Contract Law Flashcards
Definitions of Contracts
Common law Contract
Under common law, a contract is a legally enforceable agreement. In most instances, contract formation requires a bargain in which there is a manifestation of mutual assent to the exchange and also consideration. A valid contract is formed when there is an offer, an acceptance, and consideration.
UCC Contract
Under the UCC, a contract is a total legal obligation that results from the parties’ agreement. In most instances, contract formation requires a bargain in which there is a manifestation of mutual assent to the exchange and also consideration.
Types of Contract
Bilateral Contract - formed by an act or promise
Under common law, a bilateral contract is a contract in which mutual promises are given as the agreed exchange for each other.
Unilateral Contract - formed by an act
Under common law, a unilateral contract is a contract in which a promise is given in exchange for actual performance by other party. A unilateral contract can only be formed upon completion of performance; a mere promise to perform cannot bind the offeror.
Moderns courts presume a contract is bilateral unless the offer clearly warns that it is unilateral.
Quasi Contract (implied-in-law contract)
Under common law, a quasi-contract is a legal substitute for a contract to be used when a court wishes to impose an obligation on a party to avoid unjust enrichment. A court may use a quasi-contract if:
1.- a benefit was conferred to another
2.- there was a reasonable expectation of payment for the benefit conferred
3.- the recipient of the benefit knew or had reason to know of expectation of payment, and
4.- the recipient of the benefit will be unjustly enriched if he does not pay for the benefit
Implied-in-Fact contract
Under common law, an implied-in-fact contract is an agreement presumably intended by the parties to the agreement, but not reduced to express language.
These kind of contracts are founded upon a meeting of the minds by both parties which is inferred from their conduct; this conduct implies a tacit understanding that an agreement exists between the parties. Implied contracts are found to exist when unjust enrichment to one of the parties would occur if a court found that no contract existed.
Contract Validity
i.- Void Contract (nulidad del contrato)
Under common law, a void contract is an agreement that is completely without any legal effect from the beginning.
ii.- Voidable Contract (contrato anulable)
Under common law, a voidable contract is an agreement that one or both parties can elect to avoid or ratify, but is not automatically without effect. Ex: if one of the parties did not have capacity.
iii.- Unforceable Contract (contrato inaplicable)
Under common law, an unenforceable contract is an agreement that may be valid by formation, but is otherwise unenforceable due to an applicable defense.
Other relevance definitions
i.- Goods Under the UCC
Under the UCC, goods are all things that are movable at the time of identification to a contract for sale. Goods do not include regular cash or currency, but goods do include money begin treated as a commodity. Goods also include the unborn young of animals and growing crops to be severed from land. Everything that is in commerce, even if it’s heavy to move.
For goods it has to be understood as, unborn young animals, growing crops, manufactured goods, and otter identified things attached to realty. This term does not include information, investment securities, the subject matter of foreign exchange transactions, or choses in action. Services and land are not goods for purpose of the UCC.
ii.- Merchant Under the UCC
Under the UCC, a merchant is a person who regularly deals in the type of goods involved in the transaction, or who, through his occupation, has specialized knowledge of the business practice involved.
Contract Formation
A contract is formed upon a valid offer, acceptance, and consideration. Generally, the formation of a contract requires a bargain in which there is a manifestation of mutual assent to an exchange. A preliminary analysis of contract formation is as follows:
i. - was there a proper offer
ii. - was the offer property accepted
iii. - was there proper consideration or an appropriate substitution for consideration
Mutual Assent- Offer and Acceptance
i.- Offer
- Fundamental elements of a Valid Offer
a.- Present contractual intent
b.- Communicated to an identified offeree
- Adverstisement
- Rewards
c.- Definite and certain terms- essential terms of the offer
- uncertain and absent terms (presumption of reasonableness)
- UCC Distinction
Time window of offer
Revocation of an offer
a.- Revocation of offer by offeror
b.- Irrevocable offers
- common law option contracts- consideration required
- UCC firm offer rule- consideration not required (merchant’s firm offers)
- reasonable detrimental reliance by the offeree
- partial performance of a unilateral contract by the offer
Rejection of offer by offeree
a.- Express rejection of the offer
b.- Counteroffer
Termination of offer as a matter of law
ii.- Acceptance
a.- Common law-Mirror Image Rule
b.- UCC Battle of the forms
- If at least one party is not a merchant
- If both parties are merchants
c.- Nonconforming Goods
d.- Communication of Acceptance
- General rule
- The Mailbox rule
- Exceptions to the mailbox rule
e.- Notificatoin of Acceptance:
- Unilateral contract
- Bilateral contract
iii.- Consideration
Under common law, consideration is a bargained-for legal detriment.
