Contract Formation

Question 1

Under the UCC when both parties are merchants, what happens when an additional term is included in the acceptance? What are the exceptions?

Answer 1

It is automatically included, unless:

i) The term materially alters the original contract;
ii) The offer expressly limits acceptance to the terms of the offer; or
iii) The offeror has already objected to the additional terms, or objects within a reasonable time after receiving notice.

Question 2

Under the UCC when both parties are merchants, what happens when a different term is included in the acceptance? What are the exceptions?

Answer 2

Majority applies the “knock-out” rule, under which different terms in the offer and acceptance nullify each other and are “knocked out” of the contract.

Minority treats different terms the same as additional terms (includes them unless an exception applies).

Question 3

What are the ways an offer can terminate before acceptance?

When is each termination method effective?

Answer 3

1. Revocation by offeror (direct or constructive)
   a) an offer can be revoked by the offeror at any time prior to acceptance
   b) revocation by mail: effective upon receipt
2. Rejection by offeree (inc. counteroffer)
   a) rejection is effective upon receipt
3. Lapse
   a) if time limit not specified, terminates at the end of a reasonable period of time
   b) a time-limited offer starts to run from the time the offer is received
4. Death or insanity/incapacity of a party
   a) Exception: An offer that is an option does not terminate upon death or mental incapacity because consideration was paid to make it irrevocable.
5. Destruction or illegality of subject matter

Question 4

What is the “firm-offer rule”?

Answer 4

Under the UCC, a merchant’s (any businessperson’s) offer to buy or sell goods is irrevocable for time stated in offer or for reasonable time (≤ 3 months either way) IF:
• there are assurances that offer will remain open, AND
• assurances are in a writing signed by offeror (initialing, letterhead, e-signatures OK)

Question 5

For bilateral contracts, what methods of acceptance are permitted, and under what circumstances is notice required?

Answer 5

• Giving a return promise.
• Beginning performance. In this case, notice required if needed for offeror to learn of performance. If notice is not given, offeror’s duty is discharged.
• Implied acceptance of a valuable benefit by conduct or failure to act.

Question 6

Define “express contract” vs. an agreement “implied in fact.”

Answer 6

When words express the intent of the parties, the contract is an express contract. When conduct indicates assent or agreement, the agreement is considered implied in fact.

Question 7

What are the essential terms of a contract under the common law?

Answer 7

Question 8

What “gaps” can the UCC fill? How does it fill them?

Answer 8

Question 9

What is an exception to the general rule about which terms must be covered in the agreement under the UCC?

Question 10

If an employment contract does not state duration, how will courts determine how long the contract will last? What if the contract provides for “permanent employment”? “lifetime employment”?

How do many employment agreements overcome the default rule about the duration of an employment contract?

Answer 10

Duration not stated: There is a rebuttable presumption that the employment is “at will.” In an employment-at-will relationship, either party can terminate the relationship at any time, without the termination being considered a breach of the contract (unless the termination is against public policy, such as when an employee is discharged for filing a discrimination claim).

“Permanent employment”: Most courts hold that, in the absence of a proven contrary intention, the employment is “at will,” because the duration term in the contract is considered too vague.

“Lifetime employment”: Some courts hold that the agreement is for at-will employment, while others take the term literally.

Many employment agreements overcome the default rule of employment at will by express terms of the contract, by rules published by the employer (such as those in an employee handbook), or by implication (by usage or conduct).

Question 11

Is an advertisement an offer, or an invitation to deal? What are two exceptions?

“Used car for sale for $5,000. First come, first served.” Is this an offer, or an invitation to deal? Why?

Answer 11

Advertisements generally are considered invitations to receive offers from the public. Exceptions:

a) reward advertisements; and
b) advertisements that are very specific and leave nothing open to negotiation, including how acceptance can occur.

Used car:

Question 12

[Under the common law,] when an option has been given, is separate consideration required:

a) if the option is a promise not to revoke an offer to enter a new contract?
b) if the option is within an existing contract?

Answer 12

a) Yes
b) No

Question 13

Under the UCC firm offer rule, is consideration by the offeree generally needed to keep the offer open? What is the exception?

