Contract Formation Flashcards
What is a contract? How are contracts created?
A contract is a legally enforceable agreement.
There are two ways in which contracts are formed:
Express Contract: created by the parties’ words (oral or written)
Implied-in-Fact Contract: created by the parties conduct.
What are the two main types of contracts that can be formed?
There are two types of contracts formed:
**Bilateral Contract: **Where an offer can be accepted in any reasonable way. (flexible)
Unilateral Contract: Where an offer can be accepted **only by performing. **(inflexible)
- Offer expressly says acceptance by performing only
- Involves reward, contest, or prize.
What constitutes an offer? What is not considered an offer?
Definition: a manifestation of an intention to be bound.
**Advertisements **are not generally considered an offer, unless thre is a quantity.
Also see if there are any terms that are too indefinite to be enforced, particularly no mentioned quantity:
Open Price Term: court will read in a “reasonable” price except in a contract for the sale of real property.
Requirements Contracts: Okay under Article 2, despite uncertain quantity.
How do you know if the offer was terminated?
Look for any potential:
Lapse: an offer lapses after a stated term or a reasonable time has passed.
Revocation: an offer terminates when the offeror revokes the offer.
**Rejection: **An offer terminates when the offeree rejects it.
- Counteroffer: operates as a rejection, but mere bargain does not.
- Conditional “acceptance”: not an acceptance at all.
Death: Death of either party before acceptance terminates a **revocable **offer.
When can an offer be revoked? How can an offer be revoked? When can an offer not be revoked?
General Rule: An offer can be revoked any time before acceptance.
**Direct Revocation: **The offeror indicates directly to the offeree that he has changed his mind about the deal.
Indirect Revocation: The **offeror engages in conduct **that indicates that he has changed his mind and the offeree is aware of the conduct.
The offer cannot be revoked in four situations:
Option: an option is a promise to keep the offer open that is paid for.
Firm Offer (Article 2): In a sale of goods, if a merchant promises in a signed writing to keep an offer oepn, the offer is irrevocable. If the offer does not state a time period, the offer will be firm for a reasonable time not to exceed 3 months. Note: the terms “merchant” and “signed” are *broadly defined *under Article 2.
Foreseeable Reliance Before Acceptance: only really happens in the contractor/subcontractor situation.
Starting to Perform in Unilateral Contract: you must start performance, merely preparing does not constitute performance.
When is a revocation effective?
A revocation is effective only when it is received.
Can an acceptance vary from the offer? How does Article 2 differ from the common law?
Common Law: Acceptance must miror offer (“Mirror Image Rule”)
Article 2: For a sale of goods, the acceptance does not have to mirror offer.
No Mirror Image Rule: The offeree’s adding or changing a term does not prevent acceptance under Article 2, BUT:
Offeree’s Term is Included ONLY IF:
i. both parties are merchants;
ii. there is no material change; AND
iii. there is no objection within a reasonable time.
Note: If the term is customary in the industry, it’s not material. Also offeror can keep out even a minor change, by simply rejecting it within a reasonable time.
When has an offer been accepted?
Look to the language of the offer - if it specifies a mode of acceptance, then it must be accepted in that way.
An offer can be accepted by:
Bilateral Contract: with a promise to perform, or by starting a performance (coming with an implied promise to finish the job).
Unilateral Contract: ONLY completing performance is acceptance. Starting performance is not acceptance, so there is no obligation to finish the job.
Improper Performance: under the common law, it’s simultaneous acceptance **and **breach. Under Article 2, it is also simultanenous acceptance and breach, unless seller is sending the goods **as an accomodation **(seller says this phrase) to buyer. This means there is no acceptance and thus no breach.
Note: Offeree’s silence is not acceptance.
When is an acceptance effective? What are the exceptions?
Acceptance is effective when mailed (“Mailbox Rule”).
Exceptions:
Offer states otherwise: offeror can overide the mailbox rule and provide a receipt of acceptance date.
Irrevocable Offer: mailbox rule does not apply to irrevocable offers - acceptance is not effective until received. Irrevocable offers tend to terminate whenthe option is up. Acceptance must be received by then.
Rejection sent first:* *then it is a race - whichever gets there first is effective.
What are the defenses against formation?
Lack of Capacity: minors (under 18), intoxicated, and the mentally incompetent are considered having the lack of capacity to enter into a contract. An incapacitated defendant may disaffirm the contract.
Exceptions:
Implied Affirmation: retaining the benefit after (re-)gaining capacity.
Necessaries: an incapacitated party is liable for necessaries (i.e. food, shelter, clothing, and medical care), but only for the reasonable value, not the contract price.
Economic Duress: Rarely a successful defense against formation unless: (1) threat to break an existing contract; (2) the only reason the party agreed was to maintain the first deal; and (3) there is no other reasonable source for the goods/services, etc.
Misrepresentation/Non-Disclosure of a Material Fact: even an honest misrepresentation is a fatal flaw as long as it is material.
Ambiguity/Misunderstanding: there is no contract if the parties are on “different wavelengths,” unless one of them knew or had reason to know of the other party’s meaning. If a party knew, then innocent party’s meaning governs.
Mistake About a Material Fact:
Mutual Mistake: if there is a mutual mistake of a material fact, both parties are excused from performance, because the fact was at the heart of the deal.
Unilateral Mistake: generally not a defense - one party’s mistake is not a fatal flaw to the contract, unless the other party had reason to know or knew.
No Consideration: when someone has not recieved a “bargained for legal detriment/benefit,” which can be a promise, performance, or even forbearance.
**Past Consideration: **is not consideration at all. You can’t bargain for anything that’s already been done.
Adequacy of Consideration: irrelevant if there’s a bargain.
Illusory Promise: an illusory promise is unenforceable.
How can a contract be modified? How does Article 2 differ from the common law?
Common Law: New consideration is required to modify a contract. Performing a preexisting duty is not enough (“Preexisting Duty Rule”)
Sale of Goods (Article 2): Consideration is not required to modify a contract, but you must show good faith.
What are public policy reasons for not finding a contract?
Covenant not to compete: A court will invalidate or narrow a covenant not to compete that operates as a restraint of trade. The court will consider the scope of the covenant (duration and geography) and the need for the covenant (uniqueness of the services).
Exculpatory Clauses: An exculpatory clause can eliminate liability for negligence, but not for gross negligence or intentional torts.
Unconscionability: Generally not a valid defense against enforcement. Look for:
Substantive: the terms are unfair (e.g. indentured servitude)
Procedural: the agreement process was unfair (e.g. small print)
