(1) Contracts: Governing Law, Formation & Parole Evidence Rule

Question 1

Which applies… UCC or Common Law Governing Law

Answer 1

UCC governs all contracts related to the sale of goods. Goods are all things that are moveable (other than money). Any contract not governed by the UCC is governed by common law including services and real estate. For mixed contracts (i.e., the contract covers both the sale of goods and rendering services) the predominant purpose test applies to determine which law applies to the entire transaction.

Question 2

Mixed Contracts - Predominant Purpose Test

Governing Law

Answer 2

Determine what the person is really paying for. If the predominant purpose of the contract is for services then common law will apply. If the predominant purpose is for the sale of goods then the UCC will apply. If the contract divides payment between services and goods then the applicable law is applied to either section.

Question 3

General Rule:

Formation of a Contract

Answer 3

A valid contract is formed when there is mutual assent (an offer and acceptance of that offer), adequate consideration and no defenses to formation.

Question 4

Mutual Assent

Formation

Answer 4

Mutual assent occurs upon acceptance of a valid offer to contract.

Question 5

General Definition/Unilateral/Bilateral Definition:

Offer

Formation

Answer 5

• General Offer Definition: (1) An offer is a manifestation of intent to contract by one party; (2) with definite or reasonably certain essential terms; (3) that is communicated to an identifiable offeree.
  
  • Under common law all essential terms (i.e., parties, subject matter, price and quantity) must be covered in the agreement. If the terms are not certain and definite the contract fails for indefiniteness.
• Unilateral Offer Definition: A unilateral offer is a promise for an act.
• Bilateral Offer Definition: A bilateral offer is a promise for a promise.

Question 6

Are they offers?

Advertisements

Formation

Answer 6

Advertisements are not offers but instead invitations for offers. An advertisement would be considered an offer if it included sufficiently clear and definite terms so that a reasonable person would understand how performance or acceptance may be completed.
*ex. Including “First come first served” makes it an offer.

Question 7

Can an advertisement be revoked as an offer?

Formation

Answer 7

An advertisement may be revoked only by notice to the same level as the advertisement.

Question 8

Option Contract

Formation

Answer 8

An option contract is when consideration is given for an independent promise to keep an offer open for a specified period of time.

Question 9

Contractor Option Contract Rule

Formation

Answer 9

The majority rule is that where a general contractor uses a particular subcontractor’s bid to formulate their own, an implied option contract is created via promissory estoppel.

Question 10

Merchant Firm Offer

Formation

Answer 10

Under the UCC a Merchants Firm offer is (1) an offer to buy or sell goods; (2) by a merchant (a person who deals in goods of the kinds); (3) which states that the offer will be held open and is not revocable during the time stated (if no time is stated then a reasonable time which cannot exceed 90 days unless consideration is provided); AND (4) AND the assurance to keep the offer open is in a signed writing from the offeror.

Question 11

Consideration/Detrimental Reliance

Formation

Answer 11

Promissory estoppel will make the offer irrevocable if it was reasonably foreseeable that such detrimental reliance would occur. The offeror is liable to the extent necessary to avoid injustice.

Question 12

How to Terminate an Offer?

Formation

Answer 12

1. Rejection
2. Counteroffer
3. Revocation
4. Destruction of the Subject Matter/Illegality
5. Lapse of Time
6. Death/Incapacity

Question 13

Rejection

Answer 13

An offer is terminated by rejection, if the offeree clearly conveys to the offeror that the offeree no longer intends to accept the offer. A rejection is effective upon receipt.

Question 14

Counteroffer

Answer 14

A counteroffer acts as a rejection of the original offer and creates a new offer. However if the offer is an option contract then the offeree has a right to make counter offers during the option period without terminating the original offer.

Question 15

Revocation

Answer 15

An offer may be revoked at any time before acceptance through unambiguous words or conduct by the offeror to the offeree. A revocation is effective once communicated and if sent via mail is effective once received.

Question 16

Indirect Revocation

Answer 16

If an offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, the offer is automatically revoked.

Question 17

Destruction of the Subject Matter/Illegality

Answer 17

An offer involving subject matter that is destroyed or becomes illegal is terminated.

Question 18

Lapse of Time

Answer 18

If the offer specifies a time on which the offer terminates, then the time fixed by the offer controls. The time generally starts to run once the offer is received. If the offer does not set a time limit the power of acceptance terminates at the end of a reasonable period of time.

Question 19

Death/Incapacity

Answer 19

The power of acceptance is terminated upon the death or mental incapacity of the offeror, even if the offeree does not learn about it until after they accept.
*Exception is an option offer because consideration as provided to keep the offer open.