Answer 13

No. However, consideration is required to extend irrevocability beyond three months.

Question 14

When may the doctrine of promissory estoppel make an offer irrevocable?

Answer 14

The doctrine of promissory estoppel may make the offer irrevocable when the offeree reasonably and detrimentally relies on the offeror’s promise prior to acceptance. It must have been reasonably foreseeable that such detrimental reliance would occur in order to imply the existence of an option contract.

Frequently arises in the contractor/subcontractor context.

Question 15

In general, when can an offeror revoke an offer, and how?

When is a revocation by mail effective?

Answer 15

In general, an offer can be revoked by the offeror at any time prior to acceptance. An offer is revoked when the offeror makes a manifestation of an intention not to enter into the proposed contract. A revocation may be made in any reasonable manner and by any reasonable means.

By mail: effective upon receipt

Question 16

When the doctrine of promissory estoppel makes an offer irrevocable, to what extent and for what may the offeror be liable?

Answer 16

The offeror is liable to the extent necessary to avoid injustice, which may result in holding the offeror to the offer, reimbursement of the costs incurred by the offeree, or restitution of the benefits conferred.

Question 17

If the offer is for a unilateral contract, can the offeror revoke the offer once the offeree has begun performance?

Answer 17

No. Once performance has begun, the offeree will have a reasonable amount of time to complete performance but cannot be required to complete the performance. A unilateral contract is not formed until performance is complete. [In other words, the offer is irrevocable for a period of time reasonable to complete performance.]

Question 18

When may an offer be irrevocable? Is consideration required to make it irrevocable? For how long is it irrevocable?

Answer 18

Question 19

In general, a counteroffer acts as ___. What is an exception?

Answer 19

both a rejection and a new offer

NOTE: Examine the offeree’s statement closely. It may be a rejection, but it may also be only an inquiry (e.g., “Is that a 2005 model car?”) or merely indecision (e.g., “I’ll keep your offer under advisement.”); in either case the offer remains open.

An exception exists for an option holder, who has the right to make counteroffers during the option period without terminating the original offer.

Question 20

How can an offer of a bilateral contract be accepted? A unilateral contract?

Answer 20

NOTE THAT NOTICE MAY BE REQUIRED.

Question 21

If the offeror terminates the offer before the offeree begins to perform on a unilateral contract, but the offeree has incurred expenses in preparing to perform, what can the offeree do?

Answer 21

The expenses may be recoverable as reliance damages.

Question 22

What are some factors that suggest a means of acceptance is reasonable?

Answer 22

A means of acceptance is reasonable if it was used by the offeror, used customarily in the industry, or used between the parties in prior transactions.

Question 23

What are 4 ways that acceptance without communication (by silence) might be possible?

Answer 23

a) Unilateral reward offers or contests (e.g., my lost cat Monster)
b) Unilateral offer in which the parties are geographically close (such that the offeror will see that performance has occurred)
c) A past history of silence serving as acceptance (such that the offeree should reasonably notify the offeror if she does not accept)
d) The offer says that acceptance must come by silence, and the offeree intends to accept the offer by silence.

Question 24

If the buyer requests that the goods be shipped (to accept an offer), and the seller ships nonconforming goods:

a) has the seller accepted the offer?
b) has the seller breached the contract?
c) for what is the seller liable? Exception?

Answer 24

a) Yes
b) Yes
c) The seller is then liable for any damage caused to the buyer as a result of the breach.

Exception: If the seller “seasonably” notifies the buyer that the nonconforming goods are tendered as an accommodation, then no acceptance has occurred, and no contract is formed. The accommodation is deemed a counteroffer, and the buyer may then either accept (thereby forming a contract) or reject (no contract formed).

Question 25

When is an acceptance by mail effective? What is an exception?

Answer 25

When sent, not upon receipt (Mailbox Rule)

Exception: Acceptance following rejection. If a communication is sent rejecting the offer (or making a counteroffer), and a later communication is sent accepting the contract, the mailbox rule will not apply. The first one to be received by the offeror will prevail. (The offeror need not actually read the communication that is received first for it to prevail.)