Contract Formation

Question 1

When does a unilateral mistake occur? What is the rule regarding a unilateral mistake?

Answer 1

A unilateral mistake occurs when there is a mistake by only one of the two parties as to a basic assumption upon which the contract is made.

Where one party makes a unilateral mistake about a basic assumption on which the contract is bases, and the other party knew or had reason to know of the mistake, the mistaken party will be allowed to rescind the contract.

Making a unilateral mistake alone, however, is not sufficient to allow the mistaken party to rescind the contract. A contract can be rescinded for unilateral mistake only when the other party knew of the mistake or when the mistake was so obvious that the other party should have known that the first party made a mistake.

Question 2

What is the majority rule regarding accepting options?

Answer 2

The majority view is that acceptance of an option is effective only when received by the offeror, so the usual “mailbox rule” does not apply to make the acceptance effective on dispatch. The buyer must accept the option within the agreed period.

Question 3

What is the definition of a contract?

Answer 3

A contract is an agreement that is legally enforceable.

Accordingly, look first for an agreement. Then, second, determine whether the agreement is legally enforceable.

Question 4

When analyzing the agreement process, what information is relevant to consider?

Answer 4

In looking for an agreement, watch for information in the question about

(i) the initial communication (“offer”)
(ii) what happens after the initial communication (“termination of the offer”)

AND

(iii) who responds and how she responds (“acceptance”).

Question 5

What is an offer? How do you determine whehter an offer is made? What is the general test for deciding whether the inital communication is an offer?

Answer 5

General test: Manifestation of commitment

An offer is one person’s (the offeror) manifestation of willingness to contract. Look for words or conduct showing commitment by that person.

The basic test is whether a reasonable person in the position of the offeree would believe that his or her assent creates a contract.

If I offer to sell you my 1973 Cadillac for $400, that results in a legal obligation for me, the offeror, and an opportunity for you, the offeree.

Question 6

Under a sales contract, what terms are required for the offer to be valid?

Answer 6

Sale of real estate (common law) price and description required; it is not an offer if it is missing price term in sales contract.

Sale of goods (Article 2) no price requirement.

NOTE: Watch for missing price term in sales contract.

Question 7

If an offer contains vague or ambiguous terms is that sufficient to make a valid offer? Are requirements or output contracts considered vague or ambiguous?

Answer 7

Vague or ambiguous material terms are not sufficient to make an offer under either common law or UCC [Includes words like appropriate, fair, reasonable are considered vague and ambiguous].

Requirements or output contracts are not vague or ambiguous and are valid.

Question 8

Can an output (or requirements) contract state the quantity of goods to be delivered under the contract in terms of the buyer’s requirements or seller’s output?

Answer 8

A contract for the sale of goods can state the quantity of
goods to be delivered under the contract in terms of the buyer’s requirements or seller’s output.

Terms like “all,” “only,” “exclusively,” “solely” are acceptable.

Requirements or output contracts are not vague or ambiguous and are valid.

Question 9

Under output or requirement contracts, can a buyer increase requirements?

Answer 9

Buyer can increase requirements so long as the increase is in line with prior demands.

No unreasonably disproportionate limitation on increases.

Question 10

Is an advertisement or price quotation an offer? Are there any exceptions?

Answer 10

The general rule is that an advertisement or price quotation is not an offer.

Exceptions:

• (i) An advertisement can be a unilateral offer if it is in the nature of a reward.
  
  • For example, Carbolic Smoke Ball Company promises 100 pound reward to anyone who catches the flu after using its smoke ball as directed.
• (ii) An advertisement can be an offer if it specifies quantity and expressly indicates who can accept.
  
  • For example, Lefkowitz Department Store advertises “1 fur coat $10 – first come, first served.”
• (iii) Price quotation can be an offer if sent in response to an inquiry.

Question 11

What are the four methods for determining whehter an offer was terminated?

Answer 11

1. Lapse of time
2. Death of a party prior to acceptance
3. Revocation of an offer
4. Rejection by words or conduct of the offeree

Question 12

What is the lapse of time method of termination of an offer?

Answer 12

The lapse of time method requires that the offer is accepted in the time state or within a reasonable time frame.

Question 13

What happens when a party dies prior to an offer being accepted?

Answer 13

The general rule is that death or incapacity of either party after the offer, but before acceptance, terminates offer.

Exception: Irrevocable offers (see below)

Question 14

Who has the power of accepting an offer? What does it mean for an offer to be terminated?

Answer 14

Offers generally create the power of acceptance in the person to whom the offer was made (the “offeree”), creating a contract. However, an offer cannot be accepted if it has been terminated. An offer that has been terminated is “dead.”

Question 15

How is an offer revoked?

Answer 15

Through the words or conduct of offeror.

