Contracts and Sales (Formation) Flashcards
(123 cards)
1
Q
What is a contract?
A
A contract is a legally enforceable agreement. A legally enforceable contract is typically created though the process of mutual assent (i.e., offer and acceptance) and consideration, provided no valid defense to the contract exists.
2
Q
How is a contract formed?
A
For a contract to be formed, there must be a manifestation of mutual assent to the exchange, which occurs upon acceptance of a valid offer to contract.
3
Q
Express Contract
A
A contract in which words are used to express the parties’ intent.
4
Q
Implied in Fact Contract
A
A contract in which conduct indicates assent or agreement.
5
Q
Offer
A
An offer is an objective manifestation of the offeror’s willingness to enter into an agreement that creates the power of acceptance in the offeree. In other words, it is a communication that gives the recipient power to conclude a contract by acceptance. A statement is an offer only if the person to whom it is communicated could reasonably interpret it as an offer. It must express the present intent of a person to be legally bound to a contract.
6
Q
UCC 2-204(1)
A
A contract may be formed in “any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”
7
Q
Intent
A
The intent of a party means what a reasonable person in the position of the other party would believe as a result of the party’s objective manifestation of intent.
8
Q
How is intent determined?
A
Intent is determined by the objective theory of contracts.
9
Q
Knowledge by the offeree
A
To have power to accept an offer, the offeree must have knowledge of it.
10
Q
Terms
A
For a contract to exist, the terms of the contract must be certain and definite, or the contract fails for indefiniteness.
11
Q
Common law required terms
A
Parties, subject matter, price, quantity
12
Q
UCC required terms
A
Quantity
13
Q
UCC Approach (Terms)
A
Under the UCC, a contract is formed if: (1) both parties intend to contract and (2) there is a reasonably certain basis for giving a remedy
14
Q
Duration
A
In most ongoing contracts, if a duration term is not specified in the agreement, courts will imply that the contract will last for a reasonable period.
15
Q
Employment Contracts (Duration)
A
If an employment contract does not state duration, there is a rebuttable presumption that the employment is at will.
16
Q
At-Will Employment Relationship
A
In an at-will employment relationship, either party can terminate the relationship at any time, without the termination being considered a breach of the contract (unless the termination is against public policy, such as when an employee is discharged for filing a discrimination claim).
17
Q
How do many employment agreements overcome the default rule of at-will employment?
A
By express terms of the contract, rules published by the employer (such as those in an employee handbook), or by implication (by usage or conduct).
18
Q
Missing Terms
A
As long as the parties’ intent to form a contract is apparent, the court may supply a missing term on t he presumption that the parties intended to include a reasonable term.
19
Q
What missing terms can the UCC fill the gap for (other than subject matter and quantity)?
A
Time (reasonable), place for delivery (the seller’s place of business), time of payment (when the buyer is to receive the goods), assortment of goods (reasonable choice of the buyer) and price for the goods
20
Q
When does the UCC supply a reasonable price upon delivery?
A
If the contract omits a price or the parties agree to set the price in the future and then fail to agree.
21
Q
Vague Terms
A
When the terms of the contract are vague, certain presumptions cannot be made because the parties’ intent is unclear.
22
Q
Language
A
The offer must contain words of promise, undertaking, or commitment (as distinguished from works that merely indicate intention to sell or interest in buying). The offer must also be targeted to a number of people who could actually accept.
23
Q
Bilateral contract
A
A bilateral contract is one in which a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render both promises enforceable. An offer requiring a promise to accept can be accepted either with a return promise or by starting performance. Commencement of performance of a bilateral contract operates as a promise to render complete performance.
24
Q
Unilateral contract
A
A unilateral contract is on e in which one party promises to do something in return for an act of the other party (e.g., a monetary reward for finding a lost dog). Unlike in a bilateral contract, the offeree’s promise to perform is insufficient ot contstitue acceptance.
25
Advertisements
Advertisements generally are considered invitations to receive offers from the public unless associated with a stated reward. An advertisement that is sufficiently specific and limiting as to who may accept may also constitute an offer (e.g., "Used car for sale for $5,00. First come, first served).