Question 20

Can an offer be revived after termination?

Answer 20

YES, a terminated offer may be revived by the offeror. Then the revived offer may be accepted by the offeree.

Question 21

General Rule/Unilateral/Bilateral:

Acceptance

Answer 21

Acceptance is a manifestation of assent to the terms of the offer which indicates a commitment to be bound.
* Unless an offeror requires the offeree to accept in a particular manner the offeree can accept in any reasonable manner and by any reasonable means. Silence is not a manifestation to be bound.
* For bilateral contracts the start of performance or a return promise manifests acceptance.
* For unilateral contracts acceptance requires complete performance. Prior to complete performance an offer is irrevocable.

Question 22

Mailbox Rule

Acceptance

Answer 22

Unless the offer states otherwise, acceptance of an offer is deemed accepted once the acceptance is sent or communicated. However revocation of an offer is not effective until received by the offeree.

Question 23

Mirror Image Rule (Common Law)

Acceptance

Answer 23

The common law mirror image rule states that acceptance must exactly mirror the offer. Acceptance with any additional terms or differing terms constitutes a counteroffer which revokes the initial offer.

Question 24

Battle of the Forms UCC 2-207 Additional Terms Rule

Acceptance

Answer 24

The UCC states that acceptance does not need to mirror the offer and acceptance may include additional terms without revoking the offer. If both parties are merchants the additional terms are included in the contract if: (1) both parties are merchants; (2) the term is not a material change; (3) the offer does not expressly limit acceptance to the exact terms of the offer; AND (4) the offeror did not object to the different or additional terms within a reasonable time.

Question 25

Define “material change” under the Additional Terms Rule

Acceptance

Answer 25

A material change is a change that is likely to cause hardship or surprise to the offeror (i.e., arbitration clause, payment of shipping charges, disclaimer of warranties)

Question 26

If a party is not a merchant how are the additional terms treated?

Acceptance

Answer 26

If the one party is not a merchant then the additional terms are treated as proposals and the offeror must accept them.

Question 27

Battle of the Forms UCC 2-207 Differing Terms Rule (Knock-out Rule)

Acceptance

Answer 27

Different terms in the offer and acceptance knock each other out and the gaps are filled using the UCC’s gap filling provisions.

Question 28

Rule & Exception:

Shipment of Goods

Answer 28

If a buyer requests goods to be shipped that is an offer. The seller may accept by either promising to ship or by prompt shipment or conforming or non-conforming goods. If the seller ships nonconforming goods then the shipment is both an acceptance of the offer and a breach of contract.

Exception: If the seller notifies the buyer that the nonconforming goods are tendered as an accommodation then no acceptance has occurred and a contract has not been formed.

Question 29

Consideration

Answer 29

Consideration is a bargained for exchange of a promise for a return promise or performance that benefits the promisor or causes detriment to the promisee.

Question 30

Is past or moral consideration sufficient?

Consideration

Answer 30

Past or moral consideration is not sufficient to support a contract. However modern trend is starting to enforce promises when necessary to prevent injustices and only proportional to the benefit conferred.

Question 31

Is performing a preexisting legal duty sufficient consideration?

Consideration

Answer 31

A promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform. Unless the preexisting duty is varied in some way or the promisor gives something in addition to what is already owed.

Question 32

Is an illegal act or promise sufficient consideration?

Consideration

Answer 32

A promise that is voidable or unenforceable by rule of law cannot constitute consideration.

Question 33

Promissory Estoppel/Detrimental Reliance

Answer 33

Contracts without consideration maybe enforced under the doctrine of promissory estoppel when (1) a party reasonably and foreseeably relied to his detriment on the promise of the other party; (2) the promisor should have reasonably expected a change in position in reliance of the promise; AND (3) enforcement of the promise is necessary to avoid injustice.

Question 34

Gifts

Answer 34

A promise to make a gift does not involve bargained for consideration and is unenforceable. The test to distinguish a gift and valid consideration is whether the offeree could have reasonably believed that the intent of the offeror was to induce the action.
*Giving someone 1K because they turn 21 is not consideration because they were going to turn 21 promise or no promise.

Question 35

Illusory Promises

Answer 35

An illusory promise is one that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. These promises are not binding.

Ex. At my option, I will give you $100.

Question 36

Are promises under the promisors control illusory promises?

Answer 36

NO, promises conditioned on something within the promisors control aren’t illusory because they promise to use best efforts.

Question 37

Output Contracts

Answer 37

An output contract requires a seller to sell all of the output of the particular goods to the buyer.

