Contracts Flashcards
(127 cards)
1
Q
Chapter 1
A
2
Q
A contract is:
A
- a promise or set of promises
- for the breach of which the law gives a remedy, or
- the performance of which the law in some way recognizes as a duty.
3
Q
A promise is:
A
- a manifestation of intention
- to act or refrain from acting in a specified way,
- so made as to justify a promisee in understanding that a commitment has been made.
4
Q
Promisor
A
A promisor is the person making the promise.
5
Q
Promisee
A
A promisee is the person to whom the promise is made.
6
Q
Basic Rules of Interpretation
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Ordinary Meaning. Interpret words according to the objective and ordinary meaning of the words.
Technical Meaning. Technical terms and words are given their technical meaning.
Surrounding Circumstances. Words and conduct are interpreted in light of all surrounding circumstances.
7
Q
A contractual promise is
A
(1) a promise made as part of a contract,
(2) the promisor makes the promise in exchange for a return promise or return performance from the promisee,
(3) such promises are generally legally enforceable.
8
Q
A gratuitous promise is
A
(1) a naked or bare promise,
(2) the promisor gives the promise without receiving anything in return from the promisee,
(3) such promises are generally not legally enforceable.
9
Q
Every contractual promise creates rights and duties in the parties.
A
(1) The promisor has a duty to perform what was promised.
(2) The promisee has a right to receive the promised performance from the promisor.
10
Q
Chapter 2
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11
Q
Every contract requires consideration on both sides of the transaction.
Consideration consists of:
A
(1) a bargained for exchange between the parties, and
(2) that which is bargained for must be of legal value.
12
Q
To establish a bargained for exchange,
A
(1) the promisor’s promise must induce the promisee’s detriment, and
(2) the promisee’s detriment must induce the promisor’s promise.
13
Q
Induce
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To persuade or influence the other party to act or refrain from acting in a specified way.
14
Q
A detriment is generally either
A
(1) the promisee becoming obligated to perform an act that she was not otherwise obligated to perform, or
(2) the promisee forbearing the exercise of a legal right that the promisee otherwise has a legal right to exercise.
15
Q
Legal value is established if there is either:
A
(1) a detriment to the promisee, or
(2) a benefit to the promisor.
16
Q
Benefit to Promisor
A
The promisor gains something that she is not otherwise legally entitled to have, such as a service, property, an increase in wealth, or other tangible gain.
17
Q
In a bilateral contract
A
(1) the parties form a contract by exchanging promises.
(2) the detriment induced by the promisor’s promise is the promisee’s return promise.
(3) the contract forms when the parties exchange promises.
18
Q
In a unilateral contract
A
(1) the parties form a contract by an exchange of a promise for a return performance.
(2) the detriment induced by the promisor’s promise is the promisee’s return performance.
(3) the contract forms once the promisee completes performance.
19
Q
Consideration Provided to Third Parties
A
A contract still forms even if the consideration for the promisor’s promise flows to a third party rather than to the promisor.
20
Q
Enforceability of Gratuitous Promises
A
An executory gratuitous promise lacks consideration and therefore is unenforceable as a contract.
Exception. If a gratuitous promise is executed, then the promisor cannot rescind the promise.
21
Q
Promises Between Family Members
A
There is a rebuttable presumption that promises for goods and services made between family members are gratuitous.
The presumption can be rebutted by clear and convincing evidence that the family members in fact intended to enter a contract.
22
Q
Alternatives to Consideration
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Promissory Estoppel. In the absence of consideration, a court may find that a promisee’s detrimental reliance on a promise renders that promise enforceable to the extent necessary to prevent injustice.
Restitution. Where one party has bestowed a benefit on another party, a court may order the benefited party to pay for the value of the benefit received even when there is no contract.
23
Q
Chapter 3
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24
Q
Condition
A
An event that must occur to trigger some legal effect or outcome.
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Event
The uncertain occurrence of something that is not within the control of the promisor — i.e., in the case of a conditional gift, the party promising to give a gift.