26
Termination of Offers
An offer can be accepted only when it is sill outstanding (ie.e., before the offer is terminated).
27
How can offers be terminated?
Lapse of time in offer, death or mental incapacity, destruction or illegality, revocation, or rejection by offeree.
28
What controls when the offer specifies a date on which the offer terminates?
The fixed time by the offer controls
29
When does the lapse of time start if the offer states that it will terminate after a specified number of days?
The time generally starts to run form the time the offer is received, not sent, unless the offer indicates otherwise.
30
When the offer expire when there is a delay?
If the offeree is aware or should have been aware of a delay in the offer's transmittal, the offer expires when it would have expired had there been no delay.
31
What occurs when the offer does not set a time limit for acceptance?
The power of acceptance terminates at the end of a reasonable period.
32
How is "reasonable" determined?
What is reasonable is a question of fact that depends on various factos, including the nature of the contract, the purpose and course of dealing between the parties, and trade usage.
33
Death or mental incapacity
An offer terminates upon the offeror's or offeree's death or mental incapacity, even if the offeree does not learn of the offeror's death or mental incapacity until after the offeree dispatches what is believed to be an acceptance.
34
What is an exception to the death or mental incapacity termination?
An exception exists for an offer that is an option, which does not terminate upon death or mental incapacity because consideration was paid to keep the offer open during the option period. The offer is therefore irrevocable during that period.
35
Destruction or illegality
An offer involving subject matter that is destroyed is terminated. Similarly, an offer that becomes illegal is terminated.
36
Revocation
Revocation is the act of withdrawing an offer during contract negotiations.
37
Restatement (Second) of Contracts §42
In general, an offeror can revoke an offer at any time before acceptance. An offer is revoked when the offeror manifests an intent not to enter into the proposed contract.
38
How may a revocation be made?
A revocation may be made in any reasonable manner and by any reasonable means, and it is not effective until communicated. A revocation sen tby mail is not effective until received.
39
Restatement (Second) of Contracts §68
A written revocation, rejection, or acceptance is received when the writing comes into the possession of the person addressed, or of some person authorized by him to receive it for him, or when it is deposited in some place which he has authorized as the place for this or similar communications to be deposited for him.
40
Under the UCC, a person receives notice when?
Under the UCC, a person receives notice when the notice (1) comes to that person's attention; or (2) is duly delivered in a reasonable form at the place of business or where held out as the place for receipt of such communications.
41
UCC 1-202
An organization receives notice when the notice comes to the attention of the individual conducting the transaction or when it would have come to that individual's attention had the organization exercised due diligence.
42
When does constructive revocation occur?
If the offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, the offer is automatically revoked.
43
What limits an offeror's power to revoke an offer?
Option, UCC firm offer, promissory estoppel, and partial performance
44
What is option?
An option is an independent promise to keep an offer open for a specified period (promise not to revoke). This promise limits the offeror's power to revoke the offer until after the period expires while also preserving the offeree's power to accept. If the option is a promise not to revoke an offer to enter into a new contract, the offeree must generally give separate consideration for the option to be enforceable. If the option is within an existing contract, no separate consideration is required. While the option contract is in effect, the offeree's power of acceptance cannot be terminated by rejection, counteroffer, revocation, or the offeror's death or incapacity unless the requirements are met for the discharge of a contractual duty.
45
UCC firm-offer rule
An offer to buy or sell goods is irrevocable if : (1) the offeror is a merchant (2) there is an assurance that the offer is to remain open; and (3) the assurance is contained in a signed writing from the offeror. The offeree does not need to provide consideration to keep the offer open under the UCC firm-offer rule.
46
Merchant
A merchant includes (1) a person who regularly deals in the type of goods involved in the transaction, (2) a person who by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction; and (3) any businessperson when the transaction is of a commercial nature.
47
UCC firm-offer time period
If the time period during which the option is to be held open is not stated, a reasonable term is implied. However, irrevocability cannot exceed three months, regardless of whether a time period is stated or implied, unless the offeree gives consideration to validate it beyond the three-month period.
