Contract Formation Flashcards
Under Article 2, when an offeree proposes additional or different terms during acceptance, the court will apply __________ to determine whether the additional or different terms become part of the contract.
Battle of the Forms.
For Battle of Forms, an offeree’s terms are included only if:
- both parties are merchants
- no material change
- no objection within a reasonable time
Under Article 2, when an offeree proposes additional or different terms as part of an otherwise valid acceptance, the acceptance __________.
The Article 2 battle of the forms provision provides that the proposal of additional or different terms by the offeree in a definite and timely acceptance is effective as an acceptance, UNLESS the acceptance is expressly made conditional on assent to the additional or different terms. Whether the additional or different terms become part of the contract depends on whether both parties are merchants.
When Battle of the Forms applies, what happens to additional terms?
Under the UCC, if both parties to a contract are merchants, additional terms in an acceptance will be included in the contract unless (i) they materially alter the original contract; (ii) the offer expressly limits acceptance to the terms of the offer; or (iii) the offeror has already objected to the particular terms, or objects within a reasonable time after notice of them is received.
On July 1, a retiring breeder sent a note to his rancher neighbor offering to sell his prize bull for $15,000. On July 10, the neighbor wrote the following note to the retiring breeder:
“I have decided to take the bull. I will give you a cashier’s check on delivery on Saturday, July 28.”
The retiring breeder did not respond because he did not want to deliver the bull on July 28 and did not think that the delivery day was agreed to. Instead, he delivered the bull on Monday, July 30. The neighbor refused the delivery and stated that he had found another bull he likes better. The retiring breeder sues the neighbor for breach of contract.
Is the retiring breeder likely to prevail?
The retiring breeder will not prevail because he did not deliver the bull on July 28. Under the UCC, an acceptance with additional terms does not constitute a rejection and counteroffer, but rather is an effective acceptance unless made expressly conditional on the assent to the additional terms. Here, the neighbor accepted the offer and added the additional term of a delivery date. Thus, there was a contract.
Here, both parties are merchants (cattle breeders). The change in the delivery date does not materially change the offer, the offer did not limit the acceptance to its terms, and the retiring breeder did not object. Therefore, the July 28 delivery date became part of the contract. By delivering the bull on July 30th, the retiring breeder breached the contract.
In September, a manufacturer of office furniture received an email purchase-order form from a retailer of office furniture. The order was for 100 executive leather swivel chairs and specified a delivery date no later than November 1, at a total cost of $10,000, as quoted on the manufacturer’s website. Two days later, the manufacturer emailed its own purchase-order acceptance form to the retailer, who was a new customer and had never seen the form before. The purchase-order acceptance form stated that it was an acceptance of the specified order, was signed by the manufacturer’s sales manager, and contained all of the terms of the retailer’s form, but it also contained an express warranty and a clause disclaiming all implied warranties such as the implied warranty of merchantability.
Assuming that there were no further communications between the parties, what is the status of the relationship between the parties?
The manufacturer and the retailer have a contract without the disclaimer. In contracts for the sale of goods, a definite expression of acceptance operates as an acceptance even if it states additional terms. Between merchants, additional terms proposed by the offeree in an acceptance automatically become part of the contract unless (i) they materially alter the original terms of the offer (e.g., they change a party’s risk or the remedies available); (ii) the offer expressly limits acceptance to the terms of the offer; or (iii) the offeror had already objected to the additional terms or objects within a reasonable time.
Here, a clause was added by the manufacturer (the offeree) providing for an express warranty and a disclaimer of all implied warranties. The disclaimer materially altered the original terms of the offer. Therefore, the disclaimer would not become part of the contract.
A wholesale seller of widgets telephoned a retail seller of widgets and told him that he had 5,000 pounds of widgets ready for delivery at $5,000. The retailer agreed to purchase the widgets, but stated that he wanted the wholesaler to deliver 2,000 pounds now and 3,000 pounds next month. There were no further communications between the parties.
Assuming that the retailer’s request is not a material change of terms, what is the most likely result of the conversation between the wholesaler and the retailer?
The conversation created a contract for 2,000 pounds of widgets now and 3,000 pounds next month. Under the UCC, a contract is formed whenever it appears from the parties’ communications that they intended to enter into a contract.
If the contract is between merchants, the additional terms in the acceptance are included in the contract, unless (i) the additional terms materially alter the contract, (ii) the offer expressly limits acceptance to the terms of the offer, or (iii) the offeror objects within a reasonable time. Here, both parties are merchants, and we were told to assume that that the delivery terms do not materially alter the contract. There is no indication that the offer limited acceptance to the terms of the offer or that the wholesaler objected to the terms; thus, there is a contract containing the additional terms.
When does a letter of revocation become effective under common law? Under the UCC?
A letter of revocation of an offer is effective when it is received by the offeree.
