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Flashcards in Contracts Deck (75)
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1

 

Applicable Law

Contracts for the sale of goods (all things movable at the time that they are identified as goods to be sold under the contract) are governed by the UCC. Certain provisions apply to the UCC when both parties are merchants. A merchant is one who regularly deals in goods of the kind sold or who otherwise by his profession holds himself out as having special knowledge or skills as to the practices or goods involved.  

 

All other contracts, including those for services and real estate, are governed by common law. 

 

If a sale involves both goods and services, a court will determine which aspect is dominant and apply the law governing that aspect to the entire contract. It does not matter what part of the contract is in dispute. If the contract divides payment between goods and services, the UCC applies to the sale portion, and common law applies to the services portion.

2

 

Formation

A contract is a legally enforceable agreement. It requires valid offer, acceptance, and consideration.

3

 

Types of Contracts


 

The offer determines the type of contract. A unilateral contract is one where acceptance is accomplished only by performance, but there is a duty to notify the offeror of the acceptance within a reasonable time. With a unilateral contract, start of performance pursuant to an offer to enter into a unilateral contract makes that offer irrevocable for a reasonable time to complete acceptance. Unilateral contracts are generally silent as to method of acceptance.

 

 

Bilateral Contracts are all created with all other offers, and there is a strong presumption of a bilateral contract unless the offer expressly requires performance as the method of accpetance. Bilateral contracts are generally silent as to method of acceptance.

 

Quasi-Contracts are those agreements where contract law does not apply, but the agreement produces an unfair result and a party is entitled to an equitable remedy.

 

4

 

Offer


 

An offer is (1) a promise, undertaking, or commitment to enter into a contract (intent element); (2) with the essential terms certain and definite; and (3) communication of the promise and the terms to the offeree.

 

 

5

 

Offer: A promise, undertaking, or commitment to enter into a contract


 

The test is whether a reasonable person in the position of the offeree would believe that his or her assent creates a contract. The offer results in a legal obligation for the offeror and an opportunity for the offeree.


 

  • Offer that gives offeree a choice of terms does not make it uncertain.
  • Advertisement or price quotation is not an offer -- but invitation to offer
    • Exceptions:
      • It is in the nature of a reward
      • Specifies quantity and expressly indicates who can accept (e.g. purchase forms to limited merchants in the industry)
  • Price quotation can be an offer if sent in response to an inquiry  
  • Construction bid is an offer
  • Illusory Promise: promise that is revocable at any time
  • Binding promise of offer: Requires separate consideration to create an option contract.

 

 

6

 

Offer: With the essential terms certain and definite

Essential terms are the identity of the offeree and the subject matter, the price, time of payment or performance, quantity, and the nature of the work to be performed.

 

  • Missing Price Term in Sales Contract
    • Sale of Real Estate (common law): price and land description required, otherwise not an offer
    • Sale of Goods (Article 2): no price requirement
  • Vague or Ambiguous Material Terms
    • Invitation to negotiate
    • Not an offer under either common law or UCC
    • Magic words to look for: appropriate, fair, reasonable
    • Not sufficiently specific to be a commitment
  • Requirement & Output Contracts: a contract for the sale of goods that states the quantity of goods to be delivered under the contract in terms of the buyer’s requirements or seller’s output (all, only, exclusively, solely).
    • Constitutes an offer
    • Requirements Contract: Buyer commits to buy exclusively from that seller
    • Output Contracts: Seller has committed to sell exclusively to that buyer
  • Increase in Requirements
    • Buyer can increase requirements so long as the increase is in line with prior demands. No unreasonably disproportionate limitation on increases.

 

7

 

Termination of Offer


  1.  

    Lapse of Time: Offer must be accepted within specified time period or, if none stated, a reasonable time.

  2. Revocation: Words or conduct of the offeror that would indicate to a reasonable person that the offer is terminated. Offers not supported by consideration can be revoked at will, subject to come exceptions.

    • ​Irrevocable Offers:

      1. ​​Option Contrat

      2. Merchant’s Firm Offer

      3. Detrimental Reliance

  3. ​​Rejection: Words or conduct of the offeree rejecting the offer terminates the offer

  4. Termination by Operation of Law

    • Death or insanity of either party prior to acceptance

    • Destruction of the subject matter of the contract

    • Supervening illegality of subject matter of the contract

8

 

Option Contract


 

An offer cannot be revoked if the offeror has also:


 

  1. Promised not to revoke (or promised to keep the offer open); and
  2. This promise is supported by payment or other consideration

 

 

 

9

 

Merchant's Firm Offer


 

If no time stated, can be held open for a reasonable time up to three months if:


 

  1. Offer to buy or sell goods
  2. Signed, written promise to keep the offer open, and
  3. Party is a merchant (generally a person in business)

 

 

There does not need to be an express time stated. Common law does not have firm offer rule.