48
Signed writing
The primary purpose of the signed writing requirement is to ensure that the merchant deliberately makes a current firm offer binding. Therefore, a full handwritten signature is not always required, such as merely initialing the relevant clause is appropriate under the circumstances or when the offeror handwrites on letterhead confirming that a firm offer was already made.
49
UCC 2-205, Comment 4
A firm offer in a form prepared by the offeree must be separately signed by the offeror to protect against inadvertent signing.
50
Promissory estoppel (detrimental reliance)
When the offeree reasonably, foreseeably, and detrimentally relies on the offeror's promise before acceptance, the doctrine of promissory estoppel may make th eoffer irrevocable. The offeror is liable to the extent necessary to avoid injustice, which may result in holding the offeror to the offer, reimbursement of the costs incurred by the offeree, or restitution of the benefits conferred.
51
Partial performance - Unilateral contract
If the offer is for a unilateral contract, the offeror cannot revoke the offer once the offeree has begun performance unless the offeror has reserved the right to revoke. once performance has begun, the offeree will have a reasonable amount. of time to complete performance but cannot be required to complete the performance. A unilateral contract is not formed until performance is complete.
52
Partial performance - Bilateral contract
Commencement of performance of a bilateral contract operates as a promise to render complete performance and constitutes an acceptance. if the contract is for the sale of goods, the offeror must receive notice of the performance within a reasonable time.
53
Partial performance - Unilateral or bilateral contract
Whether the contract is unilateral or bilateral, the offeree must have had knowledge of the offer when she began performance.
54
General Offer
A general offer is an offer made to a large number of people, generally through an advertisement. A general offer can be revoked only by notice that is given at least the same level of publicity as the offer. So long as the appropriate level of publicity is met, the revocation will be effective, even if a potential offeree does not learn of the revocation and acts in reliance on the offer. If a person has actual knowledge of the intent to revoke but did not see the notice, then the revocation will be effective as to such person.
55
Rejection by offeree
An offer is terminated by rejection (i.e., the offeree clearly conveys to the offeror that the offeree no longer intends to accept the offer). A rejection is usually effective upon receipt. An offeree cannot accept an offer once it has been terminated. A counteroffer acts as a rejection of the original offer and creates a new offer. An exception exists for an option holder, who has the right to make counteroffers during the option period without terminating the original offer.
56
Revival of offer
A terminated offer may be revived by the offeror and then accepted by the offeree.
57
Acceptance
An acceptance is an objective manifestation by the offeree to be bound by the terms of the offer. Only a party to whom an offer is extended may accept. If the offer is extended to a class, a party who is a member of the class may accept. An offeree must know of the offer upon acceptance for it to be valid. In addition, the offeree must communicate the acceptance to the offeror.
58
What does acceptance of an offer for a unilateral contract require?
Complete performance. Once performance has begun, the offer is irrevocable for a reasonable period to allow for complete performance, unless there is a manifestation of a contrary intent. However, the offeree is not bound to complete performance. In addition, while the offeror may terminate the offer before the offeree begins to perform, expenses incurred by the offeree in preparing to perform may be recoverable.
59
If there is doubt as to whether an offer may be accepted by a promise to perform or by performance, what options does the offeree have?
The offeree may accept the offer by either.
60
Who is the master of the offer?
The offeror is the master of the offer and can dictate the manner and means by which an offer may be accepted.
61
What makes a means of acceptance reasonable?
A means of acceptance is reasonable if (1) it has been used by the offeror, (2) it is used customarily in the industry, or (3) it has been used in prior transactions between the parties. Even if the acceptance is by unauthorized means, it may be effective if the offeror receives the acceptance while the offer is still open.
62
Silence
Generally, silence does not operate as an acceptance of an offer, even if the offer states that silence qualifies as acceptance (or, more likely, implied acceptance), unless: (1) the offeree has reason to believe that the offer could be accepted by silence and the offeree was silent with the intent to accept the offer by silence or (2) it is reasonable to believe that the offeree must notify the offeror of his intent not to accept because of previous dealings or patterns of behavior.
63
Shipment of goods
If the buyer requests that the goods be shipped, then the buyer's request will be construes as inviting the seller's acceptance either by a promise to ship or by prompt shipment of conforming or nonconforming goods.
64
If the seller ships nonconforming goods?