Question 38

Requirement Contracts

Answer 38

A requirement contract requires the buyer to purchase all of the particular goods that the buyer requires from the seller.

Question 39

Implied-In-Fact Contracts

Answer 39

Contracts created by the conduct of the parties without spoken or written words. Conduct by both parties will create a contract if: (1) the conduct is intentional; AND (2) each party knows or has reason to know that the other party will interpret the conduct as an agreement to enter into a contract.

Question 40

Quasi-Contracts (Unjust Enrichment)

Answer 40

Quasi contracts prevent the unjust enrichment and are implied by law. A quasi contracts are created if: (1) the plaintiff conferred a measurable benefit; (2) the plaintiff had a reasonable expectation they would be compensated; (3) the D requested the benefit (expressly or implied); AND (4) the D would be unjustly enriched if not forced to compensate the P.

Question 41

What remedies are available under Quasi-Contracts (Unjust Enrichment)?

Answer 41

Only restitution and reliance damages may be awarded under quasi contracts.

Question 42

Rule & Exceptions:

Modification of Contracts - Common Law

Answer 42

A modification of an existing contract requires consideration.

Exceptions: (1) an addition or change in the performance or promise; OR (2)a fair and equitable modification due to unanticipated changed circumstances and the contract is not yet fully performed by either party (usually the unanticipated circumstances must be severe or far beyond what was foreseen).

Question 43

Modifications of Contracts - UCC

Answer 43

No consideration is necessary to modify a contract but good faith is required. Good faith is honesty in fact and fair dealing in accordance with reasonable commercial standards.

Question 44

Modifications to Contracts and Statute of Frauds

Answer 44

Modifications to contracts that fall within the statute of frauds must also satisfy the statute of frauds.

If the contract falls within a exception but the contract states it must be in writing then under the UCC the modifications must be in writing under common law the modifications do not.

Question 45

Overall Note & Defenses:

Defenses to Formation/Enforceability of Contract

Answer 45

A contract maybe unenforceable based on a defense to formation or a defense to enforcement. Proof of the defense may render the contract void or voidable.

1. Statute of Frauds
2. Incapacity
3. Unconscionability
4. Illegality
5. Mutual Mistake
6. Unilateral Mistake
7. Undue Influence
8. Duress

Question 46

Overall Rule & Applicable Contracts:

Statute of Frauds

Defenses to Formation/Enforceability of Contract

Answer 46

Rule: The following contracts are not enforceable unless (1) in writing; (2) signed by the party to be charged; AND (3) state the essential terms (the agreement does not need to be in one signed contract and can consist of several writings):
a. Marriage
b. Suretyships (grantor to take on the debt of another, unless the main purpose is to benefit the grantor)
c. Contracts not performed within a year (The year starts the day after the contract is made)
d. Sale of Real Property (any interest - includes easements - remember exceptions)
e. Sale of Goods over $500 (special SOF rule + exceptions)
f. Promise to pay an estates debt from the personal funds of the Executor/Administrator

Question 47

Suretyships

Defenses to Formation/Enforceability of Contract

Answer 47

Grantor to take on the debt of another, unless the main purpose is to benefit the grantor.
*An indemnity contract doesn’t not fall within the statute of frauds.

Question 48

Contracts not Performed within a Year

Defenses to Formation/Enforceability of Contract

Answer 48

There must be no possible way the contract can be performed within a year. The year starts the day after the contract is made.

Question 49

Rule & Exceptions:

Sale of Real Property

Defenses to Formation/Enforceability of Contract

Answer 49

Rule: Contracts for the sale of real property or creating interest in real property (i.e., easements and leases)

Part-Performance Exception: A writing is not required in sale of land contracts if the party has done at least 2 of the following subsequent to the oral contract: (a) made payment for land; (b) took possession of land; (c) made valuable improvements to land.

Full Performance Exception: When a party promised to convey real property and fully performs they can enforce the other party’s oral promise unless it is a transfer of a real property interest.

Question 50

Rule & Exceptions

Sale of Goods over $500

Defenses to Formation/Enforceability of Contract

Answer 50

The writing must state the (1) parties, (2) quantity and nature of the goods, and (3) be signed.

Exceptions:
1. Merchant Confirming Memorandum
2. Goods Accepted or Paid For
3. Custom Made Goods
4. Admission during Judicial Proceeding

Question 51

Merchant Confirming Memorandum

Defenses to Enforceability of Contract - SOF - Sale of Goods -Exceptions

Answer 51

Merchant Confirming Memorandum – In a sale of goods contract between two merchants when a writing confirms the agreement and is signed by the party enforcing it and the party to be charged did not promptly object.

