Contracts Flashcards
Contract
A “contract” is a promise that will be enforced in a court of law.
A “promise” is a manifestation of a commitment to do or not do something in the future.
Elements of a Contract
Mutual Assent:
- Offer and Acceptance
Consideration: A bargained-for exchange of legal value.
- Only promises supported by “consideration” are enforced by the courts
Common Law
Governs the transactions for real property and services
Uniform Commercial Code (UCC)
Governs transactions for goods
Goods
Goods are Tangible, Identifiable, and Moveable at time of transaction
Predominant Purpose Test
When a transaction includes both services/real property and goods, the pre-dominant purpose of the contract determines the whether the UCC or the common law will apply
Merchant
- a person who deals in goods of the kind or
- otherwise by their occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction or
- to whom such knowledge or skill may be attributed to their employment to of an agent or broker or other intermediary who by their occupation holds themselves out as having such knowledge or skill
Missing Terms - Common Law
Traditional Common law:
- Any missing term or a term that promises to agree at a
later date is not an enforceable promise.
- Promise to Negotiate in Good Faith
o A promise to negotiate in good faith can be an
enforceable contract
Modern Common law:
- Agreement with missing term may be enforced if the
missing terms can be implied with reasonable certainty.
Missing Terms - UCC
Even though one or more terms are left open a contract for sale of goods does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonable certain basis for giving an appropriate remedy. i.e., no problem implying missing terms.
Objective Theory of Contracts
- Intent is determined by looking to the external or
objective appearance of the parties’ intentions as
manifested by their actions.
o What would a reasonable person understand the
parties’ manifestations to mean?
Offer
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will concluded it.
Characteristics (Elements) of offer
o Commitment language
o Contains Definite and Certain Terms:
- Quantity,
- Time for Performance,
- Identity of the Parties,
- Price, and
- Subject Matter.
o Communicated to an Identified offeree
Advertisements
Are generally not binding contractual offers, unless they invite acceptance without further negotiations in clear, definite, express, and conditional language.
- Typically they are an offer to bargain
Master of the Offer
The offeror is the creator of the offer and at the time of its creation has full control over both the fact of its existence and its terms
Manner of Acceptance
Acceptance must be made volitionally by the offeree in the manner invited by the offeror.
Traditional Manner of Acceptance
Acceptance must be exactly as stated in the offer. Where the offer is ambiguous as to unilateral or bilateral, bilateral contract is presumed.
- If unstated than acceptance is in the
manner which the offer was made.
Modern Manner of Acceptance
If unstated, an offer invites acceptance in any manner and by any medium reasonable in the circumstances.
UCC Acceptance of Non Conforming Goods
A shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
A non-conforming shipment is normally to be understood to close the bargain, even though it proves to have been at the same time a breach.
Requirement of Notice of Acceptance
Acceptance must be communicated to offeror
Acceptance by Silence
General Rule: Silence by an offeree ordinarily does not operate as an acceptance of an offer.
(1) Where because of previous dealings it is reasonable
that the offeree should notify the offeror if the offeree
does not intend to accept.
(2) Where an offeree takes the benefit of offered services
with reasonable opportunity to reject them and
reason to believe the offeror thought the offer was
accepted.
(3) Where the offeror has stated or given the offeree
reason to understand that assent may be manifested
by silence or inaction, and the offeree in remaining
silent and inactive intends to accept the offer.
Acceptance by Silence - Unilateral Contract
Acceptance of unilateral K does not require noticed unless offeror would not be on notice. Then notice must be provided in a reasonable time.
Acceptance with Notice of Offer - Unilateral contract
Performance or assent must be done with knowledge of the offer (i.e., you must be the offeree). Not required in reward cases.
Caveat – Knowledge of Offer after Performance has begun:
- Some jurisdictions follow Corbin: Continued
performance = acceptance. (See R2K, section 51)
- Some jurisdictions follow Williston: No acceptance.
Bilateral Contract
Bilateral Contracts: Bilateral contracts involve two promises and are created when one party promises to do or forbear from doing something in exchange for a promise in exchange for the other party’s act or performance. Two rights, two duties.
Unilateral Contract
Unilateral Contracts: Unilateral contracts involve only one promisor and one promisee as are formed when one party makes a promise in exchange for the other party’s act or performance. Significantly, a unilateral contract is not formed and is, thus, unenforceable until such time as the offeree complete performance. One right, one duty.