The event could be something within the control of the promisee (like stopping by the promisor’s house) or something outside the control of either party (like if it is sunny on Saturday).
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A conditional gift has two elements:
(1) the promisor intends to give a gift,
(2) but some condition must occur before the promisee may receive the benefit of the gift.
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Examples of Conditions
(1) Uncle says to Nephew, “If you want tickets to the play, then come to my house and pick them up.”
(2) Arnold says to Angel, “Meet me at the movie theater at noon and I promise to pay for your ticket to the matinee.”
(3) Akiko says to Rina, “If it is sunny this weekend, then I promise to take you to the beach resort and pay your expenses.”
(4) Friend says to another, “I promise to give you the old sofa free if you come over to pick it up.”
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Conditional Gifts Inducing Detriments
The promisor’s promise of a conditional gift may induce a detriment from the promisee (such as coming over to the promisor’s house or meeting the promisor at the movie theater).
However, the promisor does not bargain for the detriment, meaning the promisee’s detriment does not motivate the promisor’s promise of a gift.
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Conditional Gifts Still Gratuitous
(1) A promise of a conditional gift is not legally enforceable even if the condition occurs.
(2) A promise of a conditional gift is revocable any time before it is executed just like any other gratuitous promise.
(3) Once a promise of a conditional gift is executed (meaning the gift is actually given), it is no longer revocable.
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Chapter 4
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Adequacy
General Rule. Mere inadequacy of consideration will not void a contract. There is no requirement that the things exchanged be of equal value.
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Gross Inadequacy
Even when there is gross inadequacy of consideration — meaning the inequality in value between the things exchanged by the parties is shocking — the element of consideration is still satisfied.
However, a large disparity in value between the things exchanged may indicate that a defense to formation, such as undue influence, is available to the injured party and likely to be successful.
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Nominal Consideration
Nominal consideration does not satisfy the element of consideration. Consideration is nominal if it is a mere formality or pretense of a bargain.
Exception. Nominal consideration is sufficient to satisfy the element of consideration in the context of an option contract.
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Illusory Promise
An alleged promise where the promisor gives the illusion of being bound by a promise but in fact has not committed to performing any action or forbearance.
Typically, the promisor reserves a choice of alternative performances. One of which is to do nothing.
Such illusory promises do not satisfy the element of consideration.
35
Output Contracts
The seller obligates herself to sell all the output she produces of a certain good exclusively to the buyer. In turn, the buyer is obligated to purchase all that the seller produces of that particular type of good.
Output contracts are legally enforceable under the UCC, but are considered illusory under the common law/Restatement.
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Requirements Contracts
The buyer obligates herself to buy all that she requires of a particular type of good exclusively from the seller. In turn, the seller is obligated to have enough of the good to sell to meet the buyer’s requirements.
Requirements contracts are legally enforceable under the UCC, but are considered illusory under the common law/Restatement.
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Output and Requirements Contracts and Good Faith
The quantity of goods purchased or sold under an output or requirements contract is the actual output of the seller or the actual requirements of the buyer that occur in good faith.
No quantity may be tendered under an output contract or demanded under a requirements contract that is unreasonably disproportionate to any estimate provided or, in the absence of an estimate, to the previous orders placed.
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Past Consideration
Past consideration does not satisfy the element of consideration. When the promisor makes a promise in a recognition of something the promisee did for her in the past, the promisor’s promise cannot be said to have induced the promisee’s past action. That action already took place in the past.
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Moral Obligation
Moral obligation — making a promise where the motivation is love, respect, or a desire to do what is right or just — does not satisfy the element of consideration. But it may be relevant to an equitable argument for the enforcement of a promise, such as restitution, promissory estoppel, or promissory restitution.
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Exceptions to Past Consideration
and Moral Obligation Rules
The following promises are enforceable even though they are supported only by past consideration and/or moral obligation:
(1) Promise to pay a debt barred by the statute of limitations.
(2) Promise to pay a debt discharged discharged in bankruptcy.