a.- Defining Consideration:
Legal Detriment:
- Legal detriment to the Promisee
- Legal detriment to the Promisor
- Past consideration
b.- Adequacy of consideration
c.- Substitutions for Consideration
- Detrimental Reliance (promissory estoppel)
- Contracts Under Seal
- Certaing UCC Contracts.
+ Merchant Firm offers
+ Contract Modifications
d.- Illusory Promise
- Reserving the right to not perform (not enforceable)
- Preexisting Obligation (not enforceable)
- Output Contracts (enforceable)
- Requirements Contracts (enforceable)
iv- Summary of Contracts Formation
Contract Formation
i.- Mutual Assent- Offer and Acceptance
Mutual assent is often referred to as a “meeting of the minds”. The parties to most contracts give actual consent. A court will use an objective measure to determine whether a meeting of the minds occurred. In other words, it does not matter what a party silently thought he was offering or accepting, but instead the bargain is judged by what a third party would have reasonably understood the bargain to be.
Contract Formation
i. - Mutual Assent- Offer and Acceptance
- Offer
Under common law, an offer is a manifestation of present contractual intent, communicated to an identified offered, containing definite and certain terms.
Fundamental elements of a Valid Offer
a.- Present contractual intent: an offer must be an expression of promise, willingness, or commitment to enter into a contract. To create a valid offer, the offeror must ambiguously express the present intent to form a contract. A court will consider the language used by the offeror in making the “offer”, the totality of the circumstances, and any preexisting relationship between the offeror and offeree in determining the intent of the offeror. A valid offer is one that creates a reasonable expectation in the offeree that the offeror is willing to enter into a contract, based on the terms of the offer.
b.- Communicated to an identified offeree: a valid offer must be communicated to the offer to be effective; in other words, the offer must have knowledge of the offer in order to accept it. Furthermore, as a general rule, the offer must be made to a specific offer or class of offerees.
- Adverstisement: as a general rule, an advertisement is not an offer, but merely an open invitation to deal.
- Rewards: an offer of a reward is an offer to form a unilateral contract. The offeree to a reward contract must have knowledge of the offer prior to completion of performance to have a legal claim to the reward.
c.- Definite and certain terms- essential terms of the offer: the essential terms of the offer must be definite and certain. Essential terms generally include the identity of the offer, the subject matter of the contract, the price to be paid, when payment is expected, and the nature of performance.
- uncertain and absent terms (presumption of reasonableness): Under common law, the offer does not have to provide every term of the agreement. If certain terms are uncertain or absent, the court will supply reasonable terms in a manner consistent with the parties’ intent.
- UCC Distinction: Quantity is the only essential term: In a contract for goods, under the UCC, the only term that the parties must always provide is quantity. Even if other terms are left open, a contract for the sale of goods does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for the court to apply reasonable terms.
Time window of offer
Time window of offer: An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time. If the offer is not accepted within the time window of the offer, the offeror can treat the offer as having lapsed before acceptance.
Revocation of an offer
a.- Revocation of offer by offeror: Until the offeree accepts the offer, the offeror is the only one who can revoke the offer at any time. Revocation is valid and effective at the moment it is received by the offeree. An offer is revoked by the offeror if he: explicitly revokes the offer, takes definite action that is inconsistent with an intent to enter into a contract.
The offeree must be aware of the offeror’s words or actions for revocation to be effective:
- example of revocation by definite action: A sell B a thing. Before B accepts he learns that A sold the same thing to C. B cannot accept the offer even though there was no explicit revocation of the offer.
- exception: revocation by publication: this revocation is effective at the moment it is published. An offer made by publication can be revoked by publication through comparable means.
b.- Irrevocable offers: All offers are freely revocable. However, under the following scenarios, an offer becomes irrevocable:
- common law option contracts- consideration required: Under common law, an option contract is a promise that meets the requirements of a valid contract and limits the promisor’s power to revoke the offer. Under common law, separate consideration must be given for the option to be effective.