The shipment is both an acceptance of the offer and a breach of the contract. The seller is then liable for any damage to the buyer due to the breach.
65
If the seller seasonably notifies the buyer that the nonconforming goods are tendered an as an accomodation?
No acceptance has occurred and no contract is formed. The accommodation is deemed a counter offer, and the buyer may either accept (thereby forming a contract) or reject (no contract formed).
66
Mailbox rule
An acceptance that is mailed within the allotted response time is effective when sent (not upon receipt) unless the offer provides otherwise. The mailing must be properly addressed and include correct postage. This applies only to acceptance. Therefore, the rule almost exclusively applies to bilateral contracts because unilateral contracts require action as acceptance.
67
Rejection following acceptance
If the offeree sends an acceptance and later sends a communication rejecting the offer, then the acceptance will generally control, even if the offeror receives the rejection first. If, however, the offeror receives the rejection first and detrimentally relies on the rejection, then the offeree will be estopped from enforcing the contract.
68
Acceptance following rejection
If a communication is sent rejecting the offer and a later communication is sent accepting the contract, then the mailbox rule will not apply, and the first one the offeror receives will prevail. An acceptance or rejection is received when the writing comes into the possession of the offeror or the offeror's agent or when it is deposited in the offeror's mailbox. The offeror need not actually read the communication that is received first for it to prevail.
69
Revocations effective upon receipt
Offers revoked by the offeror are effective upon receipt.
70
Options and other irrevocable offers
The mailbox rule does not apply to an option contract, which requires that the offeror receive the acceptance before the offer expires. The rule also does not apply to offers that specify that acceptance must be received by a certain date.
71
Medium
If the acceptance is via an instantaneous two-way communication, such as telephone or traceable fax, it is treated as if the parties were in each other's presence.
72
Notice - Unilateral Contract
In a unilateral contract, an offeree is not required to give notice after performance is complete, unless: (1) the offeree has reason to know that the offeror would not learn of performance within a reasonable time; or (2) the offer requires notice.
73
Is notification required for an effective acceptance when the offer invites the offeree to accept by rendering performance?
No, unless the offer requests such notification.
74
If an offeree renders performance and has reason to know that the offeror lacks adequate means of learning of the performance, the offeror's duty is discharged unless:
(1) The offeree exercises reasonable diligence to notify the offeror of acceptance
(2) the offeror learns of performance within a reasonable time; or (3) the offer specifies that notification of acceptance is not required.
75
Notice - Bilateral Contract
An offeree of a bilateral contract must give notice of acceptance. Under the mailbox rule, because acceptance becomes valid when sent, a properly addressed letter sent by the offeree operates as an acceptance when mailed, even though the offeror has not yet received the notice. Under the UCC, an offeree must give notice within a reasonable time if he accepts by beginning performance. Failure to do so will result in a lapse of the offer.
76
Common law (mirror image rule)
The acceptance must mirror the terms of the offer (no different or additional terms). Under common law, any change to the terms of the offer or the addition of another term not found in the offer acts as a rejection of the original offer and as a new counter offer. Mere suggestions or inquiries, including requests for clarification or statements of intent, made in a response by the offeree do not constitute a counteroffer. A conditional acceptance terminates the offer and actgs as a new offer from the original offeree.
77
UCC (additional or different terms rule)
Additional or different terms included in an acceptance do not automatically constitute a rejection of the original offer. A confirmation that contains additional or different terms is treated as an acceptance unless the acceptance is expressly conditioned on assent to the additional or different terms, in which case the confirmation is a counteroffer. Whether the additional or different terms are treated a s part of the contract depends on whether the parties are merchants.
78
One or both parties are not merchants
When at least one party is not a merchant, additional or different terms are treated as a proposal for addition to the contract that must be separately accepted by the offeror to become a part of the contract.
79
Both parties are merchants - battle of the forms
When both parties are merchants, the parties often use sales forms that might not be designed for the sale in question. If both parties to the contract are merchants, remember that a contract exists under the terms of the acceptance unless: (1) the terms materially alter the agreement (2) the offer expressly limits the terms; or (3) the offeror objects to the new terms within a reasonable amount of time.
