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Quake Construction, Inc. v. American Airlines, Inc., 141 Ill. 2d 281 (1990)

Case Name: Quake Construction, Inc. v. American Airlines, Inc.
Plaintiff: Quake Construction, Inc.
Defendant: American Airlines, Inc. and Jones Brothers Construction Corporation
Citation: 141 Ill.2d 281 (1990)


Issue: Whether the letter of intent from the defendant is an enforceable contract.

Key Facts: The defendant received an invitation to bid on a project and submitted a bid to the defendant. The defendant notified the plaintiff that it had been awarded the contract for the project and asked for the license numbers of the subcontractors it intended to use. The plaintiff told the defendant that he could not use the license numbers until he received a signed subcontract agreement. The defendant informed Quake that he would shortly receive a written contract but to induce Quake to enter into agreements with its subcontractors, Jones sent Quake a letter of intent. At a preconstruction meeting, Jones told Quake, the subcontractors, and government officials that Quake was the GC for the project. Immediately following the meeting, American Airlines informed Quake that their involvement was terminated.

 Procedural History: The trial court granted the defendant’s motion to dismiss but the Court of Appeals reversed the decision.

Holding: The letter of intent may be regarded as a contract in its own right: a contract to engage in negotiations. The letter of intent was ambiguous to the parties’ intent to be bound.

Judgment: The court remanded it back to the trial court to review more evidence, in addition to the LOI, on the parties’ intent.

Rule: The fact that parties contemplate that a formal agreement will eventually be executed does not necessarily render prior agreements mere negotiations, where it is clear that the ultimate contract will be substantially based upon the same terms as the previous document. (Common Law)

 

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Lonergan v Scolnick, 276 P.2d 8 (1954)

Case Name: Lonergan v Scolnick
Plaintiff: Lonergan
Defendant: Scolnick
Citation: California District Court of Appeal; 129 Cal. App. 2d 179, 276 P.2d 8 (1954)


Key Facts: Correspondence was sent and received between the plaintiff and defendant regarding a property that defendant was selling and plaintiff was interested in purchasing. Plaintiff wrote to the defendant what of his “rock bottom price of $2,500 cash” and where the property could be found while stating that “This is a form letter.” Defendant expressed interest in the property and recommended the use of an escrow agent. Plaintiff wrote that the escrow agent would be “O.K.” but that the plaintiff would have to decide fast because he anticipated selling the property with the next week or so. The defendant sold the property to a third party for $2,500 five days before the plaintiff opened an escrow account.

Procedural History: It was found that the plaintiff and defendant did not enter into a contract and that the defendant is entitled to judgment against the plaintiff. The trial court held that the plaintiff could not recover because he did not make a timely acceptance, not because the defendant didn’t make an offer. The plaintiff appealed to the higher court.

Issue: Does written communication between a buyer and a seller of final price, description of the property, and logistics of payment constitute an offer?

Holding: The lower court’s judgment was affirmed.

Reasoning: There can be no contract unless the minds of the parties have met and mutually agreed upon some specific thing. Based on the correspondence, the court found it evident that the negotiations between the defendant and the plaintiff were purely preliminary and that no offer was ever made by the defendant. The correspondence indicated that that defendant was trying to discover if the plaintiff was interested and did not intend to make a definite offer to the plaintiff. From the final letter from the defendant, it shows that he expected to have a buyer in the next week or so and that the defendant intended to sell to the first-comer, and was reserving the right to do so.

In accordance with Section 25 of the Restatement of the Law on Contracts:
“If from a promise,…the person to whom the promise is addressed knows or has reason to know that the person making it does not intend it as an expression of his fixed purpose until he has given a further expression of assent, he has not made an offer.”

Judgment: The defendant is entitled to judgment against the plaintiff.

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Harlow & Jones, Inc. v. Advance Steel Co., 424 F. Supp. 770 (E.D. Mich. 1976)

Case Name: Harlow & Jones, Inc. v. Advance Steel Co.
Plaintiff: Harlow & Jones, Inc.
Defendant: Advance Steel Co.
Citation: 424 F. Supp. 770 (E.D. Mich. 1976)

Issue: Under the UCC, did the defendant breach a contract when he refused the last of three deliveries because he believed it was being delivered late?

Key Facts: Defendant had several telephone conversations with William VanAs, a broker for the plaintiff. During these conversations, VanAs informed the defendant about the availability of 5000 metric tons of steel that could be shipped during September-October, 1974 and defendant informed VanAs that he was interested in purchasing 1000 tons of this shipment. VanAs recorded the terms of this transaction on a worksheet and relayed the information to the plaintiff. In July, 1974, the plaintiff mailed the defendant a sales form confirming the sale of 1000 metric tons which shipment from Europe during Sept-Oct, 1974. The plaintiff then ordered the 1000 tons of steel from Europe. The defendant did not sign or return the plaintiff’s sales form but prepared and mailed his own purchase order form (which contained the same quantities, shipping dates, and minor specification changes. This was never signed and returned by plaintiff. The steel came from Europe in three separate shipments. The first two shipments were received and paid by Advance. The last shipment arrived in late November which the defendant rejected because of “late delivery.”

Procedural History: None because the case is in the District Court (trial court) and is not on appeal.

Holding: The defendant did breach the contract by rejecting the last shipment. The terms of the oral agreement were to ship the steel by October and under UCC 2-504 the defendant could only reject the shipment if there was a “material delay.” Because steel takes an average of one month to ship from Europe; although the steel was shipped late, it did arrive by late November so there was no material delay.

Reasoning: The plaintiff and defendant were arguing that they were abiding by what they thought was a written contract. Plaintiff argued for his sales form and defendant for his purchase order form. The court decided that the sales form and purchase order form were merely confirmations of an order because the actual agreement took place through the several telephone conversations. According to the UCC, this means that the “contract” was an integration of the two forms and is made up of the terms that the two parties agree on.

Notes:

  • Do not need specific oral or written offer and acceptance if you have clear conduct that shows the parties entered into an arrangement (i.e. Advance was accepting shipments, even one that came after October 31st)
  • Also true under the Restatement even if you can’t point to the exact offer and acceptance by the parties. The difference is how the court would fill in “gaps.”

 

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Consideration

Consideration is a crucial concept in understanding Contract Law. The making of a promise (offer and acceptance) is insufficient by itself to result in the formation of a contract.* The additional requirement is the presence of “consideration.”

The concept of consideration has developed over the years. In 1875 consideration was defined as:

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”

Consideration means not so much that one party is profiting as that the other abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise of the first. The idea behind consideration is determining the types of contracts we want to enforce. The main type of contract we don’t want to enforce is a gift.

The court now explains that consideration requires a benefit to the promisor or a detriment to the promise that is bargained for. In other words, benefit or detriment are insufficient to constitute consideration. However, according to Pennsy Supply the requirement that consideration be bargained for does not require actual bargaining between the parties.

The court uses the Homlesian test of “reciprocal conventional inducement, each for the other.” (Bargaining theory of consideration). “The promise must induce the detriment and the detriment must induce the promise.” Oliver Wendell Holmes, Jr.

The Restatement adopts the bargain theory of consideration and rejects any additional requirement of benefit or detriment.

*Note: International contract law recognizes that a contract can be formed without the additional requirement of consideration.