Contract formation Flashcards
What is a Contract
Legally enforceable agreement
- Mutual Assent (offer and acceptance)
- Consideration
- Lack of defenses
Look first for an agreement formed, then see if it’s legally enforceable
Need all three of the above elements for an enforceable contract - check carefully for all three
Types of contracts
Can be express or implied
Quasi-contracts are not contracts but when an unenforceable contract results in unjust enrichment (referred to as unjust enrichment)
- action in restitution
Bilateral contracts
Bilateral contract is one consisting of the exchange of mutual promises - promise for a promise
Each party is both a promisor and a promisee
Most are bilateral
Acceptance of a bilateral contract
Offer can be accepted in any reasonable way
Can be accepted by promising or beginning performance
Unilateral contract
The offeror requests performance, rather than a promise - so can only be accepted by performance
The offeror-promisor promises to pay upon the completion of the requested act by the promisee
Once the act is completed, a contract is formed
Two situations of unilateral contract
A unilateral contract, which requires full performance, occurs in only two situations
1) when the offeror clearly (unambiguously) indicates that competition of performance is the only manner of acceptance, and
2) where there is an offer to the public, such as a reward offer
“Offer. . . only by”
Void contract
One that is totally without any legal effect from the beginning
- like an agreement to commit a crime
Cannot be enforced by either party
Voidable contract
One that one or both parties may elect to avoid, such by raising a defense that makes it voidable
Unenforceable contract
Otherwise valid but isn’t enforceable due to a defense, like statute of limitations or statute of fraud
Common law vs UCC
Generally, common law governs contracts
Article 2 of UCC applies to contracts involving the sale of goods
Common law governs everything else
Goods defined
Goods are all things moveable at the time they are identified as the items to be sold under the contract
So, article 2 applies to sales of most tangible things
Does not apply to the sale of real estate, services, intangibles, or to construction contracts
Merchant defined
Article 2 generally defines merchant as one who regularly deals in goods of the kind sold or who otherwise by their profession holds themselves out as having special knowledge or skills as to the practices or goods involved
Article 2 provisions dealing with general business practices (SOF, confirmatory memory, firm offers, modifications), almost anyone in business can be deemed a merchant
Some provisions are narrower and require a person to be a merchant with respect to goods of the kind involved in the subject transaction
Merchant must be acting in their business capacity in order for merchant rules to apply
- not a merchant for purposes of sales that are solely personal
Contracts involving goods and nongoods
Sale involves both goods and services, determine which aspect is dominant and apply the law governing that aspect to the whole contract
If contract divides payment between goods and services, article 2 will apply to the sale portion and common law to the services portion
Good faith and fair dealing - common law
Common law imposes a duty of good faith and fair dealing in evert contract
Breach of this duty usually involves exercising discretion in a way that deprives the other party of the fruits of the contract
Good faith and fair dealing - UCC
Every contract within the UCC imposes an obligation of good faith in its performance and enforcement
Good faith is honesty in fact and the observance of reasonable commercial standards
Mutual assent generally
For an agreement to be enforced as a contract, there must be mutual assent - One party must accept the other’s offer
Determined by an objective standard - did words or conduct manifest a present intention to enter into a contract?
Offer generally
For a communication to be an offer, it must create a reasonable expectation in the offer that the offeror is willing to enter into a contract on the basis of the offered terms
- was there an expression of a promise, undertaking, or commitment to enter into a contract?
- were there certainty and definiteness in the essential terms?
- was there communication of the above to the offer?