Traditional Common Law - Promise to Agree at a Later Date
Traditional Common law: Any missing term or
a term that promises to agree at a later date is
not an enforceable promise.
CAVEAT – Promise to Negotiate in Good Faith: A
promise to negotiate in good faith can be an
enforceable contract.
UCC - Missing Terms (UCC 2-204)
Even though one or more terms are left open, a
contract for sale of goods does not fail for
indefiniteness if the parties have intended to
make a contract and there is a reasonable
certain basis for giving an appropriate remedy.
6 Ways an Offer Dies
- Lapse
- Rejection
- Direct Revocation
- Indirect Revocation
- Death/ Incapacity
- Counter Offer
How Offers Die - Lapse
Acceptance must occur within the time stated in the offer. If the offer does not state a time, then acceptance must be communicated in reasonable time
How Offers Die - Rejection (R2K 38)
An offer is terminated by rejection when the offeror receives from the offeree a manifestation of a refusal of the terms of the offer
How Offers Die - Revocation (R2K 42):
An offeree’s power of acceptance terminates when the offeree receives from the offeror a manifestation of intention not to enter into the proposed contract.
How Offers Die - Indirect Revocation (R2K 43)
An offeree’s power of acceptance is terminated
when the offeror takes definite action inconsistent with an intention to enter the proposed contract and the offeree acquires reliable information to the that effect
How Offers Die - Counteroffer (R2K 39)
The normal effect of a counter-offer is to reject the original
offer, i.e., it terminates the original power of acceptance in the offeree who is now a counter-offeror unless the offer itself expressly indicates its continuance notwithstanding one or more counteroffers
How Offers Die - Death or Incapacity (R2K 48)
Death or incapacity revokes an offer. There is no requirement that the fact of death be communicated to the offeree to constitute an effective termination of the offer
4 Ways to Keep an Offer Alive
- Option Contract
- Reliance in Construction Contracts
- Firm Offer
- Part Performance
Option Contract (R2K 25)
An “option contract” is a separate contract with only one purpose: to make an offer irrevocable. Death of the optioner will not revoke the offer.
Rejection of offer held open by an option (R2K 37)
If the optioner were to justifiably rely upon a rejection by the optionee, the option contract might be discharged. Absent such reliance, the general rule is that a rejection or counteroffer will not discharge the option contract.
Mailbox Rule and Acceptances of Option Contracts
Acceptances of an option contract are not covered by mailbox rule and are only effective upon receipt by offeror.
Reliance in Construction Contracts
An offer by subcontractor that was used by a general contractor to compute bid submitted for a construction
job may not be revoked.
Firm Offer (UCC 2-205)
If:
(1) a merchant
(2) makes a written offer
(3) giving assurances that the offer will be held open and irrevocable,
(4) and is signed,
(5) makes the offer irrevocable for a reasonable
time not to exceed THREE MONTHS.
Part Performance (R2K 51):
Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the
performance requested by the offer may accept by completing the requested performance.
Acceptance of Self Service Contracts:
Acceptance of Self Service contracts can be accomplished in three ways:
(1) by the act of delivering the goods to the check-out counter and paying for them (ie. Performance);
(2) by the promise to pay for the goods as evidenced by their physical delivery to the checkout counter (implied promise); and by
(3) by the promise to deliver the goods to the check-out counter and to pay for them there as evidenced by taking physical possession of the goods by their removal from the shelf (implied promise through partial performance).
Acceptance of Auction Contracts (UCC 2-328):
A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
Additional Terms in Acceptance or Confirmation aka Battle of the Forms (UCC 2-207):
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent with a reasonable time operates as an acceptance even though it states terms additional to/ different from those offered or agreed upon, unless acceptance is expressly made conditional on assent of the additional/ different terms.
(2) The additional terms are to be construed as proposals
for additions to the contract.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such a case, the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this act.
Additional Terms in Acceptance or Confirmation aka Battle of the Forms (UCC 2-207) - Between Merchants
Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance
to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has
already been given or is given with a
reasonable time after notice of them
is received.
Consideration
A bargained-for exchange of legal value.
Legal Value
Legal Value will be found if there is a benefit to the
promisor or detriment to the promisee.
Bargained-for Exchange
The benefits and detriments must be given
for the other.
Sufficiency of Consideration
Courts will not weigh consideration.
Sham Consideration - Traditional Rule (1RK 84)
Even if the parties know there is “sham” consideration, as long as not money for money, ok under the common law.
