Formation of Contracts

Question 1

What is a contract?

Answer 1

A legally enforceable agreement

Question 2

What are the two “universes” in contract law?

Answer 2

1. common law
2. UCC Article 2

Question 3

When are you in the common law universe for contracts?

Answer 3

When the contract deals with real estate or services

Question 4

When are you in the UCC Article 2 universe for contracts?

Answer 4

When a contract deals with goods (regardless of whether the parties are merchants)

Question 5

What “universe” are you in if the contract has elements of both services and goods?

Answer 5

You cannot be in two universes at the same time; mixed contracts MUST fall into one universe or another (“all-or-nothing rule”). So, you must use the predominant purpose rule to determine whether common law or the UCC applies.

Predominant Purpose Rule: If the sale-of-goods aspects of the transaction predominate, the UCC applies to the entire transaction. If the services aspects of the transaction predominate, apply the common law.

Question 6

What is an exception to the all-or-nothing rule?

Answer 6

Divisible contracts (a contract that can be easily separated into different parts). In that case, the common law would apply to the parts pertaining to services, while the UCC would apply to the parts pertaining to goods.

Question 7

What are the four big topics concerning contract formation?

Answer 7

Agreement (offer and acceptance)
Consideration
Defenses to Formation
Statute of Frauds (enforceability)

(“All Contracts Don’t Stink”)

Question 8

What is an agreement?

Answer 8

An agreement can be broken down into offer and acceptance.

Question 9

What is an offer?

Answer 9

An offer is a manifestation of a willingness to enter into an agreement by the offeror that creates a power of acceptance in the offeree.

Question 10

What “test” governs offers?

Answer 10

The objective test

This means that the outward appearance of words and actions matters—not the secret intentions of the parties

Question 11

What should you ask yourself to determine whether a valid offer has been made by the offeror?

Answer 11

Whether the offeror displays an objectively serious intent to be bound.

CAUTION: Situations involving humor, anger, or opinion may not be displaying a serious intent to be bound under the objective test.

Question 12

Who can accept an offer?

Answer 12

An offer must usually be directed to a specific offeree. In other words, you cannot accept an offer unless it is directed at you.

EXCEPTION: Contest offers or reward offers that promise something to anyone who accomplishes a certain task.

Question 13

How specific must your offer be under common law?

Answer 13

All essential terms must be covered in the agreement.

Question 14

What are essential terms under the common law?

Answer 14

1. Parties
2. Subject Matter
3. Price
4. Quantity

Question 15

How specific must an offer be under the UCC?

Answer 15

Under the UCC, the only essential term is the quantity. Here, the law is more willing to fill the gaps and find a contract, even if the agreement leaves out some key terms like price.

EXCEPTION: Requirements and Output Contracts. Both output and requirements contracts are specific enough under the UCC. Even though they don’t state a quantity term, they provide a formula for calculation.

Question 16

What must a valid offer do?

Answer 16

Convey the power of acceptance to the other side.

CAUTION: Invitations to deal (a preliminary communication that reserves a final right of approval with the speaker) do not convey a power of acceptance to the other side. An advertisement is usually considered an invitation to deal (aside from reward advertisements or advertisements that are very specific and leave nothing open to negotiation, including how acceptance can occur).

Question 17

How can an offer be terminated (squash the caterpillar)?

Answer 17

1. Revocation
2. Constructive Revocation
3. Rejection
4. Counteroffer (operates as a rejection plus a new offer)
5. Death of the Offeror
6. Reasonable Amount of Time Passes

Question 18

What are the different types of irrevocable offers (caterpillar’s power shield)?

Answer 18

1. Option Contracts
2. Firm Offer
3. Unilateral Contracts (Offeree Has Started Performance)
4. Detrimental Reliance

Question 19

When can an offeror revoke an offer?

Answer 19

Any time prior to acceptance (unless it is an irrevocable offer)

Question 20

What is an option contract?

Answer 20

A contract in which the offeror promises to keep the offer open in exchange for consideration. Consideration is required. The offer remains open for the specified time period, and if none, for a reasonable amount of time.

Question 21

What is a firm offer?

Answer 21

A merchant, the offeror, gives written and signed assurance that the offer will remain open. Consideration is NOT required and the offer stays open for the specific period of time, or if none, for a reasonable amount of time (not to exceed more than 90 days).

Question 22

What is a merchant?

Answer 22

Someone who regularly deals in the type of good at issue; a business person; or a person holding himself out as having knowledge or skills particular to the goods.

Question 23

What are the requirements of a firm offer?

Answer 23

It must be written, signed by the offeror (merchant), and contain an explicit promise not to revoke.

Question 24

What is a unilateral contract?

Answer 24

Arises from a promise that requests acceptance by an action of the promisee.

In other words, a unilateral contract is a contract in which one party promises to do something in return for an act of the other party.

Question 25

How can the offeree accept an offer for a unilateral contract?

Answer 25

By completing performance. However, once a party begins performance, the offer is irrevocable for a reasonable amount of time for the party to finish performance (unless the offer states otherwise).

Question 26

When does detrimental reliance occur?

Answer 26

Arises when an offeree reasonably and detrimentally relies on the offer in some foreseeable manner. TIPS: Look especially for a general contractor/subcontractor context.

Question 27

What is acceptance?

Answer 27

A manifestation of willingness to enter into the agreement by the offeree.

Question 28

What "test" is acceptance governed by?

Answer 28

The objective test

Question 29

Who is the "master" of the offer?