There must be a valid underlying contract and separate consideration to create an enforceable option contract.
If the agreement does not specify how long the option is to remain open, the option will remain open for a reasonable amount of time. To determine, compare the date of the offer to the date of the response. And if it’s not expressly stated in the offer, a reasonable amount of times approximately one month.
NY Distinction: Under New York General Obligations Law (NYGOL), if an offer to enter into a contract is: in writing, signed by the offeror, and states that the offer is irrevocable, the offer is not revocable during the specified time period, even if the offer is not supported by consideration.
- UCC firm offer rule- consideration not required (merchant's firm offers): under common law, an offer by a merchant to buy or sell goods in a signed record that fiver assurance that it will be held open is irrevocable, even without consideration, during the time stated or, if no time is stated, for a reasonable time, but for no longer than three months. To be revocable, an offer made by a merchant for the sale of goods requires: an assurance that the offer will be held open, in writing, that is signed by the merchant. Consideratio nis not required for a UCC firm offer.
- reasonable detrimental reliance by the offeree: Under common law, if the offeror could reasonably expect that the offeree would rely on the offer to the offeree's detriment, the offer may be deemed irrevocable for a reasonable length of time to avoid injustice. Even if the offer is not deemed irrevocable, the offeror may be liable to the offeree to the extent of the detrimental reliance.
- partial performance of a unilateral contract by the offer: Under common law, a unilateral contract can be revoked any time prior to full performance. However, modern courts hold that an offer for a unilateral contract becomes irrevocable once performance has begun. Mere preparation does nor qualify as partial performance. There must be substantial steps taken to complete performance for this rule to hold. This rule essentially creates an option at the start of performance for the offeree to complete performance within a reasonable amount of time.
NY Distinction: Under NY law, unilateral contract offers are revocable at any time until completion of performance. Partial performance does not protect the offeree from revocation. NY rejects the modern rule.
Rejection of offer by offeree: An offeree can reject an offer by either an express rejection of the offer or by making a counteroffer, both are effective when received.
a.- Express rejection of the offer: an offeree can reject an offer by simply stating that he does not accept the offer. Once rejected, the offer terminates.
b.- Counteroffer: under common law, a counteroffer is an offer made by an offeree to the offeror that relates to the same matter as the original offer, but proposes different terms.
Counteroffer under the UCC: the UCC applies different rules when the offeree proposes differing terms.
Termination of offer as a matter of law: If either of th parties to the offer dies or is deemed insane by a court prior acceptance, the offer is terminated as a matter of law. Note that in an option contract, the option to accept remains open even after a party’s death or if a party is deemed insane by a court during the option period.
Contract Formation
i. - Mutual Assent- Offer and Acceptance
- Acceptance
Under common law, acceptance is a manifestation of assent to the terms of an offer in the manner authorized by the offer. The accepted terms must mirror the terms of the offer for a valid acceptance under common law.
a.- Common law-Mirror Image Rule: Under common law, acceptance must mirror the offer; so acceptance must be identical to the offer in all respects. If the offeree does not absolutely accept each and every term of the offer, the offeree’s response is treated as a rejection and counteroffer.
b.- UCC Battle of the forms: acceptance under the UCC is premised on a definite and seasonable expression of acceptance. Under the UCC, acceptance does not have to mirror the offer as long as the acceptance expressly indicates intent to enter into a contract. The specific UCC rules that apply depend on whether the parties are merchants.
- If at least one party is not a merchant: Under the UCC, a definite and seasonable expression of acceptance in a record operates as acceptance, even if the acceptance contains new or different terms. If at least one party to a contract is not a merchant, additional or different terms are viewed as proposals to modify the contract; those terms do not become part of the contract unless the offeror agrees.
- If both parties are merchants: Under the UCC, a definite and seasonable expression of acceptance in a record operates as acceptance, even if the acceptance contains new or different terms. If both parties to a contract are merchants, additional terms will be incorporated into the contract unless: the other party objects to the new terms within a reasonable time, the terms materially alter the contract, or the offer expressly limits acceptance to the exact terms of the offer.
Some courts apply the “knockout rule” that says: any terms that that conflict between the offer and acceptance are eliminated from the contract.
c.- Nonconforming Goods: Nonconforming goods are goods that are not the same as those called for under a contract or that are in some way defective.