79
(Both parties are merchants) Acceptance includes additional terms
An additional term in the acceptance is automatically included in the contract when both parties are merchants unless: (1) the term materially alters the original contact, (2) the offer expressly limits acceptance to the terms of the offer; or (3) the offeror has already objected to the additional terms or objects within a reasonable time after receiving notice of them. If any of these three exceptions is met, the term will not become part of the contract, and the offeror's original terms control.
80
Terms that materially alters the contract
A term that results in surprise or hardship if incorporated without the other party's express awareness materially alters the original contract. Examples of terms found to have materially altered the original conduct include a warranty disclaimer, a clause that flies in the face of trade usage regarding quality, a requirement that complaints be made in an unreasonably short time period, and other terms that surprise or create hardship without the other party's express awareness.
81
Terms that do not usually material alter the contract
Terms that usually do not materially after the contract include fixing reasonable times for bringing a complaint, setting reasonable interest for overdue invoices, and reasonably limiting remedies.
82
Knock-out rule
Most jurisdictions apply the knock-out rule, under which different terms in the offer and acceptance nullify each other and are knocked out of the contract. When gaps are created after the knock-out rule is applied, the court uses Article 2's gap-filling provisions to patch the holes.
83
UCC rule - acceptance based on conduct
If the offer and purported acceptance differ to such a degree that there is no contract but the parties have begun to perform as if there were, then Article 22 provides that there will be a contract. The contract's terms will consist of those terms on which the parties' writings agree, together with any supplementary terms filled in by UCC provisions.
84
Consideration
Consideration is a benefit (e.g., act, money, return promise) bargained for and received by the promisor form a promisee. If there is a valid offer and acceptance that creates an agreement, the agreement is legally enforceable so long as there is consideration. Valuable consideration is evidenced by a bargained-for change in the legal position between the parties.
85
Bargain and exchange majority rule
Consideration exists if there is a detriment to the promisee, irrespective of the benefit to the promisor.
86
Bargain and exchange minority rule
Consideration exists if there is either a detriment or a benefit; both are not required.
87
Bargain and exchange, second restatement
Consideration exists if there is simply a bargained-for exchange.
88
Legal detriment and bargained-for exchange
For the legal detriment to constitute sufficient consideration, it must be bargained for in exchange for the promise. The promise must induce the detriment, and the detriment must induce the promise (mutuality of consideration).
89
Forms of consideration
A return promise to do something, a return promise to refrain from doing something legally permitted, the actual performance of some act, refraining from doing some act
90
Gift distinguished
A promise to make a gift does not involve bargained-for consideration and is therefore unenforceable.
91
Test to distinguish a gift from valid consideration
The test to distinguish a gift from valid consideration is whether the offeree could have reasonably believed that the offeror's intent was to induce the action. If yes, there is consideration, and the promise is enforceable.
92
Adequacy of Consideration
The basic concept of legal detriment is that something of substance, either an act or a promise, must be given in exchange for the promise that is to be enforced. In general, a party cannot challenge a contract on the grounds that the consideration is inadequate. A difference in economic value between the items exchanged is not grounds for finding that a contract did not exist because of inadequate consideration.
92
When does a party's promise to make a gift enforceable?
A party's promise to make a gift is enforceable under the doctrine of promissory estoppel if the promisor/donor knows that the promise will induce substantial reliance by the promisee and the failure to enforce the promise will cause substantial injustice.
92
Subjective value
The benefit to the promisor does not need to have an economic value. Regardless of the objective value of an item, if the promisor wants it, the giving of it will constitute adequate consideration.
93
Pre-existing duty rule (general rule)
A promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform (i.e., there is no legal detriment). Note that if the promisor gives something in addition to what is already owed (however small) or varies the preexisting duty in some way (however slightly), most courts find that consideration exists.
94
Exception for a third party
When a third party’s promise is exchanged for the promise to perform an act that the promisor is already contractually obligated to perform, the party’s promise to the third party is sufficient consideration.
95
Past consideration
Under the common law, something given in the past is typically not adequate consideration because it could not have been bargained for, nor could it have been given in reliance upon a promise.