(3) Promise to pay a debt of a minor made upon reaching the age of majority.
(4) Promissory restitution.
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Chapter 5
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Preexisting Duty Rule
When analyzing consideration and looking at whether there is a “bargain for exchange” between the promisor and promisee, a purported commitment by the promisor or the promisee to do what they were already legally obligated to do is not a promise or a detriment. Thus, it cannot be sufficient to satisfy the element of consideration.
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Types of Preexisting Duties
A party to a contract may have a preexisting duty for three basic reasons:
(1) Public duty of a public official,
(2) Public duty of private persons,
(3) A duty imposed by an earlier contract either with the same party or with a different party.
44
Public Duty of a Public Official
A party who works as a public official — such as a police officer, firefighter, detective, public school official, city administrator, or the like — has a preexisting legal duty because of the public role that they are fulfilling. Thus, the public official’s purported commitment to do what they are already obligated to do by virtue of their public role is neither a promise nor a detriment.
45
Public Duty of a Private Person
Every person has a preexisting public duty to obey the law. Thus, a person’s purported commitment to do what they are already obligated to do by law — such as promising not to take illegal drugs, not to steal, not to commit a battery, and the like — is neither a promise nor a detriment.
46
Preexisting Duty Imposed by Contract
A party to a contract may have a preexisting legal duty because they are bound by a previous contract either with the same party or with a different party. Thus, the party’s purported commitment to do what they are already obligated to do by virtue of the earlier contract is neither a commitment nor a detriment.
47
Modification
A modification is when the parties to an existing contract mutually agree to change the terms of their contract. Contract modifications include changes to essential terms, such as payment, timing, quantity, the identity of the real estate, services, or goods at issue, and even the parties.
Modifications may be written or oral unless otherwise required by the Statute of Frauds.
48
Common Law Contract Modifications
Under the Common Law/Restatement, a successful contract modification generally requires two things:
(1) New consideration, and
(2) Good faith.
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UCC Contract Modifications
Under the UCC, a successful contract modification requires only good faith. No new consideration is needed.
50
Types of Unenforceable
Contract Modifications
Under the Common Law/Restatement, unenforceable contract modifications tend to fall into one of two different categories:
(1) A party demanding more money to perform the same duty the party is already required to perform under the existing contract.
(2) A creditor agreeing to accept less than full payment from a debtor in settlement of an undisputed debt.
51
Types of Enforceable
Contract Modifications
Under the Common Law/Restatement, the following contract modifications are generally enforceable:
(1) Providing additional or different consideration,
(2) Settlement of an honest dispute,
(3) Accord and satisfaction,
(4) Mutual rescission, and
(5) Novation.
52
Additional or Different Consideration
A party’s promise to perform something more or something dissimilar from what the party is already obligated to perform under the original contract constitutes consideration sufficient to support a contract modification.
53
Settlement of an Honest Dispute
When the parties to a contract have an honest dispute over the performance of one of the parties, the settlement of that dispute is consideration for a modification.
Generally, the breaching party will waive her right to receive full performance from the injured party in exchange for the injured waiving her right to sue the breaching party.
54
Accord and Satisfaction
A type of settlement agreement comprised of two parts.
(1) Accord - The parties to the original agreement enter into a new agreement (a separate contract with its own exchange of promises) in which one party agrees to accept a different performance from the other party. The accord suspends the duties owed under the original agreement.
(2) Satisfaction - The parties’ performance of the accord satisfies both the duties owed under the original agreement and the duties owed under the accord.
55
Mutual Rescission
A contract modification where the parties to an existing contract mutually agree to terminate their contract. Both parties promise to waive their rights and to release the other party from their duties under the contract.
56
Novation
A novation is a contract modification where the parties agree to mutually rescind their original contract and to form a new contract where one of the parties has been replaced by a new party.