Under common law, a shipment of nonconforming goods does not constitute acceptance.
Under the UCC, a shipment of nonconforming goods results in both an acceptance of the offer and a breach of contract. Under this rule, the shipment of nonconforming goods is the acceptance of the offer. A breach occurs because the shipment is nonconforming, unless the shipper gives notice before shipment or with shipment that the nonconforming goods are offered only as accommodation. The buyer is not required to accept these goods and has the right to reject nonconforming goods. However, if the buyer accepts the goods, the shipper is not in breach of contract.
d.- Communication of Acceptance: in general, the offeree’s acceptance of the offer must be communicated to the offeror. The following rules help to identify when acceptance is effective.
- General rule: the general common law rule is that acceptance is effective when received. The general rule applies when acceptance or notice is communicated directly to the offeror. Under the UCC, an offer can be accepted by any medium reasonable in the circumstances.
- The Mailbox rule: applies if the offeree does not explicitly tell or notify the offeror of her acceptance; rather, this rule applies if the offeree send her acceptance of the offer. If the offeree sends her acceptance by mail, acceptance is effective the moment the communication is sent, unless: an option contract is involved, or the offer clearly states that acceptance is only effective when received.
- Exceptions to the mailbox rule: 1.- Option contract: exercise of the option in an option contract is effective when received; 2.- Acceptance and Rejection of the offer by the offeree: i.- rejection before acceptance (mailbox rule does not apply): if the offeree sends rejection of the offer before sending acceptance of the same offer, the timing of receipt controls. Receipt is satisfied when the letter arrives, not when the letter is sent or read. If the rejection is received first, the offer is effectively rejected. If the acceptance is received first, the offer is deemed to have been accepted; and, ii.-Acceptance before rejection (mailbox rule applies): if the offeree sends acceptance of the offer before sending rejection of the same offer, the normal mailbox rules apply. The offer is deemed to have been accepted. In some exception, if the offeror receives the rejection first and detrimentally relies on the rejection of the offer, the offeree is estopped from enforcing the contract even if the acceptance was sent first.
e. - Notificatoin of Acceptance:
- Unilateral contract: when a unilateral contract exists, no notification of acceptance is necessary unless the offer specifically requests notification. However, if an offeree knows or has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless: the offeree exercises reasonable diligence to notify the offeror of the acceptance; the offeror learns of the performance within a reasonable amount of time; or, the offer indicates that notification of acceptance is not required.
- Bilateral contract: When there is a bilateral contract, the offeree accepts the offer by communication acceptance to the offeror. No additional notification is required.
Contract Formation
ii.- Consideration
Under common law, consideration is a bargained-for legal detriment.
a.- Defining Consideration:
Legal Detriment:
- Legal detriment to the Promisee
- Legal detriment to the Promisor
- Past consideration
b.- Adequacy of consideration
c.- Substitutions for Consideration
- Detrimental Reliance (promissory estoppel)
- Contracts Under Seal
- Certaing UCC Contracts.
+ Merchant Firm offers
+ Contract Modifications
d.- Illusory Promise
- Reserving the right to not perform (not enforceable)
- Preexisting Obligation (not enforceable)
- Output Contracts (enforceable)
- Requirements Contracts (enforceable)
Contract Formation
ii. - Consideration
a. - Defining Consideration
Legal Detriment:
- Legal detriment to the Promisee: is found if the promisee does something that he is not legally required to do; also is found if the promisee does not do something that he has a legal right to do.
- Legal detriment to the Promisor: is found if the promisor does something or gives up something that the promisee was not legally entitled to expect or demand.
Bargained-For: as a general rule, there must be a bargained-for change in the legal position between the parties for a fully enforceable contract. Under this requirement, a gift does not qualify as valid consideration. Similarly, past consideration is typically not valid consideration.
- Past consideration: under common law, consideration given prior to the contract is not valid consideration. Past or moral consideration, by definition, does not change the legal position between the parties.
NY Distinction: Under NYGOL, past consideration is valid if: the promise is in writing, the past consideration is expressly stated in the writing, the past consideration can be proven, and the writing is signed by the offeror.
Contract Formation
ii. - Consideration
b. - Adequacy of consideration
Courts will not scrutinize whether the parties are receiving equal or fair value in an exchange. Courts will simply look to whether the parties are exchanging something of some value. The dispositive issue is the presence of consideration, not the adequacy of the consideration. This is sometimes called the “Peppercorn Theory”, under this theory, if parties agree to trade a valuable painting for a peppercorn, a court will not undo the bargain.