96
Executory contract
An executory contract is a contract whose terms are to be performed by both parties at a later date or in an ongoing manner. In such agreements, the exchange of promises is adequate consideration. Note, however, that an obligation to make a one-time payment in the future typically does not make a contract executory.
97
Modification - common law
At common law, modification of an existing contract must be supported by consideration. Agreements to modify a contract may still be enforced if: (1) The parties rescind the existing contract by tearing it up or by some other outward sign and then enter into a new contract whereby one party must perform more than she was to perform under the original contract, (2) one party agrees to compensate the other when unanticipated difficulties arise if the modification is fair and equitable considering those difficulties; or (3) there are new obligations on both sides.
98
Factors allowing for modification
The modification must rest in circumstances that were not anticipated as part of the context in which the contract was made; these circumstances need not be completely unforeseeable. In such circumstances, the parties’ relative financial strength, the formality with which the modification is made, the extent to which it is performed or relied on, and other factors may be relevant.
99
Modification - UCC
Unlike the common law, under Article 2, no consideration is necessary to modify a contract; however, good faith is required. Thus, if one party attempts to extort a modification, it will be ineffective under the UCC.
100
What does good faith require?
Good faith requires honesty in fact and fair dealing in accordance with reasonable commercial standards. The definition of good faith no longer limits the fair dealing prong of the rule to merchants. The same definition of good faith applies to all parties, both merchants and non-merchants alike.
101
Installment contracts
Generally, a party benefited by a condition under a contract may orally waive that condition without new consideration. However, in installment contracts, the waiver may be retracted if the other party is provided reasonable notice that strict performance is required. The retraction is allowed unless it would be unjust because of a material change of position by the other party in reliance on the waiver.
102
Accord and satisfaction
Accord and satisfaction are the tender and acceptance of an alternative performance that discharges a contractual obligation.
103
Accord
Under an accord agreement, a party to a contract agrees to accept a performance from the other party that differs from the performance promised in the existing contract. This alternative performance satisfies the other party’s existing duty.
104
Dispute of a monetary claim
When a party agrees to accept a lesser amount in full satisfaction of its monetary claim, there must be consideration or a consideration substitute for the party’s promise to accept the lesser amount.
105
Satisfaction
A satisfaction is the performance of the accord agreement; it will discharge both the original contract and the accord contract. However, there is no satisfaction until performance, and the original contract is not discharged until satisfaction is complete. Therefore, if the party promising a different performances breaches an accord, the other party can sue either on the original contract or under the accord agreement.
106
Use of a negotiable instrument
If a claim is unliquidated or otherwise subject to dispute, it can be discharged if: (1)The person against whom the claim is asserted in good faith tenders a negotiable instrument (e.g., a check) accompanied by a conspicuous statement indicating that the instrument was tendered as full satisfaction of the claim (e.g., “Payment in full”); and (2) The claimant obtains payment of the instrument. A claimant’s addition of a restriction to an endorsement of the check, such as “under protest,” does not preserve the claimant’s right to seek additional compensation.
107
Exceptions to use of a negotiable instrument
When the claimant is an organization, the discharge is not effective if the instrument is not tendered to a person, place, or office designated by the organization. If no such designation is made or if the claimant is not an organization, the discharge is not effective if the claimant returns the payment within 90 days. However, regardless of the type of claimant, when the claimant or an agent of the claimant with direct responsibility over the disputed obligation knew, within a reasonable time before collection was initiated, that the instrument was tendered in full satisfaction of the claim, these exceptions do not apply, and the claim is discharged. The burden to establish such knowledge is on the party seeking discharge.
108
Illusory promises
An illusory promise is one that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. Such a promise is not legally binding. A promise that is based on a condition under the promisor’s control may be illusory, but courts often find that the promisor has also promised to use their best efforts to bring about the condition. Similarly, a promise to purchase goods upon the promisor’s satisfaction with the goods is not illusory because the promisor is required to act in good faith.
109
Voidable and unenforceable promises
A promise that is voidable or unenforceable by a rule of law (e.g., infancy) can nevertheless constitute consideration.
110
Requirements contract
A requirements contract is a contract under which a buyer agrees to buy all that the buyer will require of a product from the other party.