• Later unambiguous statement by offeror to offeree of unwillingness or inability to contract, or
• Later unambiguous conduct by offeror indicating an unwillingness or inability to contract that offeree is aware of.

The offeree must be aware.

Question 16

Are multiple offers considered a revocation?

Answer 16

No. Multiple offers are not considered valid revocation.

Question 17

What type of offers are irrevocable (cannot be revoked) by the offeror?

Answer 17

1. Options
2. UCC “Firm Offer Rule”
3. Reliance
4. Unilateral Contract

Question 18

What is an option?

Answer 18

An offer cannot be revoked if the offeror has not only made an offer but also:

(i) promised to not revoke (or promised to keep the offer “open”)

AND

(ii) this promise is supported by payment or other consideration (“option”)

Question 19

What is the UCC “Firm Offer Rule?”

Answer 19

An offer cannot be revoked for up to three months if:

(i) offer to buy or sell goods,
(ii) signed, written promise to keep the offer open, and
(iii) party is a merchant.

(Merchant is GENERALLY a person in business.)

Question 20

What is reliance?

Answer 20

An offer cannot be revoked if there has been:

(1) Reliance that is
(2) Reasonably foreseeable AND
(3) Detrimental.

Question 21

When is a unilateral contract irrevocable?

Answer 21

The start of performance pursuant to an offer to enter into a unilateral contract makes that offer irrevocable for a reasonable time to complete performance.

**Unilateral means performance, not mere preparation. **

Question 22

What are the three methods of indirect rejection of an offer? Do these methods apply to all contracts?

Answer 22

• Counteroffer (applies to all contracts)
• Conditional Acceptance (applies to all contracts)
• Additional Terms (doeesn’t apply to sale of goods contracts, i.e., common law only)

Question 23

What is the general rule regarding counteroffers? How are counteroffers distinguished from bargaining? Is an option terminated by a counteroffer?

Answer 23

Counteroffer generally terminates the offer and creates a new offer. Thus generally, where a counteroffer has been made there is no express contract unless that counteroffer has itself been accepted.

Bargaining does not terminate the offer. And, counteroffers do not terminate options.

Question 24

What is the rule regarding conditional acceptances of an offer? Are there any exceptions to this rule?

Answer 24

A conditional acceptance terminates the offer. Look for a response to an offer with the word “accept” followed by one of these words or phrases: “if,” “only if,” “provided,” “so long as,” “but,” or “on condition that.”

Common law: conditional acceptance acts as a rejection and becomes a counteroffer that can be accepted by conduct

UCC: conditional acceptance operates as a rejection

Question 25

What is the effect of adding terms to an offer? What is the common law rule regarding additional terms? UCC?

Answer 25

Additional terms to an offer operates as a rejection.

Mirror Image Rule:
Under common law, a response to an offer that adds new terms is treated like a counteroffer rather than an acceptance.

Additional or different terms not rejection under UCC Article 2 (2-207).

Seasonable expression of acceptance:
A fact pattern in which there is (i) offer to buy or sell goods and (ii) a response with additional or different terms raises two separate questions:

1. Is there a contract?
   
   • Under the UCC, a response to an offer that adds additional or different terms, but does not make the new terms a condition of acceptance, is generally treated as an acceptance – a “seasonable expression of acceptance.”
   • Whether the parties are merchants is irrelevant in answering this first question.
2. Is the additional term a part of the contract?
   
   • The additional term is not a part of the contract unless both parties are merchants.
   • Even If both parties are merchants, the additional term is not a part of the contract if the additional term is “material” [fact question] or if the additional
     term is objected to by original offeror.

Question 26

What is the mirror image rule?

Answer 26

Mirror Image Rule:
Under common law, a response to an offer that adds new terms is treated like a counteroffer rather than an acceptance.

Question 27

What is a “seasonable expression of acceptance?”

Answer 27

Seasonable expression of acceptance:
A fact pattern in which there is (i) offer to buy or sell goods and (ii) a response with additional or different terms raises two separate questions:

Is there a contract?

• Under the UCC, a response to an offer that adds additional or different terms, but does not make the new terms a condition of acceptance, is generally treated as an acceptance – a “seasonable expression of acceptance.”
• Whether the parties are merchants is irrelevant in answering this first question.

Is the additional term a part of the contract?

• The additional term is not a part of the contract unless both parties are merchants.
• Even If both parties are merchants, the additional term is not a part of the contract if the additional term is “material” [fact question] or if the additional term is objected to by original offeror.

Question 28

What is a counteroffer?

Answer 28

“Counteroffer generally terminates the offer and creates a new offer. Thus generally, where a counteroffer has been made there is no express contract unless that counteroffer has itself been accepted. Counteroffers need to be distinguished from bargaining.
Bargaining does not terminate the offer. And, counteroffers do not terminate options.
“

Question 29

What is a conditional acceptance? How is it interpreted under common law? UCC?