Offer and price quotations
Price quotations generally are not offers, but can be if given in response to an inquiry that contains a quantity term
Surrounding circumstances and offer
The circumstances surrounding the language contained in the offer is considered by courts in determining whether an offer exists
Offer - prior practice and relationship of the parties
In determining whether certain remarks constitute an offer rather than preliminary negotiations, a court will look to the prior relationship and practice of the parties involved
Offer - method of communication
The broader the communicating media, the more likely it is that the courts will view the communication as merely the solicitation of an offer
Ads, catalogs, circular letters, and the like containing price quotations are usually construed as mere invasions for offers
- unless quantity term
Definiteness and offer
The more definite the language of the statement, the more likely it is an offer
Factors for considering intent to enter into a contract from offer
Objective reasonable person standard of intention - what reasonable person would think in the circumstances
- language
- surrounding circumstances
- prior relationship of the parties
- method of communication
Offer - elements
Promise, undertaking, or commitment to enter into a contract, not mere invitation to begin negotiations. An intent to enter into a contract
With definite and certain terms communicated to offeree
Definite and certain terms of the offer
An offer must be definite and certain in its terms
Basic inquiry is whether enough of the essential terms have been provided so that a contract including them is capable of being enforced
- identification of the offeree
- definiteness of subject matter
Identification of the offeree - offer
To be considered an offer, a statement must sufficiently identify the offeree or a class to which they belong to justify the inference that the offeror intended to create a power of acceptance
Definiteness of subject matter - offer
The subject matter of the deal must be certain because a court can enforce a promise only if it can tell with reasonable accuracy what the promise is
- Requirements for specific types of contracts
- missing terms
- vague
- terms to be agreed on later
Offer for real estate transaction
An offer involving realty must identify the land and the price terms
The land must be identified with some particularity, but a deed description isn’t required
Most courts will not supply a missing price term for realty
Offer for sale of goods
In a contract for the sale of goods, the quantity being offered must be certain or capable of being made certain
Offer for sale of goods - requirements and output contracts
Although sale of goods, still valid even if the quantity term is not known at the outset
The parties are assumed to act in good faith, so can’t be a tender or a demand for a quantity unreasonably disproportionate to
- any state estimate, or
- in the absence of a stated estimate, any normal or otherwise comparable prior output or requirements
Requirement contract
Buyer promises to buy from a certain seller all of the goods the buyer requires and the seller agrees to sell that amount to the buyer
Output contract
A seller promises to sell to a certain buyer all of the goods that the seller produces, and the buyer agrees to buy that amount from the seller
Offer for employment and other services
In contracts for employment, if the duration of the employment is not specified, the offer, if accepted, is construed as creating a contract terminable at the will of either party
For other services, the nature of the work to be performed must be included in the offer
Offer - missing terms
The fact that one or more terms are left open does not prevent the formation of a contract if it appears that the parties intended to make a contract and there is a reasonably certain basis for giving a remedy
If so, majority of jurisdictions and Article 2 hold that the court can supply reasonable terms for those that are missing
Price
Time
Missing term - price
Except in contracts for real property, the failure to state the price does not prevent the formation of a contract if the parties intended to form a contract without the price being settled
If contract for the sale of goods is missing a price term, Article 2 provides that the price will be a reasonable price at the time of delivery
Missing term - time
If an agreement does not specify the time in which an act is to be performed, the law implies that it is to be performed within a reasonable time
Vague terms - offer
The presumption that the parties’ intent was to include a reasonable term goes to supplying missing terms
The presumption cannot be made if the parties have included a term that makes the contract too vague to be enforced
Uncertainty can be cured by part performance that clarifies the vague term or by acceptance of full performance
If a material term is vague or ambiguous, it is not an offer at common law or under the UCC
- appropriate, fair, and reasonable signal a possible vagueness problem
Offer - terms to be agreed on later
Often, an offer will state that some term is to be agreed on at a future date
If the term is a material term, the offer is too uncertain
Offer - communication to the offeree
To have the power to accept, the offeree must have knowledge of the offer
Therefore, the proposal must be communicated to them
Continuing offer
An offer to form a series of contracts
Watch for facts in which a seller offers to sell to a buyer certain goods for a stated price over a specified time period
