Contract Formation

Question 1

Contract Formation Formula

Answer 1

K = MA(O + A) + C - D

Question 2

Offer

Answer 2

A communication that creates a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms
-Reasonable person standard for intent to enter into a contract
-Courts consider surrounding circumstances (i.e., jest)
-Bids are offers

Must include definite and certain terms:
-Offeree’s name
-Offer’s subject matter; and
-Price

Question 3

Advertisements

Answer 3

Invitations to deal (not offers) unless:
1. contains promise
2. certain and definite terms; and
3. the offeree is clearly identified

Question 4

Material terms for real estate transactions

Answer 4

Land terms + price terms

Question 5

Material terms for sale of goods contracts

Answer 5

Only quantity (UCC has gap fillers)
-Requirements contract: buyer promises to buy from a certain seller all the goods the buyer requires
-Output contract: seller promises to sell all goods that he produces

Exception: unreasonably disproportionate increase/decrease in goods
-i.e., 100,000 batteries for last 3 years to 1,000,000 batteries this year

Reasonable price and within a reasonable time if price and time are not supplied

Question 6

Material terms for employment and services contracts

Answer 6

Must include nature of the work to be performed
-No duration = at will employment

Question 7

Termination of Offer

Answer 7

An offer may be terminated by an act of either party or by operation of law

Question 8

Termination by Offeree

Answer 8

1. Lapse of time
2. Express rejection (effective upon receipt)
3. Counteroffer as rejection + new offer
   -Offer made by the offeree that contains the same subject matter as the original offer, but differs in terms
   -Distinguish counteroffer “.” from mere bargaining “?”
4. Conditional acceptance (new terms cannot be accepted by performance)
   -An acceptance that is made expressly conditional on the acceptance of new terms is a rejection + new offer

*Rejection or counteroffer of option contract does not terminate the offer
-Offeree is free to accept the original offer within the option period unless the offeror detrimentally relied on the rejection

Question 9

Termination by Offeror

Answer 9

Revocation of an offer before acceptance
-Effective on receipt - requires offeree’s knowledge
-Offer can be revoked indirectly by conduct that indicates change of mind

Exceptions:
1. Option contracts: b/c offeree paid to keep the offer open for the option period

2. Merchant’s firm offer (UCC): merchant offers to buy/sell goods in a signed writing + gives assurance to hold offer open
   -Not revocable for stated period or reasonable time if no stated period
   -Period cannot exceed 3 months (longer periods are still firm for 3 months)
   **3-month limitation only applies to offers not supported by consideration
3. Detrimental reliance: when the offeror could reasonable foresee the offeree relying on the offer to his detriment, the offer is irrevocable as an option contract for a reasonable length of time
4. Beginning performance of unilateral contract offer
   -Irrevocable once performance has begun, but offeree is not bound to complete performance (no acceptance until full performance - bridge problem)
   -Distinguish from substantial preparations to perform (i.e., ordering paint but not starting to paint a house)

Question 10

Termination by operation of law

Answer 10

1. Death or insanity of either party (only revocable offers)
2. Destruction of the contract’s subject matter
3. Supervening illegality

Question 11

Acceptance

Answer 11

A manifestation of assent to the terms of the offer
-Offer language controls the method of acceptance
-Power of acceptance not assignable unless its an option contract
-Offeree must know about offer to accept

Question 12

Acceptance of bilateral contract offer

Answer 12

By either a promise to perform or by beginning performance
-Silence cannot constitute an acceptance unless it would be commercially reasonable
-Any offer can be accepted in any reasonable manner

Under Article 2, an offer to buy goods for current or prompt shipment may be accepted by either:
-A promise to ship; or
-Current or prompt shipment of conforming or nonconforming goods

Under common law, any different or additional terms constitutes a rejection and counteroffer (mirror image rule)

Question 13

Acceptance of unilateral contract offer

Answer 13

No acceptance until performance is completed
-Remember that beginning performance makes the offer irrevocable but does not oblige the offeree to complete performance

Offeree must provide notice within a reasonable time after performance has been completed unless:
-Notice waived; or
-Performance would normally come to the offeror’s attention

Question 14

Acceptance under UCC Article 2

Answer 14

An offer to buy goods for current or prompt shipment may be accepted by either:
-A promise to ship; or
-Current or prompt shipment of conforming or nonconforming goods

Shipment of nonconforming goods is an acceptance + breach unless:
-Seller “seasonably notifies” the buyer that the shipment of nonconforming is only offered as an accommodation (counteroffer)
*Only applies when shipment is used as a form of acceptance (not promising to ship)