 

10

 

Detrimental Reliance


 

  • Must be reasonably foreseeable
  • Start of Performance makes offer irrevocable for a reasonable time to complete performance

  • BUT mere preparation does not make offer irrevocable

     

11

 

Acceptance


 

Acceptance of an offer is an unqualified assent to the terms of an offer that is communicated to the offeror. Acceptance may be made by any medium reasonable under the circumstances, unless the offer limits the form of acceptance.

 


  •  

    Common Law: acceptance must include acceptance of each and every term of the offer (Mirror Image Rule)

  • Conditional acceptance is not an acceptance = rejection

  • Counteroffer: differs in its terms from the offer, and operates both as a rejection of the original offer and a new offer under the common law

  • Under the UCC, an acceptance that varies the terms is a valid acceptance

     

     

 

 

12

 

Methods of Acceptance


 

  • Unilateral Contracts: full performance by offeree who knows of offer
  • Bilateral Contracts:

    • Common law: either a promise or beginning of performance

    • UCC:

      1. ​​Promise to ship

      2. Shipment of goods

      3. Shipment of nonconforming goods is acceptance and breach, unless it is an accommodation

13

 

Mailbox Rule


 

  • Acceptence is effective upon dispatch
    • Exception: the offer stipulates that acceptance is not effective until received or otherwise controls the form of acceptance
  • Option Contract: acceptance is effective only on receipt
  • Offeree sends rejection, then acceptance: first received is effective
  • Offeree sends acceptance, then rejection: acceptance effective unless rejection received first and offeror detrimentally relies

 

 

14

 

Acceptance with Varying Terms (2-207)


 

Under 2-207, the UCC does not require offer and acceptance to be mirror images of one another. Additional or different terms in sale of goods contract (offer made, response adds terms or puts in different terms) is still acceptance (unless the terms are made a condition of acceptance) and there is a contract.

 

 

15

 

2-207: Different Terms


 

Different Terms → Knockout Rule (Majority Rule)

  • Different terms contradict each other
    • Some courts construe the different terms as proposals for additions
    • As between merchants, different terms are analyzed as additional terms
  • UCC Gap filler
    • Conflicting terms are both knocked out and replaced by UCC Gap Fillers
    • If there are none, course of performance between the parties

 

 

 

 

16

 

2-207: Additional Terms


 

As between merchants additional terms become part of the contract UNLESS


 

  • Offer expressly limits acceptance to the terms of the offer; OR
  • They materially alter the offer; OR
  • Notification of objection to the additional or different terms is given within a reasonable time after notice is received

 

If both parties are not merchants, the Buyer’s proposed change would not be effective unless Seller did something to accept the “proposal.

 

17

 

Consideration


 

Consideration is a bargained-for exchange (not a gift) and a detriment to promisee or legal benefit to promisor. The adequacy of the consideration is generally not relevant.


 

Bargained for


 

  • Detriment to the promisor and a benefit to the promisee
  • Requires a bargained-for exchange

 

Legal detriment


 

  • Refraining from something that person had a legal right to do
  • Promise to perform a preexisting legal duty is not good consideration
  • Forbearance to sue on a claim that the claimant knows to be invalid is not good consideration if: (1) the claim is invalid and (2) claimant is aware the claim is invalid.

 

Promise as Consideration


 

  • One promise is generally consideration for another promise

  • Exception - Illusory Promise: With a right to terminate at any time without notice (illusory promise is usually the wrong answer) 

 

 

 

 

18

 

Promisory Estoppel


 

Promise is enforceable, even without consideration, to the extent necessary to prevent injustice if the promisor should reasonably expect to induce action of a definite and substantial character, and such action is in fact granted. The promisor should reasonably expect to induce definite or substantial action or forbearance; and such action or forbearance is in fact induced.

 

 

19

 

Mistake (defense to formation)


 

Mutual Mistake: Contract may be voidable by the adversely affected party if the:


 

  1. Mistake concerns a basic assumption upon which the contract was made;
  2. Mistake has a material effect on the agreed-upon exchange; and
  3. Party seeking rescission did not assume the risk of the mistake

 

 

Unilateral Mistake: Contract is voidable if nonmistaken party knew or should have known of the mistake (majority of jurisdictions) or the mistake is basic and the mistaken party’s hardship outweighs the detriment to the non-mistaken party’s expectations under the contract (in the minority of jurisdictions).

