Basics and formation

Question 1

What is a Contract and requirements to form a valid Contract

Answer 1

A contract (‘‘K’’) is a promise or set of promises enforced by law (I.e., a legally enforceable agreement)

Requirements to form a valid K – a K is formed when there exists:

1. Mutual assent (I.e., a meeting of the minds)
   
   • Demonstrated by an offer and valid acceptance
2. Consideration
   
   • A bargained-for exchange of legal value between the parties
3. No defenses to K formation
   
   • No defenses to formation exist that would invalidate the K

Question 2

What is the effect of a defense to contract formation or enforcement?

Answer 2

if there is a valid defense to K formation or enforcement, a K may become:

• Void- K never had any legal effect (none can enforce it)
• Voidable- one or both parties may elect to void the K (only the aggrieved party may enforce it)
• Unenforceable- otherwise valid K that is unenforceable b/c a defense applies (e.g., incapacity, Statute of Frauds)

Question 3

Types of contracts

Answer 3

Bilateral K - exchange of mutual promises (each party is a promiser and promise)

Unilateral K - offer requires performance as the manner of acceptance

• Offeror-promisor agrees to pay upon completion of the act requested by the promisee; once act is completed, K is formed
• E.g., A promises to pay B $100 if B paints A’s fence; B is not obligated to paint A’s fence, but if B does, K is formed and A must pay B $100

Quasi-contract - not a K, but rather a restitution remedy designed to prevent unjust enrichment; usually arises when there is an unenforceable agreement, but one side has realized a benefit

Question 4

MBE clues that can give rise to a Quasi-Contract

Answer 4

There is an unenforceable agreement, but one side had realized a benefit.

Look for:

1. P has conferred a benefit to D;
2. P reasonably expects to be paid;
3. D knowingly accepted the benefit; and
4. D will be unjustly enriched if P is not compensated

Question 5

Applicable law (which applies?)

Answer 5

Common law - applies to most Ks, except sales of goods

• Any K not involving the sale of goods should be treated under common law contract principles
• Most often arises in the form of Ks for real estate or services

UCC Article 2 - governs the sale of goods

• If both parties to a K are merchants, the UCC has additional special rules (e.g., acceptance with additional terms)

Question 6

What is the law applicable for mixed contracts? (good and services)

Answer 6

for Ks involving both goods and services, the predominant purpose of the K dictates the applicable law

• Exception - if K terms divide payment between the goods and the services, apply the UCC to the sale of goods portion of the K and common law to the remainder

Question 7

What is an offer?

Answer 7

1. An objective manifestation of a present intent to contract
   
   1. ​Would a reasonable person believe that communication is an offer?
2. With a definitive and certain terms (not vague or terms of negotiation)
3. Communicated to an identified offeree (including element of the contract)

An objective manifestation of present intent to enter into a contract with definitive and certain terms that are communicated to a specific offeree

Question 8

Are ads offers?

Answer 8

Generally not offers, unless highly specific as to quantity and clearly indicate who may accept

Question 9

What are the UCC (sale of goods) requirements of an offer?

Answer 9

Quantity must be certain or capable of being made certain

Requirements/output Ks - no unreasonably disproportionate increase in quantity allowed.

• Missing terms OK, particularly price, if parties clearly intended to make a K and there is a reasonably certain basis for giving a remedy

Question 10

How an offer is terminated?

Answer 10

Acts of parties:

1. Revocation by offerer
2. Rejection by offeree
3. Lapse of time (Offerer can set a time limit for acceptance)

Operation of law:

1. Death or insanity of either party
2. Destruction of proposed K’s subject matter
3. Supervening illegality

Question 11

How an offeror terminates an offer?

Answer 11

1. Unambiguous statement by the offerer to the offeree
2. Offeree becomes aware of offerer’s unambiguous conduct or a statement indicating an unwillingness or inability to contract (e.g. a house with a “sold” sign)

Question 12

What are the limitations on revocation of an offer by an Offeror?

Answer 12

• Revocation is only effective upon receipt by offeree
• Offer cannot be revoked once it has been accepted
• Unilateral Ks - start of performance makes the offer irrevocable for a reasonable time to complete performance
  
  • Start of performance must go beyond mere preparation
• The offer is irrevocable

Question 13

When an offer is irrevocable?