Sham Consideration - Modern Law (R2K 81)
Unless both parties know that the purported consideration is mere pretense, it is immaterial that the promisor’s desire for the consideration is incidental to other objectives and even that the other party knows this to be so.
Sufficiency of Consideration - Exception
Equitable Action for Specific Performance: A court sitting in equity may refuse to grant specific performance if:
1) the consideration for it is grossly inadequate or its terms are otherwise unfair
2) its enforcement will cause unreasonable or disproportionate hardship or loss to the defendant or to third persons, or
3) it was induced by some sharp practice, misrepresentation, or mistake.
Consideration - Like for Like
First Restatement of Contracts Section 76(c):
Consideration is not sufficient if it is the transfer of money or fungible goods as consideration for a promise to transfer at the same time and place a larger amount of money or goods of the same quality.
Consideration for Option Contracts - TRADITIONAL RULE
Options Ks are like any other K and need consideration to be valid.
Consideration for Option Contracts - MODERN RULE
(R2K, section 87): An offer is binding as an option contract if it:
(1) is in writing signed by the offeror,
(2) recites a supported consideration for the making of the offer, and
(3) proposes an exchange on fair terms within a reasonable time.
Note - Nominal consideration and false
consideration will not prevent enforcement.
At Will Employment
In the absence of consideration, employment is at-will, and can be terminated by either employer or employee for any reason or no reason.
At Will Employment Exception
3 general exceptions to at-will employment:
(1) discharges in violation of public policy,
(2) discharges in violation of company handbooks constituting a unilateral contract, and
(3) discharges in violation of covenant of good-faith and fair dealing.
Illusory Promises
Where one or both promises are illusory, there is no
consideration and no contract. A promise to perform an act unless the promisor changes his mind promises nothing. There is no restraint on the promisor’s future action. There is no binding commitment to do or refrain from doing anything.
Illusory Promises - Bilateral Contract
When illusory promises are all that support a purported
bilateral contract, there is no contract.
Illusory Promises - Unilateral Contract
If only one promise is illusory, a unilateral contract can still
be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance, regardless of whether the promise was illusory at the time it was made and the promise became enforceable upon the employees’ performance.
Requirement Contracts
Contract where the buyer seeks supplies of a certain material for its needs. The exact quantity of such requirements is not available at the time the contract
is formed since the requirements will depend upon market
conditions and the competitive success of the business.
Though is not identified at the time of contract formation,
the quantity is identifiable at the end of the contract period.
Output Contracts
Where a seller agrees to sell its entire production output to a single buyer for a certain period. The output will not be precisely identified at the time of formation, but will be determined at the conclusion of the period.
Pre-Existing Duty Rule (R2K 73)
Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration, but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.
past consideration is no consideration at all
Pre-Existing Duty Rule (R2K 73) - Exception
The rule is inapplicable, however, if the promisee undertakes any obligation not required by the pre-existing duty, even if the new obligation involves almost the same performance as the pre-existing duty. […] Any consideration for the new undertaking, however insignificant, satisfies the rule.
Agreement to Pay Pre-Existing Debt
An agreement to forbear to sue upon a debt already due and payable, for no other consideration than a payment of part of the debt, is without legal consideration.
Agreement to Pay Pre-Existing Debt - Exception
Where the creditor performs by forbearing in bringing suit, and the debtor has actually received the benefit contracted for, then debtor cannot claim lack of consideration as ground for making the contract unenforceable.
Contract to Rescind Prior Contract
Contract for the rescission of a prior contract in exchange for new consideration does not run afoul of pre-existing duty rule.
Contract Modifications - Traditional Common Law
Modifications are new
contracts that require new consideration.
Contract Modifications - Modern Common Law
Modification if
(1) the parties voluntarily agree and if
(2) the promise modifying the original contract was made
before the contract was fully performed by either side,
(3) the underlying circumstances which prompted the
modification were unanticipated by the parties, and
(4) the modification is fair and equitable.
Contract Modifications - UCC
Permits modifications of contracts for the sale of goods without consideration. Requires good-faith modifications and the observance of reasonable commercial standards.
Accord and Satisfaction
An accord is a contract under which the obligee promises
to accept a stated performance in satisfaction of the obligor’s existing duty. Not until the performance of the accord, which is called satisfaction, however, is the original duty discharged. Until satisfaction by performance, the original duty is superseded and cannot be enforced by the obligee. If breach of the accord, obligee retains right to sue on original K and the accord.