57
Modifications and Exceptions
to Preexisting Duty Rule
The common law recognizes two exceptions to the rule that a contract modification requires new consideration:
(1) Courts may enforce a one-sided modification that is fair and equitable in light of an unanticipated change in circumstances, such as an unexpected labor strike, injury to one of the parties, a large increase in the cost of supplies due to a natural disaster or the like.
(2) A party may be able to argue promissory estoppel — that the one-sided modification should, in fairness, be enforced due to the party’s detrimental reliance on the promised change in contract terms.
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The UCC has specific provisions addressing whether the common law or the UCC controls in a transaction that is a mix of goods and real estate.
1. Contracts for sale of minerals, oil, natural gas, or a structure.
a. If severed (meaning removed from the land) by the seller, considered contract for sale of goods governed by the UCC.
b. If severed by the buyer, considered contract for real estate governed by the common law.
2. Contracts for sale of crops or timber is considered a contract for the sale goods governed by the UCC regardless of who severs them from the land.
58
The UCC has specific provisions addressing whether the common law or the UCC controls in a transaction that is a mix of goods and real estate.
1. Contracts for sale of minerals, oil, natural gas, or a structure.
a. If severed (meaning removed from the land) by the seller, considered contract for sale of goods governed by the UCC.
b. If severed by the buyer, considered contract for real estate governed by the common law.
2. Contracts for sale of crops or timber is considered a contract for the sale goods governed by the UCC regardless of who severs them from the land.
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Two tests have arisen to determine what body of law governs a contract that is a mix of goods and services.
(1) Predominant purpose test (majority)- court examines the language of the contract, the nature of the seller’s business, and the relative cost of the goods vs. the services to determine whether the sale of goods or the provision of services predominants. If sale of goods, then the UCC applies. If the provision of services, then the common law applies.
(2) Gravamen test (minority)- court does not attempt to classify the contract as a whole but applies the UCC if the controversy in question relates to the sale of goods component, and applies the common law if the issue arises out of the services component.
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Chapter 6
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Promissory Estoppel
If
(1) a promise,
(2) the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person,
(3) which does induce such action or forbearance, and
(4) injustice can be avoided only by enforcement of the promise,
then
the promise is binding.
The remedy granted for breach may be limited as justice requires.
62
Promise
A promise is
(1) a manifestation of an intention,
(2) to act or refrain from acting in a specified way,
(3) so made as to justify a reasonable person in the place of the promisee in understanding the manifestation as a commitment.
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Promisor reasonably expected the promise
to induce action or forbearance
Reasonable expectation encompasses two different, but related, concepts:
Whether the promisor could foresee that the promisee would take action or forbearance as a result of the promise; and
Whether the promisee’s action or forbearance was reasonable. To the extent, the promisee acted irrationally or unreasonably in light of the surrounding facts and circumstances, her actions are more likely to be considered unforeseeable and, thus, not reasonably expected by the promisor.
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Promisee takes action in
reliance on the promise
We use the “but for” test:
Can we say that “but for” the promisor’s promise, the promisee would not have acted as she did? If true, then the promisee acted in reliance on the promisor’s promise.
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Injustice can be avoided only
by enforcement of the promise
Injustice occurs if the promisee has suffered harm as a result of the action or forbearance that she took in reasonable reliance on the promise.
The harm is typically measured in economic terms and does not need to be significant.
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Expectation damages
money damages that put the promisee in the place she expected to be monetarily if the promisor had fully performed her promise.
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Reliance damages
money damages that compensate the promisee for the expenses she incurred in reliance on the promisor’s promise.
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Charitable Subscriptions
A promise by a benefactor to a charity to make a donation. Such promises, even though gratuitous, are enforceable through promissory estoppel. A charity does not need to prove that it relied on — or took action based on — the particular benefactor’s promise of a donation.
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Chapter 7
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Quasi-Contract/Implied in Law (restitution)
A court may order restitution if:
the plaintiff conferred a benefit on the defendant;
the defendant has knowledge or appreciation of the benefit;
the defendant has accepted or retained the benefit conferred; and
the circumstances are such that it would be unjust for the defendant to retain the benefit without paying the plaintiff for the fair value of it.