Answer 13

1. Option K -promise to keep an offer open
   
   • CL- consideration required in exchange for option
   • UCC - no consideration required (unless +3 months period)
2. UCC firm offers - a merchant’s offer made in a signed writing that assures the offer will be held open is irrevocable for the time stated; no consideration is required
   
   • If no time stated, irrevocable for up to three months
3. Detrimental reliance by offeree -reliance must be reasonable
4. When the offer is already accepted.

Question 14

How do you reject an offer?

Answer 14

Methods of rejection:

1. Express rejection - effective when received by the offeror
2. Counteroffer-terminates the original offer and becomes a new offer; bargaining is not a counteroffer
3. Conditional acceptance - terminates the original offer and becomes a new offer (look for terms such as “if”, “only if”, “but”, “provided”, “so long as”, “on condition that”, etc.
4. Acceptance with additional terms, when the effect causes a rejection of the new offer:
   
   1. ​CL: acceptance must mirror the offer; acceptance with additional terms creates a rejection and counteroffer
   2. UCC- depends on whether both parties are merchants
      
      • K involving non-merchant - terms of offer govern; K is formed, but additional terms are excluded and considered mere proposals to modify the K
      • Both parties are merchants - additional terms become part of the K unless certain exceptions apply

Question 15

What are the effects of including additional terms when accepting an offer?

Answer 15

• CL: Mirror images rule make the acceptance a counter-offer
• UCC:
  
  • Both merchants:
    
    • K Formed with additional terms if they are not material, and no objection is made
    • Otherwise, K is not formed
  • One merchant: K formed without the additional terms

Question 16

How do you accept an offer?

Answer 16

Acceptance arises upon offeree’s clear expression of assent to the terms of the offer.

The offer is accepted as the offer dictates it should be accepted.

Question 17

Mirror Image rule in CL acceptance

Answer 17

Acceptance in CL must mirror the offer’s terms; it cannot add, omit, or change terms of the offer, otherwise is a counteroffer

Question 18

UCC acceptance (usual issues)

Answer 18

Acceptance with additional terms - are both parties merchants?

• No - K is formed, but without additional terms
• Yes - K is formed with additional terms unless either:
  
  1. Additional terms materially change the offer,
  2. Offer expressly limits acceptance to the offer’s terms, or
  3. Offeror objects the new terms within a reasonable time

Acceptance by shipment - a merchant may accept an offer to buy goods by either:

• Providing a promise to ship goods (usually by written confirmation), or
• Promptly shipping conforming goods

Question 19

What happens if as acceptance of an offer the seller sends nonconforming goods?

Answer 19

acts as an acceptance, but it may give rise to breach

Question 20

When offers and acceptances become effective (mailbox rule)

Answer 20

Offers and acceptances transmitted via mail or other similar methods become effective upon either dispatch or receipt

• Offers - effective upon receipt
• Acceptance - effective upon dispatch

Question 21

How do you communicate an acceptance?

Answer 21

Unless otherwise provided, offers invite acceptance in any reasonable manner under the circumstances

• E.g., A sends offer to B via e-mail and B accepts via text message; valid K has been formed

If acceptance is via instantaneous two-way communication (e.g., phone), it is treated as if the parties are in each other’s presence

Question 22

Limitations and expectations to mailbox rule

Answer 22

• When offer opts out mailbox: If the offer stipulates acceptance is not effective until received, the offer controls (i.e., offerer can opt out of mailbox rules)
• Schizophrenic acceptance: If offeree sends both a rejection and acceptance, first to arrive controls
• Option Ks - acceptance is effective upon receipt
• Revocation - Revocation by offeror is effective only upon receipt (same rule)

Question 23

Acceptance by performance, what it is?

Answer 23

Unless acceptance is limited by terms of the offer, offeree may accept by partial performance (for bilateral Ks) or complete performance (for unilateral Ks)

Question 24

Acceptance by performance in unilateral K

Answer 24

Unilateral Ks - complete performance required:

• Offeree is not obligated to start or complete performance (since technically the offer has not been accepted)
• Failure to perform does not give rise to breach b/c no K is formed absent complete performance
• Revocability: - offer may become irrevocable upon the start of performance until completion. That means that the offeror can revoke until before termination.
• Notice only: required upon completion- offeree is not required to give notice upon start of performance, but must notify offerer within a reasonable time upon completion

Question 25

Acceptance by performance in bilateral K

Answer 25

Partial performance gives rise to acceptance, however, Offeree must make offerer aware of acceptance

Question 26

What if an offeree of an offer that requires express acceptance begins performance?