Substitute Contract
A substitute contract is one where the obligee accepts a new promise as satisfaction of the original duty. The acceptance of the new promise immediately discharges the duties of the
original contract. Because the substituted contract differs from the original duty, there is valid consideration.
Doubtful Claims as Consideration
Compromise of a doubtful right asserted in good-faith is
sufficient consideration for a promise.
Doubtful Claims as Consideration - Minority Rule
R2K section 74 (Corbin): Forbearance to assert or surrender a claim or defense which proves to be invalid is not consideration unless the claim or defense is in fact doubtful
because of uncertainty as to facts or the law, or the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.
Doubtful Claims as Consideration - Majority Rule
(Williston): The weight of authority holds that although forbearance from suit on a clearly invalid claim is insufficient consideration for a promise, forbearance from suit on a
claim of doubtful validity is sufficient consideration for a promise if there is a sincere belief in the validity of the claim.
- Claims that are obviously invalid are not consideration
Promissory Estoppel
R2k section 90:
(1) A promise which the promisor should
(2) reasonably expect to induce action or forbearance on the part of the promisee or a third person and
(3) which does induce such action or forbearance is binding if
(4) injustice can be avoided only by enforcement of the promise.
(5) The remedy is granted for breach may be limited as justice requires.
Moral Obligation - Material Benefit Rule (Minority)
R2K, Section 86(1)
A promise made in recognition of a benefit
previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.
[Such a promise] is not binding if the promisee conferred the benefit as a gift or for other reasons the promisor had not been unjustly enriched; or to the extent that its value is disproportionate to the
benefit. Few states have adopted this rule.
Moral Obligation - Promise to Pay Indebtedness
R2K, Section 82(1)
A new promise by the debtor to pay his debt, whether then barred by the applicable statute of limitations or not, binds the debtor for a new limitations period.
Requirements:
(a) Voluntary acknowledgment of the existence of the antecedent debt, or
(b) payment by debtor made as security or partial payment for antecedent debt, or
(c) statement waiving the statute of limitations.
Defenses to Formation - Misunderstanding
(No Contract)
No mutual assent (no K) -
if the parties attach materially different meanings to their manifestations and:
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached to the other.
Defenses to Formation - Misunderstanding
(Contract Exists)
The manifestations of the parties are operative (there is a K) in accordance with the meaning attached to them by one of the parties if
(a) the party does not know of any different
meaning attached by the other, and the other knows the meaning attached by the first party;
or
(b) that party has no reason to know of any
different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Defenses to Formation - Capacity
R2K, section 12:
- No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties.
Defenses to Formation - Capacity- Infancy
Anyone under the age of 18 is considered an infant and can only incur “voidable” contractual duties. See R2K section 14.
❖ RULE: The minor can “avoid” the contract
by disaffirming the agreement before or
within a reasonable time of reaching
majority and returning all the
consideration received.
- Disaffirmance is any manifestation of
an unwillingness to be bound by the
contract.
❖ EXCEPTION – Transactions for necessities
furnished (food, shelter, clothing,
education) cannot be avoided.
Defenses to Formation - Capacity- Infancy
RATIFICATION
RULE – Ratification: Where the party manifests an intent to confirm the contract within a reasonable time upon reaching majority, minor can no longer avoid the
agreement (ratification can be acknowledgment of the terms of the agreement).
Defenses to Formation - Capacity-
Mental Illness - Volitional Test (Modern):
❖ RULE - Incompetence to contract also exists when a contract is entered into under the compulsion of a mental disease or disorder but for which the contract would not have been made and the other party had reason to know of the defect. See R2K section, 15.
❖ Ask whether a reasonably competent person might have made such a contract.
❖ CAVEAT: Must be diagnosed by a medical
professional.
Defenses to Formation - Capacity-
Intoxication
Voidable only if the other party knew that by intoxication the intoxicated party is unable to understand in a reasonable manner the nature and consequences of the transaction, or unable to act in a
reasonable manner in relation to the
transaction.
Defenses to Formation - Capacity-
Mental Illness - Cognitive Test (Traditional):
RULE - Traditional aka Cognitive Test
❖ Did the party understand the nature and
consequences of the transaction in
question?
❖ CAVEAT: It is irrelevant whether the
other party knew of the condition.
❖ CAVEAT: Must be diagnosed by a
medical professional.
