2. Formation of a Contract

Question 1

Definition of Contract

Answer 1

A contract is (1) an agreement that is (2) legally enforceable.

Question 2

The process of agreement, look for

Answer 2

(1) The initial communication (“offer”)
(2) What happens after the initial communication (“Termination of the offer”) and
(3) Who responds and how they respond (“acceptance”)

Question 3

General Test of an Offer:

Answer 3

Manifestation of a Commitment. An offer is one person’s manifestation of willingness to contract/commit. Would a REASONABLE person, as the offer, believe that an agreement in response creates a contract?

Question 4

When evaluating an offer under common law, be careful of

Answer 4

missing price term(s) in a sales contract.

For real estate, price and description are required.

Question 5

When evaluating an offer under UCC,

Answer 5

For the sale of goods, there is NO PRICE REQUIREMENT.

Question 6

Under both Common Law and UCC offers

Answer 6

Vague or Ambiguous MATERIAL terms will result in NO OFFER.

Question 7

May an offer for the purchase of goods that increases the quantity demanded count as valid offer?

Answer 7

Yes, as long as the increase is not unreasonably disproportionate.

Question 8

General Rule on Advertisements as Offers:

Answer 8

An advertisement or price quotation is NOT an offer. But there are exceptions: (1) advertisement can be unilateral offer if it promises reward, (2) adv. can be offer if it specifies quantity AND expressly indicates who can accept; (3) Price quotation sent in response to an inquiry can be an offer.

Question 9

An offer creates the power of _______ in the person to whom the offer was made, creating a ______.

Answer 9

Acceptance

Contract

Question 10

Four methods of Terminating an Offer:

Answer 10

1) Lapse of Time - Time stated or reasonable time
2) Death of either party prior to acceptance (exception for irrevocable offers.)
3) Revocation (words/conduct)
4) Rejection (words/conduct)

Question 11

How an offer is Revoked

Answer 11

(a) Later unambiguous STATEMENT by offeror TO OFFEREE of unwillingness/inability to contract
(b) “” CONDUCT by offerror indicating unwillingness/inability to contract THAT THE OFFEREE IS AWARE OF.

Question 12

Do multiple offers constitute revocation?

Answer 12

No!

Question 13

In which situations is an offer IRREVOCABLE?

Answer 13

(1) Option offers, (2) UCC Firm Offers, (3) Reliance based on offer, (4) Unilateral Offer
[discussed individually below]

Question 14

Irrevocable OPTION OFFERS

Answer 14

An offer cannot be revoked if the offeror has (1) promised not to revoke/promised to keep the offer open AND (2) the promise is supported by payment or consideration.

Question 15

Irrevocable UCC “Firm Offer Rule”

Answer 15

An offer cannot be revoked for up to three months if (1) an offer to buy/sell goods, (2) signed, written promise to keep the offer open, and (3) party is a merchant.

Question 16

Irrevocable offer based on Reliance

Answer 16

An offer cannot be revoked if there has been (1) reliance that is (2) reasonably foreseeable and (3) detrimental.

Question 17

Irrevocable Unilateral Contract

Answer 17

The start of performance pursuant to an offer to enter into a unilateral contract makes that offer irrevocable for a reasonable time to complete performance. Note: this does not include preparation to perform.

Question 18

Is a “bid” an offer?

Answer 18

Yes.

Question 19

How is an offer terminated by Rejection?

Answer 19

(1) Counteroffer (2) Conditional Acceptance, though under common law conditional acceptance creates a counteroffer (3) Additional terms to a common law contract (mirror image rule).

Question 20

If the response to an offer is a question not a statement, what effect?

Answer 20

Bargaining! Does not terminate original offer!

Question 21

What happens when an offer to buy/sell goods is responded to with additional or different terms?

Answer 21

Under UCC, if the new terms are not a condition of acceptance (but more like a suggestion), the response + addtl. terms is treated as an acceptance of the offer. The additional terms are not part of the contract unless both parties are merchants and the additional term is not material or objected to.

Question 22

What control does an offeror have over the offeree’s acceptance?

