Contracts

Question 1

Acceptance

(ALL Contracts Don’t Stink)

Answer 1

An acceptance is a manifestation of a willingness to enter into the agreement by the offeree.

Governed by objective test.

Offeror is the master of the offer. Offeree must play by their rules. (Bilateral - promise or performance, Unilateral - performance).

Directed - must be directed at the offeree.

Must know about the offer to accept it, even with an open-to-all offer (advertisement).

Convey - must convey acceptance to offeror.

Question 2

Common Law - When it Applies

Answer 2

Common Law Universe:

Contracts for services and real estate.

Under common law, contracts may be oral or written, unless specific statutory or common law requirements mandate a written agreement.

Question 3

UCC - When It Applies

Answer 3

The Uniform Commercial Code (UCC) Universe:

Contracts for the sale of goods (movable things).

Question 4

UCC- Merchant Definition

Answer 4

Under the UCC, a “merchant” is someone who regularly deals in goods of the kind sold, and has specialized knowledge or skill. The UCC requires merchants to act in good faith in all their dealings, and to adhere to certain standards for warranties and remedies in the sale of goods.

Question 5

Offer

(ALL Contracts Don’t Stink)

Answer 5

Objective manifestation of willingness by offeror to enter into an agreement. Creates power of acceptance in recipient.

Intent - objective intent to be legally bound to a contract. Offeree can reasonably interpret it as an offer.

Direction - must be directed at a specific offeree. Contests or rewards that promise in exchange for specific task count.

Language - must contain words of promise, undertaking, or commitment, and target people who can actually accept.

Advertisements are not valid offers, unless they specify quantity and explicitly state who can accept.

Question 6

Terminating an Offer

(Squashing the caterpillar)

(ALL Contracts Don’t Stink)

Answer 6

An offer may be terminated in several ways:

1. Revocation - offeror revokes offer by express communication.
2. Constructive Revocation - offeror takes an action absolutely inconsistent with continuing ability to contract
3. Rejection - the offeree rejects the offer.
4. Counteroffer - the offeree makes a counteroffer. Operates as a rejection + new offer.
5. Death - the offeror dies.
6. Lapse - a reasonable amount of time passes.

Question 7

Option Contract

Answer 7

An option contract is a promise that keeps an offer open for a specified period of time in return for consideration. This option is irrevocable during the option period, binding the offeror to their promise not to withdraw the offer.

Question 8

Merchant’s Firm Offer

Answer 8

A firm offer by a merchant under the Uniform Commercial Code (UCC) can create a similar irrevocable offer without the need for consideration. For the offer to be valid, it must be:
(1) in writing,
(2) signed by the merchant, and
(3) provide assurances that it will be held open.

Remains open for up to three months. To be enforceable, whether it’s an option contract or a merchant’s firm offer, the terms of the offer must be specific, definite, and unambiguous.

Question 9

MIrror Image Rule

Answer 9

Common law principle, requires an acceptance of an offer to match each and every term of the offer. Any deviation from the terms of the offer is a rejection of the original offer and creates a counteroffer.

If the offeree creates a counteroffer, the original offer is terminated, and the parties must reach a new agreement. If the offeree’s acceptance matches the terms of the offer, then a binding contract is formed.

Question 10

Battle of the Forms

Answer 10

Under the UCC, additional or different terms in an acceptance do not automatically become part of the contract, unless the terms do not constitute a material alteration of the agreement and the offeror does not object. Conditional acceptance also does not create a contract.

The additional terms must not be material, and if the contract is between merchants, they must be commercially reasonable.

If at least one of the parties involved is not a merchant, additional terms in a response are treated as proposals for modifying the contract, which do not become part of the contract unless explicitly agreed upon by both parties.

Question 11

Acceptance - Mailbox Rule

(ALL Contracts Don’t Stink)

Answer 11

Applies only to Bilateral contracts, not unilateral contracts.

An acceptance is effective and a contract is formed when the acceptance is sen, by the offeree, even if the acceptance is lost in transmission and never received by the offeror.

Exception: the offeror can specify that acceptance is not effective until it is received. Then the Mailbox Rule doesn’t apply.

Question 12

Consideration

(All CONTRACTS Don’t Stink)

Answer 12

A mutual, bargained-for exchange of value or commitment, usually required to enforce a contract.

A promise, an action, or a forbearance of a right.

Must have legal value, cannot be a gift.

Exceptions:
(1) Promissory estoppel, where a promise may be binding if it induces detrimental reliance, even without consideration.
(2) Past consideration doesn’t usually support current promises.
(3) UCC = enforceable modifications without extra consideration, provided they’re made in good faith.