Common law: written communication is considered to have been “received” when it comes into the possession of the person addressed (or of someone authorized to receive it) or when it is deposited in some place authorized as the place for this to be deposited.
UCC: person receives notice when it comes to his attention, or it is delivered at a place of business through which the contract was made or another location held out by that person as the place for receipt of such communications. An organization receives a communication at the time it is brought (or should have been brought) to the attention of the individual conducting the transaction.
Under the Mailbox Rule, when is there an acceptance?
Under the “mailbox rule,” acceptance by mail or similar means creates a contract at the moment of posting, properly addressed and stamped, unless: (i) the offer stipulates that acceptance is not effective until received; or (ii) an option contract is involved.
Mailbox Rule: What happens when oferee sends an acceptance and rejection?
If the offeree sends both an acceptance and a rejection, whether the mailbox rule will apply depends on which the offeree sent first - the acceptance or the rejection.
If the offeree first sends an acceptance and later sends her rejection, the mailbox rule does apply. Thus, even if the rejection arrives first, the acceptance is effective upon mailing (and so a contract is formed) unless the offeror changes his position in reliance on the rejection.
January 18: offer January 19: sent rejection January 20: sent acceptance January 21: received rejection January 22: received acceptance
Is there a contract?
The parties do not have a contract, because the mailbox rule does not apply when the offeree sends a rejection, followed by an acceptance. In such a case, whichever is received first controls. The rejection was received first so the offer was ultimately rejected.
A doll collector knew that an acquaintance from her doll collectors’ club coveted one particular doll that she owned. The doll collector mailed a letter to the acquaintance on May 3 offering to sell the doll to her for $750. Her letter arrived on May 4. On May 5, the doll collector changed her mind and immediately mailed a revocation to the acquaintance. This revocation arrived on May 7. As the mail carrier handed it to her, the acquaintance simultaneously handed to the mail carrier her own letter to the doll collector, unequivocally accepting her offer.
What is the result of the actions here?
The outcome would turn on the court’s determination as to whether the doll collector’s letter had been received by the acquaintance before she had entrusted the letter of acceptance to the mail carrier.
The mailbox rule does not apply to revocations, however-revocations are effective only upon receipt. Receipt does not require knowledge of the revocation, but merely possession of it. The communication need not be read by the recipient to be effective. The facts here present a close question as to whether there has been a dispatch of the acceptance before the receipt of the revocation. The outcome of this question will depend on the court’s determination as to what came first (the posting of the acceptance or receipt of the revocation). This will decide the existence or nonexistence of the contract.
On July 1, a cattle rancher offered to sell his ranch to a dairy farmer for $150,000. The dairy farmer paid the cattle rancher $1,000 to hold the offer open for a period of 30 days. On July 10, the dairy farmer wrote to the cattle rancher, telling him that he could not pay more than $100,000 for the ranch, and that if he would not agree to accept that amount, he would not go through with the deal. The dairy farmer received no reply from the cattle rancher.
On July 29, the dairy farmer mailed a letter to the cattle rancher telling him that he accepted his offer to sell the ranch and enclosed a check for $150,000. The cattle rancher received this letter on August 1.
Has a contract been formed between the parties for the sale of the ranch?
No contract was formed because the cattle rancher did not receive the dairy farmer’s acceptance within 30 days. The mailbox rule does not apply to option contracts. An acceptance under an option contract is effective only upon receipt.
Here, an option contract existed because the dairy farmer paid the cattle rancher $1,000 to hold the offer open for 30 days. The dairy farmer mailed his acceptance within 30 days but it was not received by the cattle rancher within the 30-day period, so the acceptance was not effective. The option specified the period of time during which the offer would remain open, after which the offer terminated.
A merchant who offers to buy or sell goods in a signed writing that gives assurances that the offer will be held open is offering:
Under Article 2, a merchant’s firm offer arises when a merchant offers to buy or sell goods in a signed writing that gives assurances that the offer will be held open. If no specific time frame is stated in the offer, a merchant’s firm offer will remain open for a reasonable time (but in no event may such period exceed 3 months).
What is an option contract?
An option contract is a distinct contract in which an offeree gives consideration for a promise by the offeror not to revoke an outstanding offer.
A small business owner decided to retire, so she offered her long-time employee a chance to buy the business for $1 million. She promised in writing to keep the offer open to him for 90 days and to give him enough time to secure financing once he accepted the offer. Over the next few days, the employee cashed out all his retirement accounts and took a second mortgage on his home to raise the funds to purchase the business. When he approached the business owner to discuss the details of the sale, she said that she changed her mind and was revoking her offer because she did not want to retire after all.
Was the owner’s revocation of her offer proper?
The owner’s revocation of her offer was proper because the offer could be revoked at will. Generally, offers can be revoked at will by the offeror, even if she has promised not to revoke for a certain period of time. There are limitations on the offeror’s power to revoke, but none of those exceptions apply in this case.