Question 15

Battle of the forms provision

Answer 15

For an offer for the purchase or sale of goods, the acceptance with additional or different terms is still an acceptance and a contract is formed
-Different from common law mirror image rule
-Different terms are either treated under additional terms rule or “knockout rule”
-Whether additional terms are included depends on whether both parties are merchants or not

Contracts involving non-merchant: additional terms are not included unless:
-Offeror expressly agrees

Contracts between merchants - additional terms are included unless the additional terms:
-Materially alter the original terms (causes hardship or surprise)
>Industry custom is not a material change, but disclaimers are material
-Expressly limit acceptance to the offer; or
-The offeror objects

“Knock-out” rule for different terms:
-Conflicting terms in the offer and acceptance are knocked out of the contract and filled by UCC gap fillers

Question 16

Merchant’s confirmatory memo

Answer 16

A merchant’s memo confirming an oral agreement that contains different or additional terms is also subject to the battle of the forms provision
-i.e., a follow-up email after a oral deal over the phone (takes out of S/F)

Question 17

Mailbox rule

Answer 17

Acceptance by mail or email is effective on dispatch unless:
-Offer stipulates that acceptance is not effective until receipt
-Option contract acceptance is not effective until receipt
-When an offeree sends a rejection before an acceptance, in which case whichever arrives first is effective
-When an offeree sends an acceptance before a rejection, but the rejection arrives first + the offeror detrimentally relies on it

Question 18

Auction contract

Answer 18

Complete when the auctioneer so announces by the fall of the hammer or in another customary manner

“With reserve”: auctioneer may withdraw the goods at any time until he announces completion of the sale

Question 19

Consideration

Answer 19

Two elements: (1) a bargained-for exchange between parties; and (2) legal value

Question 20

Bargained-for exchange

Answer 20

Sufficient:
-Money
-Promise for a promise
-A forbearance or promise to forbear (to refrain from exercising legal right)
-A promise not to sue on a good faith claim

Insufficient:
-A gift
-A promise given in exchange for something already done except when a past obligation is unenforceable because of a technical defense (i.e. S/L)

Question 21

Legal Value

Answer 21

Must constitute a benefit to the promisor or a detriment to the promisee
-No inadequate value (“mere peppercorn” is sufficient)
-Preexisting legal duty rule

Question 22

Preexisting legal duty rule

Answer 22

Performance or promising to perform an existing legal duty is insufficient consideration

Exceptions:
-New or different consideration (look for earlier payment or in different form, i.e., stock instead of cash)
-Preexisting duty is owed to a third party
-Honest dispute as to the duty
-Fair and equitable modification caused by circumstances not anticipated at the time of formation
-Promise to ratify a voidable obligation

Question 23

Common law contract modification

Answer 23

The modern view permits modification without consideration if:
(1) the modification is caused by circumstances not anticipated at the time of formation; and
(2) it is fair and equitable

Question 24

UCC contract modification

Answer 24

A good faith agreement modifying a contract subject to the UCC needs no consideration to be binding

Question 25

Discharge of debt (consideration)

Answer 25

A debt can be discharged through an accord and satisfaction (agreement to discharge a debt for alternate performance), but requires consideration
-Consideration can be of lesser value than original bargained-for consideration in the prior contract
-Debtor’s offer to make a partial payment on an existing debt is sufficient consideration if there is some bona fide dispute as to the underlying claim

Question 26

Defenses based on lack of capacity

Answer 26

1.Contracts with infants (minors)
-A minor may choose to disaffirm a whole contract any time before (or shortly after) reaching the age of majority (when they affirm)
-Only actual age matters, not perceived age
-Exception: contracts for necessaries (health, education, or subsistence); minor can disaffirm but will be liable for restitution

2. Mental incapacity
   -So deficient that the person is incapable of understanding the nature and significance of the contract
   -Contract is voidable
3. Intoxicated persons
   -So intoxicated that the person is incapable of understanding the nature and significance of the contract
   -Contract is voidable

Question 27

Duress defense

Answer 27

When a party’s assent is procured by physical threat or economic duress (more common):
-Party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; and
-There are no adequate means available to prevent the threatened loss

Taking advantage of person’s economic position is not sufficient

Question 28

Ambiguous language (absence of mutual assent)

Answer 28

If a contract includes a term with at least two possible meanings, the result depends on:
-Neither party aware (no kx unless both parties intended same meaning)
-Both parties aware (no kx unless both parties intended same meaning)
-One party aware (kx based on what ignorant party reasonable believed)