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Promissory Restitution
supports the enforcement of a promise based on past consideration or moral obligation.
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Exceptions to Quasi-Contract a/k/a Implied-in-Law Contract
Officious Intermeddler - a person who confers a benefit upon another in a intrusive, pushy, or unwarranted manner, under circumstances where the other person has no knowledge of the benefit or otherwise should not be expected to pay, is not entitled to restitution;
Gratuitous Benefit - a person who confers a benefit upon another without an expectation of compensation, i.e., as a gift, is generally not entitled to restitution.
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Saving Lives
A medical professional may receive restitution for rendering medical services when:
it is an emergency situation,
the injured party is incapable of giving consent, and
the medical care is necessary to prevent serious bodily injury or death.
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Saving Property
Someone who saves another’s property may seek restitution when:
it was an emergency,
the party saving the property expected compensation,
the party was reasonable in believing the owner wanted the property saved, and
the owner accepted the saved property back.
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Promissory Restitution
A promisee may seek to enforce a promise based on past consideration and/or moral obligation (which ordinarily does not satisfy the element of consideration) if:
the promisor made the promise to the promisee in recognition of a benefit previously received from the promisee,
enforcement of the promise is necessary to prevent injustice, and
the promisee did not bestow the benefit on the promisor as a gift,
then the promisee may enforce the promise up to the value of the benefit bestowed on the promisor.
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“necessary to prevent injustice”
The following factors should be considered when determining whether enforcement of a promise under a theory of promissory restitution is “necessary to prevent injustice”:
the definite and substantial character of the benefit received by the promisor,
formality in the making of the promise by the promisor to the promisee,
part performance of the promise by the promisor, and
reliance on the promise by the promisee or the probability of such reliance by the promisee.
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Chapter 8
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Contract Formation
The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange (which can be broken down into the two separate elements of offer and acceptance) and consideration.
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Objective Theory
A party’s manifestation of assent to a bargain is judged by the objective reasonable interpretation of her outward expression of consent and not by her subjective intent.
Words and conduct will normally be given the same meaning that would be given by a reasonable person in the same circumstances.
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Failure to Read
Under the objective theory of contracts, when a party signs a contract (or clicks “Agree” or “Accept”), she is manifesting her agreement to the terms of a contract even if she never reads the terms. Her subjective intent or state of mind about what she is or is not agreeing to does not control.
81
Exceptions to Objective Standard
Three-step analysis for when subjective meaning controls.
1. Does the alleged contract contain a latent ambiguity, i.e., a term that becomes ambiguous when facts external to the contract are considered?
If no, then there is mutual assent and we stick
with objective meaning.
If yes, then objective meaning cannot be used,
proceed to step 2.
2. Have the parties attached the same meaning to the ambiguous term?
If no, then proceed to step 3.
If yes, then there is mutual assent and we
interpret the ambiguous term according to the
agreed upon meaning.
3. Does either party know or have reason to know the meaning the other party attached to the ambiguous term?
If no, then there is no mutual assent and
alleged contract falls apart.
If yes, then there is mutual assent and we
interpret the ambiguous according the
meaning of the innocent party, i.e., the party
without knowledge of the other’s meaning.
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Chapter 9
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Offeror
The party making the offer is called the offeror.
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Offeree
The party to whom the offer is made is called the offeree.
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Power of Acceptance
An offeror’s offer creates in the offeree the power of acceptance — i.e., the right to form a contract merely by agreeing to every term of the proposed offer.
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Preliminary Negotiations
Until one of the parties to a discussion manifests a present intent to enter into a bargain, the parties are merely engaged in preliminary negotiations and no offer has been made.
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Elements of an Offer
An offer requires:
a manifestation of a present intent to enter a bargain;
that it be stated in certain and definite terms;
that it be communicated to an identified person or persons;
that an offeree be able to reasonably understand that a contract would result if accepted.