Question 13

Acceptance - Bilateral Contract

Answer 13

Common law = a bilateral contract is accepted by a promise that is made in response to an offer and is communicated to the offeror. Acceptance may also be evidenced by the beginning of performance.

UCC = accepted in any manner that is reasonable, including by promise to ship or shipment of conforming or non-conforming goods.

Question 14

Statute of Frauds

Answer 14

Certain contracts must be in writing to be legally enforceable. The contract must be signed by the party to be charged. This includes:

(1) contracts for the sale of land,
(2) contracts that cannot be performed within one year from the date of formation,
(3) contracts for goods worth $500 or more, and
(4) suretyship contracts.

Some jurisdictions also require written contracts for agreements made in consideration of marriage.

Question 15

Acceptance - Silence

Answer 15

Silence does not work as acceptance of offer, unless:

i) The offeree has reason to believe that the offer could be accepted by silence, and he was silent with the intent to accept the offer by silence; or

ii) Because of previous dealings or patterns of behavior, it is reasonable to believe that the offeree must notify the offeror if the offeree intends not to accept.

Question 16

Statute of Frauds - Writing Requirement

Answer 16

At common law, certain types of contracts must be evidenced by a written agreement to be enforceable.

The written agreement must contain all material terms and be signed by the party to be charged (or by the party’s authorized agent).

UCC = a written agreement is required for the sale of goods priced at $500 or more and must be signed by the party against whom enforcement is sought.

Question 17

Statute of Frauds - Merchant Confirmatory Memo

Answer 17

A merchant’s confirmatory memo can satisfy the writing requirement if:
(1) Both parties to the contract are merchants;
(2) The writing accurately reflects the agreement;
(3) The writing is signed by the party seeking to enforce the contract.
(4) The recipient of the memo does not object to its terms within 10 days of receipt.

Question 18

Statute of Frauds - Performance

Answer 18

Real Estate = usually require a written agreement.

Part Performance Exception = can be enforceable if partial payment, possession, or substantial improvements.

Goods = a written agreement is generally required. BUT part performance can satisfy the Statute of Frauds ONLY for the performed portion.

Services = typically not subject to the Statute of Frauds, allowing full performance as evidence of the contract’s existence and terms.

Question 19

Statute of Frauds - Estoppel

Answer 19

A defendant may be estopped from raising the statute of frauds defense if:

(1) the plaintiff reasonably relied on the defendant’s oral promise, and
(2) it would be unjust to allow the defendant to use the statute of frauds defense.

Question 20

Unilateral Mistake

Answer 20

A unilateral mistake is a mistake made by one party to a contract that does not affect the other party.

In general, a unilateral mistake does not make a contract void or voidable, unless the mistaken party can show that the other party knew or should have known of the mistake and took advantage of it.

In such cases, the mistaken party may have the option to rescind the contract. But if the mistake was due to the mistaken party’s negligence or failure to read the contract, the contract will generally be enforced.

Question 21

Mutual Mistake

Answer 21

Mistake by the parties = no true mutual assent and thus no contract.

When both parties entering into a contract are mistaken about facts, the contract may be voidable by the adversely affected party if:

(1) the mistake concerns a basic assumption on which the contract was made,
(2) the mistake has a material effect on the agreed-upon exchange, and
(3) the party seeking avoidance did not assume the risk of the mistake.

Question 22

Ambiguity

Answer 22

A contract may be unenforceable or subject to interpretation if:
(1) a material term in a contract is ambiguous,
(2) both parties had a reasonable interpretation of the term, and
(3) neither party knew or had reason to know of the other party’s interpretation.

Question 23

Fraud or Misrepresentation

Answer 23

A party may be liable for fraud or misrepresentation if they make a false statement regarding an existing fact with the intent to deceive, and the other party relies on that false statement in entering into the contract.

The false statement must have been made before the contract was formed, and the reliance must have been reasonable.

No duty to disclose information, except in certain circumstances, such as when a special relationship exists between the parties.

Question 24

Illegality of Subject Matter

Answer 24

A contract is void if its subject matter is illegal, unless the illegality is due to the purpose of the contract rather than its subject matter.

Parties are presumed to know the law and have a duty not to enter into an illegal contract, or a contract that would require them to engage in illegal activity.

Question 25

Unconscionability

Answer 25

A court may refuse to enforce a contract or a part of a contract if it is found to be unconscionable. Unconscionability can be either substantive or procedural.

Substantive unconscionability = the terms of the contract are so one-sided that they are oppressive or grossly unfair.