Peerless ship problem

Question 29

Mutual mistake (absence of mutual assent)

Answer 29

Avoidable if mutual mistake of fact:
1. Concerns basic assumption (existence of subject matter, i.e., baron cow)
-Mistake in value is not a defense
2. Has material effect on exchange
3. Party seeking avoidance did not assume the risk

Question 30

Unilateral mistake (absence of mutual assent)

Answer 30

A unilateral mistake about facts relating to an agreement do not prevent contract formation unless the non-mistaken party knew about the mistake
-Voidable by the mistaken party
-Common in construction contracts where one party makes a mechanical error in computation

Question 31

Illegality defense

Answer 31

If the consideration of subject matter of a contract is illegal, the contract is void unless one party is not culpable/does not have knowledge of culpability

If only the purpose behind the contract is illegal, the contract is voidable by the party that is unaware of its purpose or aware but did not facilitate + the purpose does not involve serious moral turpitude

Question 32

Misrepresentation defenses

Answer 32

1. Fraudulent misrepresentation
   -Voidable by innocent party that justifiably (reasonably) relied on the fraudulent misrepresentation
2. Material misrepresentation
   -Voidable by innocent party that justifiably (reasonably) relied on a material misrepresentation

Question 33

Unconscionability defense

Answer 33

Allows a court to modify or refuse to enforce an entire contract or a provision
-Requires unfair surprise + oppressive terms *AT THE TIME OF FORMATION

Examples:
-Inconspicuous risk-shifting provisions in fine print
-Take it or leave it contracts
-Limitations on remedies
-Provisions releasing a contracting party from liability from their own intentional wrongful acts

Question 34

Statute of Frauds

Answer 34

Certain agreements must be evidenced by a writing signed by the party sought to be bound (the party being sued - defendant)
-Statute of frauds may be raised as affirmative defense by party being sued
-Subject to statute of frauds = must be in writing + signed by party raising defense or the contract is invalid

(MYLEGS)
Marriage
Year (within one)
Land
Executor (or Administrator) - rarely tested
Goods (for $500 or more)
Surety - usually wrong answer

Question 35

Promises in consideration of marriage (S/F)

Answer 35

A promise that induces marriage by offering something of value
-Prenuptial agreements

Question 36

Performance not within one year from date of contract (S/F)

Answer 36

A promise that by its terms cannot be performed within one year
-Runs from the date of the agreement, not date of performance
-Lifetime or indefinite contracts NOT subject to statute of frauds
-Assume super human performance (i.e., cutting down all trees on ranch)
-Full performance takes contracts out of S/F

Question 37

Interest in land (S/F)

Answer 37

A promise creating an interest in land must be evidenced by writing

Need writing for:
-Leases for more than one year
-Easements of more than one year
-Mortgages
-Fixtures
-Mineral or structures severed by the buyer
*Agent authorized to sell land under equal dignity rule must have underlying contract in writing

No writing required for:
-Contracts to build
-Broker’s contracts (find a buyer for a seller)
-Full performance

Question 38

Executor (S/F - rarely tested)

Answer 38

A promise by an executor or administrator to pay the estate’s debts out of their own funds must be evidenced in writing

Question 39

Goods priced at $500 or more (S/F)

Answer 39

A contract for the sale of goods for $500 or more must be evidenced by a signed writing
-Article 2 applies to sale of goods contracts, so the following can also take the contract out of the S/F (no writing required):
1. Specially made goods (substantial beginning in manufacture/commitment)
2. Written confirmation by merchant (between merchants - confirmatory memo rule)
3. Admission in court (party admits there is an agreement in pleadings/testimony)
4. Performance (full or part depending on type of contract)

Question 40

Suretyship promises (S/F)

Answer 40

A promise to answer for the debt or default of another must be evidenced by a writing
-Regularly tested as the WRONG answer
-If A does not pay you, I will = surety

Question 41

Contract modifications (S/F)

Answer 41

A written contract can be modified orally but the modification must be in writing if the modified contract falls within the statute of frauds
-i.e., modification puts sale of goods contract above $500
-Common law contracts cannot prohibit oral modification, but UCC contracts between merchants can
>Non-merchant UCC contract requires that party’s separate signature

Question 42

Statute of frauds performance exceptions

Answer 42

Full performance
-Land sale contracts (conveyance)
-Service contracts

Part performance
-Land sale contracts with 2/3: payment, possession, and/or valuable improvements
-Sale of goods contracts for specially manufactured goods or goods that have either been paid for or accepted (kx not enforceable beyond those goods)