Can accept it multiple times until reach max
Termination of offer
An offer cannot be accepted after it has been terminated
An offer may be terminated by an act of either party or by operation of law
Termination - lapse of time
The offeree must accept the offer within the time specified or, if no time period is specified, within a reasonable time
Failing to accept within a reasonable time means the offer is terminated and can no longer be accepted
Lapse of time - reasonableness
A reasonable amount of time is a question of fact that depends on all of the circumstances at the time the offer and attempted acceptance are made
- nature of the contract
- the parties’ purposes, or
- their course of dealing
General rule of thumb is if one month passed, raise issue
Offer terminated - Rejection
Express rejection- statement by the offeree that they do not intend to accept the offer and thus, the offer is terminated
Counteroffer can also be a rejection
Counteroffer as rejection
Offer made by the offeree to the offeror that contains the same subject matter as the original offer, but differs in its term
Both a rejection and a new offer, so terminates the original offer and becomes the new offer, reversing roles of parties
Distinguish between mere bargaining
Counteroffer vs. Bargaining
Distinguish between a counteroffer, which is a rejection, and a mere inquiry into bargaining
An inquiry will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration
Test is whether a reasonable person would believe that the original offer had been rejected
Conditional Acceptance
When an acceptance is made expressly conditional on the acceptance of new terms, it is a rejection of the offer
Conditional acceptance is essentially a new offer
Offer that results from a conditional acceptance cannot be accepted by performance
Conditional acceptance and parties ship or accept goods
If the parties ship or accept goods after a conditional acceptance, a contract is formed by their conduct and the new terms are not included
Conditional acceptance turns into new offer, accepted cannot be by performance so if it is, conduct is what created it so no new terms
Rejection plus new offer that cannot be accepted by performance under common law and UCC
When rejection is effective
A rejection is effective when it is received by the offeror
Termination of an option contract
Because an option is a contract to keep an offer open, a rejection of or a counteroffer to an option does not constitute a termination of the offer
The offeree is still free to accept the original offer within the option period unless the offeror has detrimentally relied on the offeree’s rejection
Revocation
A revocation is the retraction of an offer by the offeror and can happen anytime before acceptance if not irrevocable
Offeror may revoke by directly communicating the revocation to the offeree
Revocable indirectly too
Revoking an offer made by publication
An offer made by publication can be directly revoked only by publication through comparable means
Revoking offer indirectly
An offer may also be revoked indirectly if the offeree receives
- correct information
- from a reliable source
- of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer
Two party street
When revocation of an offer is effective
A revocation is generally effective when received by the offeree
- generally, written communication is received when it is delivered to a place of business through which contract was made or another location authorized to receive it
- Does not matter whether the recipient actually reads the communication
Where revocation is by publication, it is effective when published
Limitations on revocation generally
Offers can be revoked at will by the offeror, even if he has promised not to revoke for a certain period, except
- options contracts
- merchant’s firm offer under article 2
- detrimental reliance
- beginning performance in response to unilateral contract offer
- beginning to perform when offer is indifferent as to manner of acceptance
Options contract
An option contract is when the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer
The offer is irrevocable for the time stated
Merchant’s firm offer under article 2
If a merchant offers to buy or sell goods in a signed writing and the writing gives assurances that it will be held open
Offer is not revocable for lack of consideration during the time stated, or if no time is stated, for a reasonable time
- but it can never exceed 3 months even if says will be open for three months. If say more, will be bound only by three months
- 3 month limit applies only to offers not supported by consideration
Broad merchant rule - anyone in business
Signed writing - merchant’s firm offer
Writing is broadly defined
Anything that looks authenticated will work
Letter head is sufficient
Merchant’s firm offer - form supplied by offeree
If the form is supplied by the offeree, holding-open term must be separately signed by the offeror
Revocation - detrimental reliance
When the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held irrevocable as an option contract for a reasonable length of time
Foreseeable reliance - consider whether its something someone would do before acceptance vs after acceptance
Rare but will come up in the contractor bid situation
revocation - beginning performance in unilateral contract offer
An offer for a true unilateral contract becomes irrevocable once performance has begun
- but substantial preparations to perform do not
The offeror must give the offeree a reasonable time to complete performance