88
Manifest Present Intent to Enter a Bargain
We break this element down as follows:
Manifestation- the offeror’s outward expression to another party rather than a secret, unexpressed intent.
Present Intent- whether the offeror’s purpose — as determined by an objective interpretation of her words and actions — is to make a deal with another party.
Bargain- an exchange of consideration.
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Certain and Definite Terms Generally
All the essential terms of an offer must be reasonably certain, meaning they must be specific and definite enough to provide a court a basis for determining the existence of a breach and for fashioning an appropriate remedy.
Caveats:
Uncertainty as to incidental or collateral matters is not generally fatal, assuming the parties otherwise show an intent to enter into a contract.
Even if the parties to a contract have not agreed on every single term, a contract may still form.
90
Certain and Definite as to Essential Terms
It is the essential terms of an offer that must be certain and definite. The essential terms generally include: the parties, the subject matter, the price, the payment terms, and the timing.
The key to determining whether a term is in fact essential is whether or not a court needs the term to determine breach and/or to fashion the appropriate remedy.
91
Common Law Implied Terms
Under the common law, a court may imply a reasonable term if one of the essential terms is missing. Consider the following common law examples:
Time performance- when the parties do not include a time for the completion of performance, a court will likely imply a reasonable time based on all the facts and circumstances, including the nature of the contract.
Price to be paid- the parties need not agree to an actual dollar figure so long as there is some objective way to determine the price, such as looking at a rental market to determine the fair rental value of an apartment.
Scope of work or property transferred- if the parties do not identify what services are to be rendered or the piece of property to be bought or sold, it is unlikely the court can or will imply a term.
92
UCC Gap Fillers
The UCC has specific provisions, called gap fillers, to fill in missing or indefinite terms in contracts for the sale of goods. They are as follows:
Missing time provisions- a reasonable time;
Open price term- a reasonable price;
Place for delivery- the seller’s place of business or wherever the goods are located, if they are store at a third location, such as a warehouse.
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Agreement to Agree
An agreement by the parties to agree to an essential term in the future — such as the rental rate for the renewal of a lease for a second term — is generally not enforceable. Our standard for certain and definite terms still applies. There must be enough certainty for a court to determine a breach and/or to fashion an appropriate remedy. If this standard is not met, the agreement to agree will fail as with any other contract.
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Identified Person or Persons
An offeror must communicate her offer to an identified person or persons, since it is only the identified person or persons who have the power of acceptance. The offeror need not identify a person by name. Rather, she need only specify a method for identifying the person or persons, such as “all persons entering the class of first-year law students in the Fall 2022 semester” are eligible to purchase a law school t-shirt at a 40% discount
95
Advertisements General Rule
Advertisements, catalogs, flyers, price quotations and the like are usually not offers but are merely invitations to deal. The reason being that such communications are generally too uncertain, do not manifest a present intent to enter a bargain, and suffer from a problem of over acceptance.
96
Advertisements Exceptions
A court may treat an ad as an offer in the following circumstances:
Misleading ads- a court will treat an ad as an offer when a business makes a misleading ad to trick customers into a store only to be told the item is unavailable at the advertised price.
By statute- many states have passed consumer protection laws recognizing the ads of certain businesses, such as car dealerships, as offers in order to encourage these businesses to advertise truthfully.
Rewards- an ad for a reward or prize is usually construed as an offer for a unilateral contract.
Lefkowitz-type ad- when an ad is clear, definite, and explicit, and leaves nothing open to negotiation, it will be treated as an offer. In Lefkowitz, the ad was for “first person in line on Saturday at 9 AM gets fur coat for $1.”
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Reasonable Understanding of Offeree
Finally, recall that we adhere to the objective theory of contracts. So we must ask would a reasonable person in the place of the offeree view the offeror’s manifestations and conclude that all she must do is assent and she would have a contract with the offeror. Only if the answer is yes, do we ultimately conclude that the offeror has in fact made an offer that creates in the offeror the power of acceptance.
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Chapter 10
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Acceptance
Acceptance of an offer is a manifestation of assent to the terms of thereof made by the offeree in the manner invited or required by the offer.