111
Output contract
An output contract is a contract under which a seller agrees to sell all that the seller manufactures of a product to the buyer.
112
Requirements and output contracts
There is consideration in these agreements because the promisor suffers a legal detriment. The fact that the party may go out of business does not render the promise illusory. Because a covenant of good faith and fair dealing is implied in all contracts (common law and UCC), any quantities under such a contract may not be unreasonably disproportionate to any stated estimates or, if no estimate is stated, to any normal or otherwise comparable prior requirements or output.
113
Settlement of a legal claim
A promise not to assert or a release of a claim or defense that proves to be invalid does not constitute consideration. However, such a promise or release may constitute consideration if the claim or defense is doubtful because of uncertainty of facts or law. It may also constitute consideration if the party promising not to assert or releasing the claim or defense believes in good faith that it may be fairly determined to be valid.
114
Promises to Pay a Debt Barred by the Statute of Limitations or Bankruptcy
A new promise to pay a debt after the statute of limitations has run is enforceable without any new consideration. When the new promise is an express promise, most states require that the new promise be in writing and signed by the debtor. In addition, a new promise may be implied when the obligor: (1) Voluntarily transfers something of value (e.g., money, negotiable note) to the obligee as interest on, part payment of, or collateral security for the prior debt, (2) Voluntarily acknowledges to the obligee the present existence of the prior indebtedness; or (3) States to the obligee that the statute of limitations will not be pleaded as a defense. A new promise made to pay a debt discharged in bankruptcy is enforceable without any new consideration. While there must be an express promise to pay rather than a mere acknowledgment or partial payment of the discharged debt, the new promise need not be in writing.
115
Promise to Pay Benefits Received—Material-Benefit Rule
Under the material-benefit rule, when a party performs an unrequested service for another party that constitutes a material benefit, the modern trend permits the performing party to enforce a promise of payment made by the other party after the service is rendered. This is the case even though at common law, such a promise would be unenforceable because of a lack of consideration. This rule is not enforced when the performing party rendered the services without the expectation of compensation (e.g., as a gift). In addition, the promise is enforced only to the extent necessary to prevent injustice. The promise is not enforceable to the extent that its value is disproportionate to the benefit received or if the promisor has not been unjustly enriched.
116
Requested services distinguished
If one party requests another party to perform a service but does not indicate a price and the service is performed, this generally creates an implied-in-fact contract. The party who performed the requested service is generally entitled to recover the reasonable value of his services in a breach-of-contract action against the party who enjoyed the benefit of the services without paying. An exception applies, however, when the services were rendered without the expectation of payment.
117
Promissory Estoppel
Promissory estoppel is referred to as a consideration “substitute.” The doctrine of promissory estoppel (detrimental reliance) can be used under certain circumstances to enforce a promise that is not supported by consideration.Always evaluate whether there is sufficient consideration to form a valid contract before considering promissory estoppel as the correct answer choice.
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Requirements for promissory estoppel
A promise is binding if: (1) The promisor should reasonably expect it to induce action or forbearance on the part of the promisee or a third person, (2) the promise does induce such action or forbearance; and (3) injustice can be avoided only by enforcing the promise. In general, the promisee must rely on the promise, and such reliance must have been reasonably foreseeable to the promisor. See below, however, for an exception regarding charitable subscriptions. The remedy may be limited or adjusted as justice requires. Generally, this results in the award of reliance damages rather than expectation damages.
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Exception to the reliance requirement for charitable subscriptions
Courts often apply the doctrine of promissory estoppel to enforce promises to charitable institutions. A charitable subscription (i.e., a written promise) is enforceable under the doctrine of promissory estoppel without proof that the charity relied on the promise.
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Construction contracts and promissory estoppel
In the construction industry, it would be unjust to permit a subcontractor to revoke a bid after inducing justifiable and detrimental reliance in the general contractor. Thus, an agreement not to revoke a sub-bid offer can be enforceable under the theory of promissory estoppel. Because the sub-bid is only an outstanding offer, the general contractor is not bound to accept it upon becoming the successful bidder for the general contract. A general contractor can enter into a subcontract with another subcontractor for a lower price.