 

20

Fraud and Misrepresentation (defense to formation)



 

With the intent to induce reliance, defendant misrepresented or omitted a material fact that the defendant knew (intentional) or should have known (negligent) was false, and upon which the plaintiff actually relied. 

  • Preventing another from learning a fact is the equivalent of asserting the fact does not exist. 
  • Non-disclosure without concealment is not misrepresentation unless the non-disclosure is material or fraudulent.

 

 

21

 

Illegality (defense to formation)


 

Contract is unenforceable if either the consideration or the subject matter of a contract is illegal, such as where the agreement is: in restraint of trade, obstructing the administration of justice, inducing breach of fiduciary duties or relating to torts or other crimes; gambling contracts; or usurious contracts. When the subject matter is legal at the time of the offer, but becomes illegal before acceptance, the illegality operates to revoke the offer.

 

 

22

 

Capacity (defense to formation)


 

Those who are infants (under 18), mentally incompetent (lacks the ability to understand the agreement), or intoxicated (if the other party has reason to know) have right to disaffirm the contract. Contract will not be enforced against an “infant” but as a plaintiff, an “infant” can enforce a contract or can subsequently ratify the contract after obtaining majority by retaining the benefits of the contract.

  • Necessaries: A person who does not have capacity is legally obligated to pay for things that are necessary (food, clothing, medical care or shelter). This liability is based on quasi-contract, not contract law.


 

  • Measure of recovery is not contract price, but the value of the benefit conferred

 

 

 

23

 

Statute of Frauds (Defense to Enforcement)

Statute of Frauds is a statute designed to prevent fraudulent claims of the existence of a contract. Proof required to satisfy SOF is generally proof of either (1) performance or (2) a writing signed by the defendant. A contract must be in writing if it involves: (1) promise to pay the debt of another (suretyship); (2) transfer of any interest in land; (3) service contract that cannot be performed within 1 year; or (5) sale of goods of $500 or more. 

 

 

24

 

Statute of Frauds Writing Requirement


 


 

Does not need to contain all terms of the contract, but must be evidence that there is a contract that state the essential terms with reasonable certainty. If it does not satisfy the requirements, extrinsic evidence cannot be submitted to supply the missing terms.

 

 

 

  • Not every writing suffices
    • Common Law:
      • Material terms (who and what)
      • Signed by the person who is asserting the SOF (person being sued)
    • UCC:
      • Some signed writing indicating contract and specifying quantity
      • Merchant’s confirmatory memo: written confirmation sufficient to bind one will bind the other if not objected to within 10 day

 

 

 

25

 

Statute of Frauds Exceptions


 

  1. Admission
  2. Performance

    • Sale of goods

    • ​​Performance contracts that cannot be performed within 1 year

  3. If contracts for real property, any 2 of 3:

    • Performance by payment (whole or part)

    • Possession

    • Making of valuable improvements

  4. Estoppel (possible CA essay issue)

    • ​​Rule: When a D’s conduct or promise foreseeably induces a plaintiff to change position in reliance on an oral agreement, courts may use the doctrine of estoppel to remove the doctrine completely from the Statute of Frauds

    • Applies in cases where it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim

    • Some cases hold that the P’s reliance on the D’s oral promise can estop the defendant from asserting Statute of Frauds defense

26


 

 

Unconscionable Contract


 

 

 

 

 

Empowers a court to refuse to enforce all or part of an agreement. Policy is the prevention of oppression and surprise.

 

Look for:


 

  • One-sided contract at time it was formed (especially pre-printed)
  • Unequal bargaining power

27

 

Third Party Beneficiary


 

Third-party beneficiary is someone who, either intentionally or unintentionally, benefits from the contract at its inception.

 

 

28

 

Third Party Beneficiary: Parties


 

Promisor: the party that makes a promise that benefits the third party. to perform in favor of the third party beneficiary

 

Promisee: the party who in the contract obtains the promise from the promisor to perform that benefits the third party beneficiary

Third Party Beneficiary: Although not a party to the original contract, the party who receives payment from the promisor or an obligation of the promisor. Third party beneficiaries are able to enforce the contract.  

 

 

29

 

Intended or Incidental Beneficiary?


 

  • Intended beneficiary (will always be named in the contract)

  • Only intended beneficiaries have contract law rights 
  • Whether the third party is designed in the contract (intent of the two parties to contract makes the determination)

  • Whether performance is to be made directly to the third party

  • Whether the third party is given rights under the contract

  • The relationship between the third party and the promisee

 

 

 

30

 

Creditor or Donee Beneficiary?


 

  • Creditor: promisee’s intent was to discharge an obligation. Look for whether the third party beneficiary was a creditor of the promisee before the contract.
  • Donee: promisee’s intent was to bestow a gift