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Manifestation of Assent
To accept, an offeree must outwardly express her agreement to the bargain proposed by the offeror.
We judge whether the offeree’s outward expressions (aka manifestations) are in fact agreement to the offeror’s proposed bargain by the objective theory of contracts. We ask would a reasonable person view the offeree’s outward expressions as communicating such agreement.
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Mirror image rule
Mirror image rule- under the common law, the offeree’s acceptance must be a mirror image of the terms of the offer. It must match every essential term of the offer. The offeree’s inclusion of additional or different terms in her purported acceptance causes it to be a counteroffer.
102
Conditional acceptance
Conditional acceptance- under the common law, a conditional acceptance does not exist. An offeree’s attempt to condition her acceptance on the offeror’s agreement to additional or different terms causes the offeree’s purported acceptance to turn into a counteroffer.
103
Manner invited or required
The offeree must accept in the manner invited or required in the offer.
The offeror is the master of her offer. She may specify both (1) the method of communication the offeree must use — such as email, phone, text message, US mail, fax, face-to-face, etc. — and (2) whether the offeree must accept by return promise or return performance.
104
Method of communication
Specified- If the offeror specifies that only a particular method of communication may be used to accept the offer — such as email, US mail, text message, or by a particular form — then the offeree must use that method. The offeree’s failure to use the specified method means the purported acceptance is ineffective.
Unspecified- If the offeror does not specify a particular method of communicating acceptance, then the offeree may use any method reasonable in the circumstances. Generally, this means using the same method of communication used by the offeror to communicate the offer or a different method that is equally as fast or faster.
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Return promise or performance
10-29 fc
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Termination of
Power of Acceptance
An offeree’s power of acceptance may be terminated the following ways:
rejection; or
revocation; or
counteroffer; or
lapse; or
death.
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Rejection
An offeree rejects an offer when she communicates to the offeror that she does not intend to accept the offer.
A rejection is effective upon notice to the offeror.
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Revocation
The offeror may revoke her offer any time before the offeree accepts the offer. A revocation is effective upon notice to the offeree. It may be communicated directly or indirectly by words or actions.
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Counteroffer
An offeree makes a counteroffer when she rejects the original offer and replaces it with a new offer. It is effective upon notice to the offeror.
Note that the offeror could specify that the offer will remain open even though a counteroffer has been made.
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Mere Inquiry
A mere inquiry must be distinguished from a counteroffer. An offeree makes a mere inquiry, rather than a counteroffer, when:
The offeree asks the offeror to consider additional or different terms from those proposed in the original offer but reserves the power to accept the original offer with its terms. For instance, she might say, “While I mull over what you’ve proposed, what do you think of this alternative?”; or
The offeree explores with the offeror the possibility of additional or different terms from those proposed in the original offer, but she does not provide specific, concrete alternatives. For instance, she might say, “Would you consider going any lower on the price?”, but not suggest a specific, lower price possibility.
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Lapse
An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time. A reasonable time depends on all the facts and circumstances.
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Death
An offeree’s power of acceptance terminates upon the death of either party. However, an already agreed upon contract survives death.
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Silence as Acceptance
Silence is normally not acceptance unless:
offeree agrees that it is,
past business dealings establish that it is, or
offeree exerted control over the consideration that was offered.
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Mailbox Rule Generally
The mailbox rule is an exception to the general rule that an offeree’s acceptance is effective upon notice to the offeror. The rule provides that when an offeree sends an acceptance through the mail, it is effective upon dispatch.
Note that everything else – i.e., offer, rejective, counteroffer, revocation, etc. – is effective upon receipt.
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Mailbox Rule Exceptions
he mailbox rule does not apply in the following situations:
Parties agree that acceptance is not effective until received by the offeror.
The parties have an option contract. In which case, the offeree’s acceptance must be received by the offeror during the option period.
The federal government is a party to the business dealings. The federal government is not bound by the mailbox rule.