Answer 29

The offeror. The offeree must accept the offer according to the rules of the offer.

Question 30

How does the offeree accept when there is ambiguity about whether the offer is unilateral or bilateral?

Answer 30

Under the modern approach, if there is an ambiguity about whether the offer is unilateral or bilateral, acceptance can be by either performance or a return promise.

Question 31

Must the offer be specifically to the person trying to accept it?

Answer 31

Yes

Question 32

Must the offeree know about the offer in order to accept it?

Answer 32

Yes

Question 33

How does the offeree make their acceptance effective?

Answer 33

By communicating acceptance to the offeror EXCEPTIONS: Unilateral reward offers or contests; a unilateral offer in which the parties are geographically close such that the offeror will see that performance has occurred; silence serving as acceptance such that the offeree should reasonably notify the offeror if she does not accept; if the offer says that acceptance MUST come by silence, and the offeree intends to accept the offer by silence; or if it is an implied-in-fact contract (communications by gestures or actions).

Question 34

What is the "general rationale" of the mailbox rule?

Answer 34

To determine when an acceptance has been legally communicated when there is some delay between sending and receiving.

Question 35

What is the mailbox rule?

Answer 35

An acceptance sent by mail is effective when the letter is transmitted (sent).

Question 36

When does the mailbox rule NOT apply?

Answer 36

1. If the offeree sends something else back first (such as a rejection or counteroffer); 2. To other types of communications (revocations or rejections); or 3. To option contracts. ***It is unclear whether the mailbox rule applies to other media (such as fax or email).

Question 37

What is the rule for acceptance under UC 2-207?

Answer 37

A definite and seasonable expression of acceptance even though it states terms additional to or different from those offered or agreed upon (unless acceptance is expressly made conditional upon assent to the additional or different terms).

Question 38

When may an additional term in the acceptance control under UCC 2-207(2)?

Answer 38

When all of the following are true: 1. Both parties are merchants; 2. The new term does not materially alter the deal; 3. The initial offer did not expressly limit acceptance to its terms; and 4. The offeror does not reject or object within a reasonable time to the new term. ***It is VERY difficult for the new terms in the acceptance to govern the contract.

Question 39

What is the Knock-Out Rule?

Answer 39

Arises when the acceptance has a different term from the initial offer (as opposed to just an additional term) MINORITY: When the different term does not govern under UCC 2-207(2), the initial offer controls the terms. MAJORITY: "Knock out" both of the different terms; neither term will govern and the general gap-filling provisions of the UCC will apply.

Question 40

What is acceptance based on conduct under the UCC?

Answer 40

The parties might fail to make a contract but still act as though there is an agreement. Under UCC 2-207(3), only the terms that BOTH writings agree on become part of the contract, with all other terms supplied by the UCC default rules.

Question 41

What is a confirming memo under the UCC?

Answer 41

Arises when the parties have a contract (usually by verbal agreement) and one party sends a confirming memo with additional terms. Under 2-207(1), a written confirmation which is sent within a reasonable time operates as an acceptance.

Question 42

When does consideration exist?

Answer 42

When there is a legal detriment to the promisee that is bargained for by the promisor. The promise must induce the detriment and the detriment must induce the promise.

Question 43

What "forms" can consideration take?

Answer 43

1. A return promise to do something 2. A return promise to refrain from doing something legally permitted ("legal detriment") 3. The actual performance of some act 4. Refraining from doing some act

Question 44

What is NOT consideration?

Answer 44

Gift promises and conditional gifts do NOT count as bargained-for consideration.

Question 45

When is there NOT sufficient consideration?

Answer 45

1. Nominal consideration (a pretense of consideration) 2. Illusory promise 3. Past consideration 4. Promising not to sue

Question 46

What is an illusory promise?

Answer 46

A promise that essentially pledges nothing---either because it is vague or because the promisor can choose whether to honor it. It is not legally binding. Look for situations where one side is not really committing to the deal under the objective test, such as: "I would like to buy your car when I have more money."

Question 47

When can past consideration be sufficient? (LIMITED SITUATIONS)

Answer 47

A modern trend, adopted by the Second Restatement, leans toward enforcing some promises under the 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.

Question 48

Normally a promise not to sue is NOT sufficient consideration. However, when can settling a legal claim be sufficient consideration?

Answer 48

ONLY if: (a) The plaintiff has a reasonable, good-faith belief in the validity of the claim; or (b) There is reason to doubt the validity of the claim due to uncertain law.

Question 49

Does a contract modification require new consideration under the common law?

Answer 49

Under the common law, a contract modification MIGHT require new consideration to be valid. Common law follows the preexisting duty rule, which holds that a promise to do something that you are already legally obligated to do is NOT consideration.

Question 50

Does the UCC require new consideration for contract modifications?

Answer 50

NO, so long as the modification is made in good faith. If so, it is binding even without any new consideration.

Question 51

What is a quasi-contract?

Answer 51

A contract that arises when: 1. The plaintiff confers a measurable benefit on the defendant; 2. The plaintiff reasonably expected to get paid; and 3. It would be unjust to let the defendant keep the benefit without paying.

Question 52

When does promissory estoppel arise?

Answer 52

Arises when one party makes a promise and the other party relies on that promise to take some action

Question 53

What are the elements for a claim of promissory estoppel?

Answer 53

1. A promise is made that would be reasonably expected to induce reliance; 2. The promisee does indeed take detrimental action in reliance on the promise; and 3. Injustice can only be avoided by enforcement of the promise.