This is not an option contract because the employee has not given consideration for the offeror’s promise to keep the offer open. There is no issue of detrimental reliance because offeror did not reasonably expect employee to rely on the offer before acceptance. Offeror had no reason to anticipate the employee would immediately begin taking steps to have the purchase money.
A hotelier sent letters to all known hotel suppliers on June 1, alerting them to his need for different items. The hotelier received a signed letter dated June 8 from a hotel supply company, stating that the company had 250 ice buckets left in stock and will sell them to the hotelier for $1 each. The company added that it must receive the hotelier’s answer by November 1 and will hold the ice buckets for the hotelier until then. On July 1, the company sold 200 of the ice buckets to a competing hotel chain. On July 2, the company sent the hotelier a fax stating it had only 50 ice buckets left for sale. The hotelier received the fax that day, but put it aside and never read it. On July 10, the hotelier notified the company that he was accepting the company’s offer to sell 250 ice buckets. The company, upon receiving the hotelier’s acceptance, shipped the remaining ice buckets. The hotelier sues the company for failing to deliver all 250 ice buckets.
Will the hotelier prevail?
The hotelier will prevail. UCC applies. The June 8 letter from the supply company is a firm offer. Where a time period for the offer is stated, the period of irrevocability is that period, except that the period cannot exceed 3 months. Here, the 3-month period would end on September 8. The company’s fax stating that it had only 50 ice buckets left to sell constitutes an invalid attempt at revocation, because it is within the three-month period of irrevocability.
The neighbor told the collector that he could have the painting for $30,000. The two agreed in writing that the neighbor would keep the offer open for 30 days in exchange for $500, which the collector paid. The terms of the written agreement provided that the offer would expire at 11:59 p.m. on September 30 if the collector failed to accept by that time.
September 20: collector told neighbor he was uncertain about the potential purchase.
September 26: friend saw the painting and offered $35,000
September 27: neighbor mailed $50 to collector with a letter stating that he was terminating his offer to the collector regarding the painting and refunding 10%
September 28: collector mailed a letter to neighbor with $30,000 + neighbor sold painting to friend for $35,000
September 29: collector received neighbor’s rejection letter
October 1: neighbor received collector’s acceptance
What is the result?
The collector’s power to accept lapsed because the option contract specified that the offer would expire at 11:59 p.m. on September 30. Hence, the power had to be exercised prior to that time and it was not. The mailbox rule does not apply to the exercise of options. In such cases, acceptance is effective when received by the offeror, here on October 1.
A farmer wanted to sell his rye before the growing season was over. The farmer sent the following e-mail to a local baker: “Will sell rye, 20 bushels maximum, best price $100 per bushel, firm for 48 hours. /s/ Farmer.” Unsure how the baker would respond, and anxious to find a buyer for the rye, the farmer made the same offer to the baker’s competitor by e-mail later that same day. When the baker accepted the farmer’s offer the next day, e-mailing to him an order for 20 bushels, she was aware of the farmer’s offer to her competitor, and that her competitor had also e-mailed an order to the farmer for 20 bushels. Unbeknownst to the baker, the farmer has only 30 bushels of rye left in his fields.
Assuming the farmer is a merchant with respect to rye, which of the following states the probable legal consequences of the correspondence between the parties?
The farmer has two contracts, one with the baker and one with the competitor, for 20 bushels each. Because his e-mail provided a firm price for 48 hours and the farmer is a merchant, the offer was an irrevocable firm merchant’s offer during the 48 hours. Under the UCC, which governs here because goods are involved, a written offer signed by a merchant giving assurances that it will stay open will be irrevocable for the time stated. The farmer qualifies as a merchant of rye (one who deals in goods of that kind sold) and his offer was written and signed and contained words of firmness (“firm for 48 hours”), so it was irrevocable for 48 hours. The baker accepted the offer within the stated time. Thus, a contract was formed between the baker and the farmer. A contract was also formed between the baker’s competitor and the farmer because the competitor accepted the farmer’s offer. Therefore, the farmer is obligated to both the baker and her competitor for 20 bushels. If the farmer does not have the appropriate quantity in his field, he will have to procure it from somewhere else or be in breach.
What is a contract?
A contract is a legally-enforceable agreement. A quasi-contract (restitution) protects against unjust enrichment is a remedy of last resort.
How can an offer be terminated?
How an offer can be terminated:
- Lapse of time—must accept within specified time period or, if none, within reasonable time
- Revocation—words or conduct of the offeror terminating the offer. It is effective when received by offeree.
* Watch for irrevocable offers (merchant’s firm offer for UCC, option contract, and detrimental reliance) - Rejection—words or conduct of the offeree rejecting the offer. This is effective when received by offeror.
* counteroffer is a rejection - Termination by operation of law when:
a) Destruction of subject matter of the contract
b) Supervening illegality of subject matter of contract
c) Death or insanity of either party