The offeree mails a rejection and then an acceptance. Mailbox rule does not apply. Whichever communication the offeror receives first is effective.
The offeree mails an acceptance and then a rejection. By some fluke the offeror receives the rejection first and then offeror relies on the rejection by, for instance, selling house to someone else. The mailbox rule does not apply and the rejection is given legal effect instead.
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Auctions
In a traditional auction, the bidder is the offeror, and the auctioneer is the offeree. Contract formation generally occurs as follows:
When the auctioneer calls out a starting price, this is an invitation to deal or a solicitation for offers.
When a bidder makes a bid (e.g., by raising her hand, etc.), this is an offer to purchase the item up for auction at that price.
The auctioneer accepts a bidder’s offer when the hammer falls and the auction concludes.
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Chapter 11
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Remember Revocation
An offeror may freely revoke an offer anytime before acceptance. A revocation is effective upon notice to the offeree. It may be communicated directly or indirectly by words or actions.
But keep in mind that exceptions exist if the offer has been made irrevocable.
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Remember Revocation
An offeror may freely revoke an offer anytime before acceptance. A revocation is effective upon notice to the offeree. It may be communicated directly or indirectly by words or actions.
But keep in mind that exceptions exist if the offer has been made irrevocable.
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Irrevocability
An irrevocable offer simply means that the offeror may not revoke the offer during the irrevocability period. Any attempted revocation by the offeror is ineffective, and the offeree retains the power of acceptance during this period of time.
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Four Ways to Make
an Offer Irrevocable
Option contracts,
Promissory estoppel,
Part performance of a unilateral contract, or
UCC firm offer.
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Option Contracts
An ancillary or supplemental contract entered into by an offeror and an offeree in order to make an underlying offer irrevocable for a period of time (referred to as the “option period”).
The offeree must provide consideration to the offeror to support her promise to forego her right to revoke for this period of time. Nominal consideration is sufficient and the consideration must actually be paid, rather than just promised.
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Legal Effect of Option Contracts
A legally enforceable option contract (meaning supported by consideration) has the following legal effect:
Offer of the underlying contract becomes irrevocable for the option period.
The offer of the underlying contract will lapse at the expiration of the option period if not accepted by that point. Note: the time period works for lapse even if the option contract is not legally enforceable.
Counteroffers and rejections made by the offeree during the option period do not terminate the offeree’s power of acceptance.
The offer of the underlying contract survives if either party dies during the option period.
The mailbox rule does not apply. Mailed acceptances must be received by offeror during the option period.
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Promissory Estoppel
Promissory estoppel may be used to render an offer irrevocable for a reasonable time. Typically comes up in the limited context of a general contractor working with subcontractors to assemble a bid on a government project, such as the construction of a new school building.
The general contractor relies on the bids of the subcontractors in assembling her own bid on the project. This reliance renders subcontractor’s offer (or bid) irrevocable for a reasonable amount of time to give the general contractor time to find out whether her bid was chosen for the project and to get back to the subcontractor to formally accept the subcontractor’s bid.
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Part Performance of a Unilateral Contract
In the context of a unilateral contract, the offeree’s beginning of performance renders the offeror’s offer irrevocable, by operation of law, for a reasonable period of time to give the offeree time to complete performance.
The offer is still not accepted until the offeree completes performance. Thus, the offeree is not legally bound to complete performance even though the offer has been rendered irrevocable by the offeree beginning performance. The offeree can, therefore, quit in the middle of rendering performance and not incur liability.
Be sure to distinguish mere preparation, such as gathering supplies, from actually beginning the requested performance.
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UCC Firm Offer
Applies only to UCC
Offeror must be a merchant
Offer must be in writing
Offer must be signed by the offeror
Must include a promise to hold offer open
No time specified → for a reasonable time
Time specified → for the specified time
Under no circumstances may the time period exceed three months.
No consideration needed.
An option contract may still be used under the UCC. Mostly likely when the offeror is not a merchant or the parties want a time period longer than three months.
