Applicable Law and Formation Flashcards
Applicable Law: Common Law vs. UCC
- Article 2 of the Uniform Commercial Code (UCC) governs all contracts for the sale of goods. Goods are defined as all things that are movable at the time of identification to the contract (other than the money), including crops and the unborn young of animals.
- For mixed contracts, the predominant purpose of the contract determines which law governs. If the predominant purpose is the sale of goods, the UCC will apply. In some states, when a contract divides payment between services and goods, the UCC is applied to the goods section and the common law is applied to the services section.
Requirements to Form a Valid Contract
A valid contract is formed when there is:
(1) mutual assent (an offer and acceptance of that offer by the other party);
(2) adequate consideration or a substitute; AND
(3) no defenses to formation that would invalidate an otherwise valid contract entered into by the parties.
Mutual Assent: Offer & Acceptance
- An offer is (1) a manifestation of intent to contract by one party, (2) with definite or reasonably certain terms, (3) that is communicated to an identified offeree.
- Acceptance is a manifestation of assent to the terms of the offer, which indicates a commitment to be bound. Silence generally DOES NOT manifest acceptance, but performance may be adequate. For bilateral contracts, the start of performance manifests acceptance. For unilateral contracts, the start of performance only makes an offer irrevocable, and the offer is accepted only when performance is complete.
Offer Termination
Offers can be terminated before acceptance by:
(a) rejection or counter-offer by the offeree;
(b) lapse of time;
(c) revocation by the offeror; OR
(d) death/incapacity of either party.
Revoking Offers
Most offers may be revoked at any time before acceptance through unambiguous words or conduct by the offeror to the offeree indicating an unwillingness or inability to contract.
A revocation of an offer is effective when received. An offer can also be terminated when communicated indirectly – when (1) the offeror takes definite action inconsistent with an intention to enter into the proposed contract; AND (2) the offeree acquires reliable information to that effect.
However, some offers are irrevocable including:
(1) Option contracts (when consideration is given for a promise to keep an offer open);
(2) a Merchant’s firm offer (only irrevocable for a MAXIMUM of 3 months); AND
(3) Offers that were relied on to the offeree’s detriment.
Merchant’s Firm Offer
A Merchant’s Firm Offer is:
(1) an offer to buy or sell goods;
(2) by a merchant (a person who deals in goods of the kind);
(3) in a signed writing;
(4) which states that the offer will be held open and is not revocable during the time stated (or if no time is stated for a reasonable time), but not to exceed three months; AND
(5) that the assurance to keep the offer open must be separately signed by the offeror if the form is supplied by the offeree (such as initialing the specific paragraph). A merchant’s firm offer is enforceable without consideration.
Advertisements
An advertisement is generally not an offer, unless the language makes an express promise to adhere to specific terms. In particular, mere puffery (i.e., describing a product or service in flattering language meant to attract potential buyers) is not an offer. Courts have typically construed advertisements as either invitations to negotiate or solicitations of offers, rather than as offers.
Timing of Acceptance/Revocation
Unless the offeror states otherwise, acceptance of an offer is deemed accepted once the acceptance is sent or communicated (i.e. placed in the mail). However, revocation of an offer is deemed effective when received by the offeree. A communication is received when it comes into the possession of that person. An offer CANNOT be accepted after it is revoked (unless there is an agreement to the contrary). However, once a valid contract has been created by acceptance of the offer, revocation is no longer possible.
Mailbox Rule
An acceptance by mail is effective upon proper dispatch, regardless of whether the offeror receives the acceptance. Proper dispatch means that (1) the acceptance is placed with the postal service, (2) postage is paid, and (3) the acceptance is made out to the correct address.
An acceptance is effective upon improper dispatch only if it is received by the offeror within a reasonable time.
Acceptance—Mirror Image Rule
The traditional rule under the common law is that to accept an offer, the offeree must unconditionally agree to the exact terms of the offer. In other words, the acceptance must be
the mirror image of the offer and must not add, remove, or change any terms. Any deviation, no matter how minor, makes for a counteroffer and thus a rejection and a new offer. However, an acceptance accompanied by suggestions or requests that the offeror is free to agree to or reject does not form a counteroffer.
[Note to reader: UCC’s Battle of the Forms is on other cards]
Implied-in-Fact Contracts
A court may imply a contract, even if the parties never entered one, if:
(1) one party provides another with valuable services, property, or money;
(2) the recipient has reason to know of this;
(3) the circumstances reasonably indicate the services, property, or money was provided with the expectation of compensation; and
(4) the recipient manifests assent, as by knowingly using or retaining the benefit of the services, property, or money or failing to object under circumstances in which silence would suffice as acceptance of an offer.
Recovery is generally the reasonable value of the services, money, or property provided. Also note Note: An express contract supersedes any implied-in-fact contract on the same subject.
Output and Requirement Contracts
Output or requirement contracts are those in which the quantity is measured by the output of the seller or the requirements of the buyer. An output contract requires a seller to sell all of the output of the particular goods to the buyer, and a requirement contract requires the buyer to purchase all of the particular goods that the buyer requires from the seller.
Consideration: Bargained for Exchange
Contracts are NOT enforceable without consideration by BOTH parties. 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. For example, the money paid for goods is consideration for the seller, and the goods sold is consideration for the buyer. Generally, past or moral consideration is NOT sufficient to support a contract.
Consideration Substitutes: Promissory Estoppel/Detrimental Reliance
The doctrine of promissory estoppel may permit enforcement of a promise made by a promisor to a promisee, without consideration, if:
(1) the promisor reasonably expects or should reasonably expect the promisee to rely on the promise;
(2) the promisee in fact relies on the promise; and
(3) as a result, the promisee suffers a substantial detriment.
The court will provide a limited remedy for a breach by the promisor to prevent injustice.
Acceptance–UCC Battle of the Forms where AT LEASE ONE party to the contract is NOT a merchant.
Under UCC Article 2, if an expression is otherwise valid as an acceptance but contains terms in addition to or different from those stated in the offer, then a contract is formed.
If at least one party to the contract is not a merchant, the additional or different terms do not automatically become part of the contract. Rather, the new terms are treated as proposals for addition to the contract. They become part of the contract only if the (initial) offeror expressly agrees to them.
However, if the acceptance is expressly made conditional on the offeror’s assent to the additional or different terms, then the acceptance operates as a counteroffer—a rejection and a new offer.