Answer 29

A conditional acceptance terminates the offer. Look for a response to an offer with the word “accept” followed by one of these words or phrases: “if,” “only if,” “provided,” “so long as,” “but,” or “on condition that.”

(a) Common law: rejects and becomes a counteroffer that can be accepted by conduct
(b) UCC: rejects

Question 30

Under common law how is a reponse to an offer that adds new terms treated? Under the UCC Article 2?

Answer 30

Under common law, a response to an offer that adds new terms is treated like a counteroffer rather than an acceptance (mirror image rule). Additional or different terms not rejection under UCC Article 2 (2-207). Under the UCC, a response to an offer that adds additional or different terms, but does not make the new terms a condition of acceptance, is generally treated as an acceptance – a “seasonable expression of acceptance.” Whether the parties are merchants is irrelevant in answering this first question. The additional term is not a part of the contract unless both parties are merchants. Even If both parties are merchants, the additional term is not a part of the contract if the additional term is “material” [fact question] or if the additional term is objected to by original offeror.

Question 31

How is an offer accepted? What are methods of acceptance? What are the three common fact patterns on the bar exam?

Answer 31

The offeror can control the method of acceptance (e.g., offer states that it can only be accepted by performance), the time that a distance acceptance is effective (e.g., offer states that its acceptance is effective only when it has been received at offeror’s Richmond office), or whether the offeree must give notice that it has accepted by performance (e.g., acceptance by performance will not be effective until offeror has been so notified).

(i) **Start of performance is acceptance. ** Starting to perform is treated as an implied promise to perform and so there is a bilateral contract. Exception: Start of performance is not acceptance of unilateral contract offers. Completion of performance is required. Again, start of performance is an implied promise to perform. Offers to enter into unilateral contracts cannot be accepted by a promise. If offer requires “performance” for acceptance, then “performance” for purposes of acceptance of that offer means completion of performance.
(ii) **Distance and Delay in communications. ** The offeror and the offeree are at different places and there are delays in receipt of communications. Four rules. First, all communications OTHER THAN ACCEPTANCE are effective only when received. Second, acceptance is GENERALLY effective when mailed (i.e., the “mailbox rule”). Third, if a rejection is mailed before an acceptance is mailed, then neither is effective until received. Fourth, you cannot use the mailbox rule to meet an option deadline.
(iii) The seller of goods sends the ““wrong”” goods. General rule: acceptance and breach. Accommodation (i.e., explanation) exception: counteroffer and no breach.

Question 32

Who may accept an offer? Can offers or options be assigned?

Answer 32

Generally, an offer can be accepted only by (1) a person who knows about the offer at the time she accepts (2) who is the person to whom it was made. Offers cannot be assigned; options can be assigned unless the option otherwise provides.

Question 33

What are legal reasons for not enforcing an agreement?

Answer 33

Legal reasons for not enforcing an agreement include: (1) lack of consideration or a consideration substitute for the promise at issue;

(2) lack of capacity of the person who made that promise;
(3) Statute of Frauds;
(4) existing laws that prohibit the performance of the agreement;
(5) public policy;
(6) misrepresentations;
(7) nondisclosure;
(8) duress;
(9) unconscionability;
(10) ambiguity in words of agreement; and
(11) mistakes at the time of the agreement as to the material facts affecting the agreement.

Question 34

What is consideration?

Answer 34

A “bargained for” legal detriment (asked for by the promisor in exchange for her promises). Adequacy of consideration is not relevant in contract law.

The doctrine of consideration is of limited practical significance. In most transactions, particularly most commercial agreements, there will be no issue as to consideration. Article 2 of the UCC has further reduced the practical significance of consideration in modification.

NOTE: In dealing with consideration questions on the bar exam, go through the following three steps. First, identify the promise breaker, i.e., the person who is not doing what she promised to do. Second, ask whether that person asked for something in return for her promise, i.e., bargained for something. Third, look at the person who is trying to enforce the promise and ask what requested legal detriment that person sustained. In sum, look for bargained-for legal detriment.

Question 35

What are the three most likely consideration issues and there associated rules?

Answer 35

(1) Past consideration. It is not consideration unless expressly requested by promisor and expectation of payment by promisee.
(2) “Pre-existing contractual or statutory duty rule” [Common law different from Article 2].

Under common law, the general rule is that doing what you are already legally obligated to do is not new consideration for a new promise to pay you more to do merely that. New consideration is required for contract modification.

Exceptions to the general rule include: (a) addition to or change in performance; (b) unforeseen difficulty so severe as to excuse performance (c) third-party promise to pay.

Under UCC Article 2, there is not a pre-existing legal duty rule. New consideration is not required to modify a sale of goods contract. Good faith is the test for changes to an existing sale of goods contract.