Answer 22

The offeror can control the method of acceptance (e.g. acceptance only by performance), the tolerable physical distance of an accepting party, and whether or not the offeree must give notice of acceptance by performance.

Question 23

General Rule of Performance re: Acceptance:

Answer 23

Performance is Acceptance. Starting to perform is treated as an implied promise to perform, thus bilateral contract created. Exception for Unilateral K Offer: part performance inadequate, complete performance required for acceptance.

Question 24

Acceptance and distance/delay in Communications:

Answer 24

(1) All communications OTHER THAN ACCEPTANCE are effective only when received.
(2) Acceptance is GENERALLY effective when mailed (the mailbox rule)
(3) If a rejection is mailed before an acceptance is mailed, then neither is effective until received.
(4) Cannot use mailbox rule to meet option deadline.

Question 25

Is Incorrect Performance in response to an offer an Acceptance that creates a Contract?

Answer 25

General Rule: Yes, this will count as acceptance of the offer and breach of the contract. But, if incorrect performance is attended by an explanation, (“I hope these other products work instead”) that will not be acceptance, but rather counteroffer, thus no contract.

Question 26

Generally an offer can be accepted only by:

Answer 26

(1) a person who knows about the offer at the time they accept (2) who is the person to whom it was made.

Question 27

Can an offer be assigned?

Answer 27

YES, but an OPTION cannot be assigned, unless specifically allowed.

Question 28

If I find a lost dog and return it, not knowing of the reward offered for the dog, is that an acceptance of the reward offer?

Answer 28

No.

Question 29

What is consideration?

Answer 29

Bargained-For Legal Detriment

Question 30

How to evaluate consideration:

Answer 30

(1) Identify the promise breaker
(2) Ask whether that person asked for something in return for their promise
(3) Ask what requested legal detriment the person trying to enforce the promise sustained

Question 31

May one promise constitute consideration in return for another promise?

Answer 31

Yes.

Question 32

What is the general rule concerning “past consideration”?

Answer 32

Past consideration generally does not count as consideration.

Question 33

The Pre-Existing Contractual or Statutory Duty Rule [Common Law]:

Answer 33

Doing what you are already legally obligated to do is not new consideration for a new promise to pay you more to do merely that. Exceptions below.

Question 34

Exception to Pre-Existing Contractual/Statutory Duty Rule [Common Law]:

Answer 34

(1) An addition to or change in performance may count as new consideration; (2) Unforeseen difficulty so severe as to excuse performance may render the duty to perform new consideration; (3) A third-party’s promise to pay additional money may reinvigorate past-duties as new consideration.

Question 35

The Pre-Existing Contractual or Statutory Duty Rule [UCC]:

Answer 35

DIFFERENT from Common Law. Under UCC, new consideration not required to modify sale of goods contract. Good Faith is the test for changes to an existing sale of goods contract.

Question 36

When evaluating whether partial payment may constitute consideration in return for a release from debt, the key issue is:

Answer 36

whether the debt is due and undisputed. If due and undisputed, part payment is NOT consideration. If the part payment is attended by a benefit (i.e. paying part of a debt weeks before the debt is actually due) it IS consideration.

Question 37

Essentially, the difference between Common Law and UCC concerning new consideration is the respective requirement of

Answer 37

New Consideration under Common Law vs. Good Faith under UCC.

Question 38

What are Consideration Substitutes?

Answer 38

1) A written promise to satisfy an obligation for which the debtor is not necessarily still legally liable.
2) Promissory Estoppel, aka Detrimental Reliance

Question 39

Who lacks the capacity to contract?

Answer 39

1) Individuals under 18; 2) Mental Incompetents; 3) Intoxicated Persons.

Question 40

Consequences of contract with persons lacking capacity:

Answer 40

the person without capacity has the right to disaffirm, though the contract is NOT automatically voided.

Question 41

What if an incapable person retains the benefits of a deal and also obtains capacity?

Answer 41

Implied affirmation of the deal. Think of a 17 year old who buys and retains a car, doesn’t pay, and turns 18. The agreement is now legal.