Answer 26

An offer requiring acceptance by promise may still be accepted by performance if:

1. Offeree begins to perform; and
2. Offerer knows offeree has begun performance and acquiesces

Note- an offer may always limit methods of acceptance

Question 27

Define consideration (think about an essay)

Answer 27

Consideration is a bargained-for exchange of legal value between parties; there must be a benefit to promiser or detriment to promisee.

This is a required element of every K

Question 28

What is ‘‘Bargained-for exchange’’

Answer 28

The promise made must induce the detriment and the detriment must induce the promise

• Detriment = an obligation to do or refrain from doing something one would otherwise not be obligated to do or refrain from doing

Question 29

Past or moral consideration, valid as a consideration?

Answer 29

A promise to perform a pre-existing duty or obligation generally does not constitute consideration

Some exceptions (rare):

• Debt barren by a technical defense
• Past material benefit received when the original promisor did not want the promise to be a gift

Question 30

What is never considered as consideration?

Answer 30

• Generally: Past consideration or preexisting duty (unless exceptions)
• Promises of gifts or conditional gifts
• illusory promises- a promise where there is no obligation to perform (e.g., A promises to do B’s chores if he has time; A is not actually obligated to do anything, thus no consideration)

Question 31

What is a consideration substitute?

Answer 31

Promissory estoppel: A promise is enforceable if:

1. Promisor reasonably expects reliance by promisee
2. Promisee acts or refrains from acting such that his reliance is detrimental; and
3. performance is necessary to prevent injustice.

Question 32

Preexisting duty considerations

Answer 32

Traditionally the promise to perform under an already existing legal duty is not a consideration (e.g. I will perform if 500, then I request 600 instead. I would only be able to enforce 500)

Exceptions:

• ​New consideration promised (e.g. the additional 100 is because I now will sing 2 more songs)
• A promise to perform a voidable obligation (e.g. a minor ratification can be enforced without a new consideration)
• Existing debts (e.g. debtor will be discharged if he pays now or pays to a third party)
• Duty is also owed to a third party (e.g. a fan pays the extra 100 because he also wants the concert)
• UCC exceptions

Question 33

Remedies under a promissory estoppel

Answer 33

Some jurisdiction would award expectation damages (what is promised under the contracts)

Other jurisdictions would award reliance damages (what was spent on reliance to the promise)

Question 34

Defenses to Contract Formation

Answer 34

1. Duress (consent not voluntary)
2. Incapacity (of parties)
3. Illegality (subject matter)
4. Misrepresentation (fraud)
5. Misunderstanding (ambiguity)
6. Mistake (on the facts)
7. SoF
8. Unconscionability (K is unfair or oppressive)

Question 35

Incapacity (Defense to K formation)

Answer 35

Infants and mentally incompetent persons lack capacity to contract

• intoxicated persons may lack capacity to contract if the other party has reason to know of intoxication
• Right to disaffirm - person who lacked capacity to contract (e.g., infant) may disaffirm the K, which renders it void

Question 36

Infancy exceptions to incapacity defense

Answer 36

Infancy exceptions - Ks involving minors may be enforced or otherwise recognized where:

• Implied affirmation (ratification)- a K can be enforced against one who was an infant at the time of K formation if she has since gained capacity and retained benefits of the K
  
  • Requirements:
    
    1. Agreement entered into before capacity;
    2. Capacity has since been gained; and
    3. Benefits have been retained
• Infant liability for necessities - infants are legally obligated to pay for necessities (e.g., food, clothes, medical care)
  
  • Liability is based on quasi-K, so infant cannot be sued for breach (b/c there is not an enforceable K)

Question 37

SoF (Defense), description

Answer 37

Contracts subject to the Statute of Frauds (‘‘SoF’’) require special proof of their existence (writing or performance)

Failure to satisfy SoF requirements may result in an invalid K

Question 38

Writing requirement in SoF description

Answer 38

On a contract subject to SoF, a writing containing the signature of the party to be charged (i.e., the party asserting the SoF defense) is required

Question 39

Writing requirement in UCC

Answer 39

Under UCC the writing requirement of a SoF contract won’t be required when:

1. Both parties are merchants; and
2. The party asserting SoF defense received a signed writing memorializing the agreement and its essential terms and failed to respond within 10 days of receipt

Question 40

Performance is another way of fulfilling SoF?