Procedural unconscionability = the process by which the contract was formed, such as unequal bargaining power or hidden terms.

To be considered unconscionable, the contract must SHOCK THE CONSCIENCE of the court and the party seeking relief must not have had reason to know or understand the terms of the agreement.

Question 26

Contract Interpretation

Answer 26

The court seeks to enforce the parties’ intent as expressed in the contract.

When interpreting a contract, the court considers:
(1) the plain language of the contract,
(2) the contract as a whole, and
(3) any custom or course of dealing between the parties.

In case of ambiguities, the court may interpret them against the party who drafted the contract, and will try to find a reasonable and valid meaning that gives effect to all provisions.

Question 27

Contract Modification

Answer 27

Common law = new consideration is required for a modification of an existing contract. The modification must be in writing, unless the original contract permits oral modifications.

Modern approach = a contract modification unsupported by new consideration may be enforced if it is fair and equitable in view of circumstances not anticipated when the contract was made.

UCC = contract modifications can be made without new consideration if made in good faith, and the modification can be oral unless the original contract requires written modifications.

Regardless of the rule applied, any modification must be in writing if the contract contains a provision requiring modifications to be in writing.

Question 28

Parol Evidence Rule

Answer 28

If parties intended the writing to be the final expression of their agreement, the writing is an integration.

Any other expressions made prior to or at time of the writing are not admissible to vary the terms of the writing.

Question 29

Remedies - Expectation Damages

Answer 29

Expectation damages put the parties in the position they would have been in had the contract been performed. If the amount of damages is unclear, the court will award reliance damages instead of expectation damages.

Question 30

Remedies - Reliance Damages

Answer 30

Reliance damages put the performing party in the same economic position they would have been in if the contract had never been formed.

Question 31

Acceptance - Unilateral Contract

Answer 31

Complete performance required: no statements of intent to accept will be allowed.

Offeree must be aware of the contract to accept.

Question 32

Pre-Existing Duty Rule (Common Law)

Answer 32

A promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform.

If the promisor varies the duty or adds something additional, that is sufficient consideration.

Question 33

Misunderstanding

Answer 33

Both parties believe they agree to the same term, but they actually agree to materially different terms.

If neither party knows of the mistake, there is no contract.

If one party knows, then there is a contract according to the understanding of the unknowing party.

If both parties know, there is no contract, unless both had the same misunderstanding.

Question 34

Mixed Contracts - Common law or UCC?

Answer 34

If the contract is mixed goods and services, then these rules may apply:

1. All or Nothing: Mixed contracts must fall under the Common Law or the UCC. Divisible contracts are the only exception: can divide those into little contracts depending on type.
2. Predominant Purpose: does the contract for goods or services play a bigger role?

Question 35

Specificity of Offers

(ALL Contracts Don’t Stink)

Answer 35

Two different scenarios:

1. Common Law: all essential terms must be present. Parties, Price, Subject, and Quantity.
2. UCC: Only the Quantity term is essential. All others can be filled in. Remember Requirements and Output contracts: those satisfy Quantity term.

Question 36

Termination of Offer - Permanence of Offer

(ALL Contracts Don’t Stink)

Answer 36

Once an offer is terminated, it can no longer be accepted. Any attempted acceptance will be ineffective. Can’t un-squash the caterpillar.

Revival of Offer - offeror can revive an offer rejected by offeree, and offeree can accept new offer.

An offeree’s detrimental reliance on the offer may create promissory estoppel. Even if the offeror attempts to revoke the offer, the offeree may still be able to enforce the offer based on their detrimental reliance.

Question 37

Irrevocable Offers

(Caterpillar force field)

(ALL Contracts Don’t Stink)

Answer 37

Four ways to create an irrevocable offer:

1. Option contract - the offeror promises to hold the offer open in exchange for consideration. Cannot revoke while the time period is running.
2. Firm Offer - in the UCC universe, a merchant can make a firm offer to buy or sell goods. Must be (i) written, (ii) signed by the offeror, and (iii) contain an explicit promise not to revoke. Maximum time period is either: (i) as long as stated in the offer, or (ii) up to 90 days/3 months.
3. Unilateral Contract - this is irrevocable if the offeree has started performance. The law gives the offeree the right to finish.
4. Detrimental Reliance - when an offeree takes action and relies on the contract in some foreseeable manner.

Question 38

Destination Contract
(F.O.B. Buyer’s Place of Business)

Answer 38

Seller must get the goods to the buyer’s place of business and notify the buyer.

Risk of Loss - does not pass to buyer until the goods arrive at the indicated location.

If the goods are damaged on route to location = seller’s risk of loss