Question 52

Goods Accepted or Paid For

Defenses to Enforceability of Contract - SOF - Sale of Goods -Exceptions

Answer 52

A seller may enforce the contract price of any goods accepted or paid by the buyer but not the whole contract price if only a portion of the goods were accepted.

Question 53

Custom Made Goods

Defenses to Enforceability of Contract - SOF - Sale of Goods -Exceptions

Answer 53

A seller may enforce the contract price for custom made goods which are goods in which the seller had (a) made a substantial start; (b) are not suitable for sale in the ordinary course of the sellers business; AND (c) are specifically manufactured for the buyer.

Question 54

Admission during Judicial Proceeding

Defenses to Enforceability of Contract - SOF - Sale of Goods -Exceptions

Answer 54

a sale of goods contract for $599 is enforceable without a writing when the party to be charged admits that there was a contract during a judicial proceeding (i.e., in a deposition or courtroom testimony).

Question 55

Common Law Exceptions to Statute of Frauds

Defenses to Enforceability of Contract

Answer 55

(1) Full performance – Note partial performance is allowed for sale of real property contracts;
(2) Judicial Acknowledgement – the party admits to the agreement in pleadings or testimony;
(3) Estoppel – reasonable and foreseeable detrimental reliance on a promise (only some jurisdictions allow #3)

Question 56

Incapacity

Defenses to Formation/Enforceability of Contract

Answer 56

Parties to a contract have capacity. Contracts entered into by person who does not have capacity are voidable by that person. Incapacity arises because of infancy, mental illness or defect, guardianship, and intoxication.

Question 57

Infancy

Defenses to Formation/Enforceability of Contract - Incapacity

Answer 57

Individuals under the age of 18 do not have the capacity to contract and therefore the contract is voidable by the infant before the age of 18 or a reasonable time thereafter.
* Liability for Necessities: An infant is responsible for necessities furnished but only to the reasonable value of the services or goods and not the agreed upon price. Recovery can occur under the quasi contract theory.

Question 58

Mental Illness

Defenses to Formation/Enforceability of Contract - Incapacity

Answer 58

If a person is legally mentally incompetent the contract is void, if not the contract is voidable but it is disaffirmed if the individual is unable to (a) understand the nature and consequences of the transaction; OR (b) act in a reasonable manner with regard to the transaction, and the other party has reason to know of this fact.
* If the legally incompetent person may be liable for the reasonable value of necessities furnished during a lucid period. A non-legally incompetent person the contracts are fully enforceable during lucid periods.

Question 59

Guardianship

Defenses to Formation/Enforceability of Contract - Incapacity

Answer 59

If an individuals property is under guardianship then they have no capacity to contract and the contract is void. The person under guardianship may be liable for reasonable value of necessities furnished by another party.

Question 60

Intoxication

Defenses to Formation/Enforceability of Contract - Incapacity

Answer 60

A contract entered into while intoxicated due to alcohol or drugs is voidable by the intoxicated party if that person was unable to understand the nature and consequences of the transaction and the other person had reason to know of the intoxication. The intoxicated person must act quickly to disaffirm the contract and is required to return any value received if possible.

Question 61

Unconscionability

Defenses to Formation/Enforceability of Contract

Answer 61

Unconscionability occurs when a contract or term shocks the conscience of the court. Unconscionability usually occurs if the contract is both substantively and procedurally unconscionable. If a contract or term is found unconscionable a court may (a) refuse to enforce the contract; (b) enforce the contract without the unconscionable term; OR (c) limit the application of any unconscionable term.

Question 62

Procedural Unconscionability

Defenses to Formation/Enforceability of Contract - Unconscionability

Answer 62

procedural unconscionability occurs when one party to the contract has a superior bargaining position over the other party and uses that power to their advantage. (Ex. Inconspicuous boilerplate language, contracts of adhesion (take it or leave it))

Question 63

Substantive Unconscionability

Defenses to Formation/Enforceability of Contract - Unconscionability

Answer 63

Substantive unconscionability occurs when the contract contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power.

Question 64

Rule & Exceptions:

Illegality

Defenses to Formation/Enforceability of Contract

Answer 64

Rule: If the consideration or performance under a contract is illegal then the contract itself is illegal and is unenforceable. If the contract becomes illegal after it is formed then the duty to perform is discharged.

Exceptions: (1) Ignorance of illegality – when one party is ignorant that the contract is illegal they may recover if the other party acted with knowledge of the illegality; OR (2) lack of illegal purpose – the contract doesn’t involve illegal consideration or performance but the party has an illegal purpose and the other party has substantially performed.
Ex of #2. Maker of a device ships to a buyer. The buyer intends to export the device in violation of the law unknown to the maker. The maker may recover the price of the device even though the buyer had an illegal purpose in acquiring the device.

