contract, the court concluded that Mathews breached the contract. Curtis Company was awarded$12,450 as the cost of “cover.”

[11] On appeal, Mathews contends that the trial court erred in determining how price was to be determined under the contract. He further argues that the contract should fail because it is ambiguous and indefinite. Mathews asserts that Finding of Fact No. 11 is not supported by substantial and competent evidence. He alleges the error stems from a failure to distinguish between protein scale and protein basis. Assuming that no agreement was reached regarding protein basis, he urges that the contract is unenforceable because it is ambiguous and indefinite. He also asserts that the trial court applied an incorrect measure of damages.

[12] We first address the alleged error in Finding of Fact No. 11. It appears undisputed that both Mathews and Curtis Company, from prior dealings in the grain market, knew that protein “scale” was established by the export purchaser on the date of delivery and at the place of delivery. It is not disputed that the parties expressly agreed that protein scale was to be established in this manner. On the other hand, the record does not show that Mathews and Curtis Company agreed to accept the “basis” figure fixed in the market. Consequently, we do not find substantial evidence in the record to support that part of Finding No. 11 which states “[that] the contract provided … [for] basis to be established on the date of delivery which is prevailing in the market at the place of delivery.” We do not conclude, however, that this error materially affects the ultimate holding of the trial court.

[13] The trial court found that the parties had the requisite intent to form a binding contract for sale at the time they entered into the contract. This finding is supported by competent and substantial evidence and we will not disturb it on appeal. I.R.C.P. 52(a); Nesbitt v. Wolfkiel, 100Idaho 396, 598 P.2d 1046 (1979). Parties to a contract for the sale of goods may make a binding contract for sale even though the price is not settled, so long as they intend to enter into a binding contract. I.C. §§ 28-2-305, 28-2-204(3). That is, in the sale of goods, a contract will not fail on the grounds of indefiniteness when the price term is left open, see I.C. § 28-2-305, comment 1, so long as the agreement is entered with the mutual intent of the parties to make a binding contract.

[14] If the price in such a binding contract is left open by the parties to be established by later agreement and they fail to reach later agreement, the parties are still bound to perform under the contract for the sale of goods. In such a case, the price is a reasonable price at the time for delivery. I.C. § 28-2-305(1)(b).

[15] Here, the protein “basis” was a component of price; and, therefore it was an essential term of the contract for sale of the wheat. The term was left open to be established by the parties at a later date. The fact that this term was left open to be established, and the parties failed to reach an agreement on the figure, does not make the contractambiguous or void for indefiniteness. It simply means that a reasonable figure remained to be determined. The record discloses no proof that a fourteen percent “basis” figure was unreasonable in the “North Coast” market. We hold that the trial court correctly determined that Mathews breached the contract for sale of grain.

[16] In regard to the damages question, the trial court correctly determined that the proper standard for damages for nondelivery of the grain was the difference between the market price at the time the buyer learned of the breach and the contract price. I.C. § 28-2-713. The trial court found that Curtis Company learned of the breach on November 6 when Mathews refused to deliver the grain. The Portland market price for hard red spring wheat on this date was $3.99½ per bushel. This was $0.41½ more than the contract price of $ 3.58 per bushel. Thus, $0.41½ (damages per bushel) multiplied by 30,000 bushels gives a figure of $12,450, which the trial court awarded as damages.

[17] Mathews argues that Curtis Company first learned that the grain would not be delivered in September when he stated that he was not going to deliver his grain subject to a fourteenpercent “basis” requirement. Thus, he argues, the trial court erred by using the November 6 market price instead of September market prices in the computation of damages. Determination of the date when the buyer learned of the breach is a question of fact. Conflicting evidence exists in the record concerning the date when Curtis Company first learned that Mathews did not intend to deliver his grain pursuant to the contract. Mathews did inform Curtis Company in September that he would not agree to the fourteen percent figure. However, after that time he continued to communicate by telephone with Curtis Company employees, and he was still apparently willing to load his grain on Curtis Company trucks. The trial court made no mention of the September date in its findings of fact. The finding of the trial court that the breach occurred on November 6 is supported by substantial and competent evidence. Although conflicting evidence does exist, we will not disturb this finding. J.E.T. Development v. Dorsey Const. Co., 102 Idaho 863, 642 P.2d 954 (Ct.App.1982).

[18] Finally, Curtis Company requests that it be allowed recovery of a reasonable attorney fee for defense of this appeal. The request is made pursuant to I.C. § 12-120(2), which provides that in any action to recover on a contract relating to the purchase or sale of goods, the prevailing party shall be allowed a reasonable attorney fee to be set by the court, to be taxed and collected as costs. Curtis Company is the prevailing party both at trial and on this appeal. The action involves recovery for breach of a contract for the sale of goods. The request is therefore proper and is granted, subject to I.A.R. 41. McKee Bros., Ltd. v. Mesa Equipment, Inc., 102 Idaho 202, 628 P.2d 1036 (1981).

[19] The judgment is affirmed; costs and attorney fees to respondent, Curtis Company. Burnett and Swanstrom, JJ., concur.

2.5.1 Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher

In Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105 (1981), the parties executed a real estate lease containing an option to renew at a price to be agreed upon. The renewal clause provided that the “Tenant may renew this lease for an additional period of five years at annual rentals to be agreed upon; Tenant shall give Landlord thirty (30) days written notice, to be mailed certified mail, return receipt requested, of the intention to exercise such right.” The tenant sought to exercise this option but the landlord demanded a rental rate for renewal of $900 per month, far in excess of the $650 rate provided for the final year of the original lease. The tenant sued to compel the landlord to extend the lease at a “reasonable rate” or “fair market value.” Although a lower court granted the tenant specific performance at a “fair” rent, the appellate court reversed. The court invoked a widely applied rule that a mere “agreement to agree, in which a material term is left for future negotiations, is unenforceable.” In the court’s view, it takes at least some evidence of an agreement on all material terms before a court can step in to resolve any contractual ambiguity. An agreement to agree demonstrates to the contrary that the parties were unable to reach an agreement on that term.

2.5.2 Discussion of D.R. Curtis and Schumacher

Suppose that D.R. Curtis had involved an agreement to rent real estate or provide services rather than a contract for the sale of goods. Would the deal be enforceable?

Does Schumacher have anything to teach us about this question?

Why does the contract for the sale of goods in this case end up being enforced?

In this connection, consider the following provisions of the Uniform Commercial Code (UCC):

§ 2-204. Formation in General.

(1) A contract for sale of goods may be made in any manner sufficient to 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 moment 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.

§ 2-305. Open Price Term.

(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 intend 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.

2.5.3 Problem: Price vs. Quantity Under the UCC

As we have seen, the Code allows a court to supply a “reasonable price” when it determines that the parties intended to have an enforceable agreement but omitted or failed to agree on a price. See U.C.C. § 2-305. Similarly, the Code supplies “reasonable” judge-made defaults for many other missing terms in an agreement. A curious puzzle, however, is that the UCC contains no provision for supplying a “reasonable quantity” when the parties fail to specify one. Moreover, in a section concerned with the formal requirements for enforcing certain contracts, the Code expressly provides that a “contract is not enforceable under this subsection beyond the quantity of good shown in the writing.” See U.C.C. § 2-201.

Try to develop an explanation for this disparate treatment of quantity and price (along with other terms). Why does the Code appear so willing to supply a missing price term and simultaneously reluctant to enforce a contract that omits the quantity?