Answer 40

Yes, but special rules apply depending on the type of contract:

• Service K - only full performance satisfies SoF
• Sale of goods K - delivery and acceptance of goods satisfies SoF
  
  • Custom-made goods – SoF satisfied once seller makes a substantial beginning toward performance
• Real estate - part performance by the buyer satisfies SoF if buyer has done two of the following three:
  
  1. Full or part payment
  2. Possession of property
  3. Improvements to property

Question 41

What contracts are within SoF?

Answer 41

MYLEGS

• Marriage - promise made in consideration of marriage
• (Yo) Guarantee - promise to pay a debt of a 3rd
• Land, sale of - over 1 year
• Executor promises - to pay the debts of the decedent’s
• Goods, sale of - over 500$
• Service - has to be performed over a year

Question 42

Illegality (defense) description

Answer 42

An illegal subject matter or purpose for the K

• Illegal subject matter - K is not enforceable
• Legal subject matter but illegal purpose - K only enforceable by one who did not know about its illegal purpose
• Legality is based on existing law at the time of K formation

Question 43

Misrepresentation (fraud) (defense) description

Answer 43

A defense exists when false assertions, concealment, or misstatements about a material fact before K formation.

K will be voidable if A induces B into a K by misrepresentation and B relies on the misrepresentation

Question 44

Duress (defense) description

Answer 44

Duress is a lack of capacity defense and includes both economic and physical duress

• Duress = wrongful act or threat that overcomes a party’s free will
• Physical - Ks induced by physical duress are void
• _Non-Physica_l - Ks induced by non-physical coercion or threats are voidable by the coerced or threatened party

Question 45

Unconscionability (defense) description

Answer 45

An agreement (on his formation) cannot include unfair or oppressive terms for one of the parties

Courts may refuse to enforce all or part of a K that is unfair or oppressive to one party based on unfair bargaining and/or unfair substantive terms

• Arises with adhesion Ks, exculpatory clauses for intentional acts, etc.
• Look for an absence of meaningful choice by the disadvantaged party
• Unfair price alone is not a ground for unconscionability

Question 46

Misunderstanding (defense) description

Answer 46

Misunderstanding - ambiguity concerning terms of the K

• Neither party aware of ambiguity - no K formed unless both parties intended the same meaning
• One party aware of ambiguity - K formed
  
  • K enforced according to the intention of the unaware party (E.g., If A knows B misunderstands but A remains silent, K enforced according to B’s understanding)
• Both parties aware of ambiguity - no K formed unless both parties intended the same meaning

Question 47

Mistake (mutual and unilateral)

Answer 47

Mutual mistake - both parties are mistaken about an underlying factual assumption at the time of K formation

• K is voidable by an adversely affected party if:

1. Both parties are mistaken concerning a basic assumption of fact;
2. Mistake materially affects the agreed-upon exchange; and
3. Adversely affected party did not assume risk of the mistake

Unilateral mistake - one party makes a mistake concerning facts of an agreement; usually arises with computational errors

• Unilateral mistake will not prevent K formation
• Exception - mistaken party may void K if mistake is material and non-mistaken party knew/should have known of mistake

Question 48

Parol evidence rule, describe it

Answer 48

Under the Parol Evidence Rule (‘‘PER’’), evidence that is extrinsic to a written K is inadmissible to supplement or contradict the written K

The parties must have intended that the writing was their final agreement

Question 49

PER (Parole Evidence Rule) bars the evidence of what?

Answer 49

• Negotiations before K becomes integrated
• Agreements before K becomes integrated (oral or written)
• Exceptions- extrinsic evidence may be allowed if either:
  
  1. Agreement was only partially integrated, or
  2. Additional terms would ordinarily be in a separate agreement

Question 50

PER (Parole Evidence Rule) does not apply to, or bar admission of:

Answer 50

• Agreements (oral or written) made after the writing
• Evidence necessary to determine if there was a mistake in the process of reducing an agreement to writing
• Evidence concerning a party’s defense based on misrepresentation, fraud, or duress
• Evidence used to resolve ambiguities about the meaning parties intended to give particular terms in the writing

Question 51

What are the specific requirements of a written confirmatory rule acceptance?

Answer 51

1. Both parties are merchants
2. Memo has to be sent within a reasonable time after an oral agreement
3. The recipient doesn’t object
4. He does not need to read the term, just to reasonable know its contents