Question 65

Mutual Mistake

Defenses to Formation/Enforceability of Contract

Answer 65

A contract is voidable (maybe rescinded or reformed) when there is a mutual mistake which occurs when (1) the mistake of fact exists at the time the contract was formed; (2) both parties are mistake as to a basic assumption; (3) the mistake is material to the contract; AND (4) the person asserting the mistake did not bear the risk of the mistake (by either (a) agreement or (b) treating their limited knowledge as sufficient).

Question 66

Definition & Rule:

Unilateral Mistake

Defenses to Formation/Enforceability of Contract

Answer 66

Definition: A unilateral mistake is (1) a mistake made by one party; (2) that is unknown to the other party; (3) concerning a basic assumption; (4) that has a material effect.

Rule: A unilateral mistake is only a defense and makes the contract voidable by the mistaken party if (1) one party knew or had reason to believe that the other party was mistaken; OR (2) the mistake would make enforcement of the contract unconscionable.
*If the mistake involves price/value that is not considered a material term and the contract is not voidable.

Question 67

Undue Influence

Defenses to Formation/Enforceability of Contract

Answer 67

A party to a contract who is victim to undue influence can void the contract. Undue influence is the unfair persuasion of a party to assent to a contract.

Ex. One party is more dominant, special relationships, persuasion impaired the other parties judgement.

Question 68

Duress

Defenses to Formation/Enforceability of Contract - Duress

Answer 68

Duress is an improper threat that deprives a party of meaningful choice. When a party enters into a contract by duress through threats of physical force the contract is void, when the party enters through threat of breach of duty of good faith and fair dealing the contract is voidable. If duress is caused by a 3rd party not apart of the contract the contract is void unless promissory estoppel applies.

Question 69

Improper Threat

Defenses to Formation/Enforceability of Contract - Duress

Answer 69

improper threats include threats of crime, tort, criminal prosecution (Does not matter if the person is actually guilty), pursuing civil action when made in bad faith or threatening to breach a contract in bad faith.

Question 70

Depravation of Meaningful Choice

Defenses to Formation/Enforceability of Contract - Duress

Answer 70

a person is deprived of meaningful choice only when he does not have a reasonable alternative to succumbing to the threat.

Question 71

Rule & Exceptions:

Parole Evidence Rule

Answer 71

Rule: A party cannot introduce evidence of a prior or contemporaneous agreement (either oral or written) that contradicts a later writing. (Does not apply to subsequent agreements)

Exceptions: A court will permit such evidence in 4 instances: (1) to correct a clerical error or typo; (2) to establish a defense against formation of the contract; (3) to interpret vague or ambiguous terms but the court will interpret words to represent their ordinary or plain meaning regardless of the parties intent (plain meaning rule); AND (4) to supplement a partially integrated writing.

Question 72

How to determine partial vs full integration (+definitions)

Answer 72

The intent of the parties determines whether there is a partial or full integration.
* Common Law: The court could only look at the writing itself – the 4 corners of the document for evidence of intent. Under the 2nd restatement extrinsic evidence can be introduced to show intent. UCC presumes all writings are partial integrations.
* Partially Integrated Writing Definition: Does not contain a complete statement of all terms the parties agreed to and as such proof of additional terms is allowed if they do not contradict the writing.
* Fully integrated Writing Definition: Is a complete and exclusive statement of the terms and discharges prior agreements to the extent they are within its scope. A merger clause is evidence the writing is complete on its face and therefore cannot be supplemented with additional consistent terms.

Question 73

Rule

UCC Trade Usage, Course of Dealing and Performance

Answer 73

Even if the terms appear to be unambiguous the party may explain or supplement by evidence of trade usage, or course of dealings or performance. If the express terms are inconsistent with course of performance, course of dealings, or trade usage priority is given: (1) express terms prevail over all others; (2) course of performance prevails over course of dealings and trade usage; and (3) course of dealing prevails over trade usage.

Question 74

Definition:

Course of Performance

Answer 74

Is conduct that is relevant to understanding the agreement between the parties (repeated performance and accepting performance without objection).

Question 75

Course of Dealing

Answer 75

Is conduct concerning previous transactions between the parties that can reasonably establish a common basis of understanding for interpreting their conduct.

Question 76

Trade Usage

Answer 76

Is any practice or method of dealing in the particular business or industry that is practiced with such regularity so as to justify an expectation that it will be practiced in the instant case.