While a court must generally find valid consideration to enforce a contract, there is no requirement that all consideration for an agreement is valid. If part of the consideration is valid, the contract is enforceable.
Contract Formation
ii. - Consideration
c. - Substitutions for Consideration
- Detrimental Reliance (promissory estoppel): While not considered a traditional “valuable consideration”, detrimental reliance is one substitute for consideration. Promissory estoppel allows for agreements without consideration to be at least partially enforceable if the facts indicate the promisor should be estopped from not performing. In general, consideration may not be required to the extent necessary to prevent injustice if: the promisor should reasonably expect to induce action or forbearance; and the action or forbearance is actually induced.
- Contracts Under Seal: Under old common law, contracts under seal did not require consideration; the seal itself was a substitute for consideration. Most jurisdictions, including NY, have abolished the significance of a seal. Accordingly, a seal is significant only if an MBE question specifies that a jurisdiction applies the minority rule, or old or traditional rule. The following requirements are necessary for a contract under seal under the old rule: the contract is in writing, the parties intended to create a contract under seal, the contract is sealed-in-fact, and the contract is delivered.
- Certaing UCC Contracts.
+ Merchant Firm offers: an irrevocable offer made by a merchant for the sale of goods requires: an assurance that the offer will be held open, in writing that is signed by the merchant. Here there is no requirement of consideration.
+ Contract Modifications: Contracts for the sale of goods do not require consideration for modifications made in good faith. Under the UCC, modifications can be written or oral, except if the contract is within the Statute of Frauds. If the contract, as modified, is for at least $500, the contract is within the Statute of Frauds and any modifications to the contract must be in writing. In the UCC rule the new consideration is required to make a contract modification binding.
NY Distinction: in NY, contract modifications are valid without consideration, provided that the modification is in writing and signed by the party against whom that modification will be enforced.
Contract Formation
ii. - Consideration
- Illusory Promise
Under common law, an illusory promise is a promise that does not absolutely require a party to perform under the contract.
Consideration must exist on both sides of the contract to be valid. An illusory promise results in a eval detriment to only one party. If consideration is merely an illusory promise, the contract will not be enforced.
- Reserving the right to not perform (not enforceable): A signs a contract with B to wash B’s car in exchange for $500. In contract, A reserves the right not to perform if he does not want to. A has not given real consideration because he is not required to perform. The contract is unenforceable for lack of consideration. However, if a right to nonperformance is restricted in any way, the contract may be enforceable.
- Preexisting Obligation (not enforceable): B is already contractually required to walk A’s dog on Tuesday. A and B then sign a contract under which A will give B his television if B walks A’s dog on Tuesday. Because B can perform under the contract by walking the dog and B is already obligated to walk the dog, B’s promise is illusory. In effect, B is not promising anything in order to acquire the television.
- Output Contracts (enforceable): B promises to sell to A “all the footballs that B can produce” during a certain time period, even though the exact quantity is unknown. A is required to purchase B’s footballs and B is bound to produce them. This is known as an output contract and it is enforceable, unless the quantity produced subject to an output contract is unreasonably disproportionate to a stated estimate or any normal or comparable prior output. The seller’s consideration in an output contract is parting with the legal right to sell the goods to another source.
- Requirements Contracts (enforceable): a promises to buy from B “all the footballs that A will require” during a certain time period, even though the exact quantity is unknown. If A requires any footballs, then A is required to purchase those footballs from B, and B is bound to produce them. This is known as a requirements contract and it is enforceable, unless the quantity required subject to a requirements contract is unreasonably disproportionate to a stated estimate or any normal comparable prior requirements. The buyer’s consideration in a requirements contract is parting with the legal right to buy the goods from another source.
Contract Formation
iii.- Summary of contracts formation
Unless a fact pattern explicitly provides that a valid contract was formed, a contract analysis should always begin with a determination of whether there is a valid contract. This is accomplished by an analysis of the aforementioned elements: offer, acceptance, consideration. If there is a valid offer, acceptance, and consideration, all of the elements of a valid contract are present. The next usual step in a contract analysis is to determine whether any relevant defenses preclude enforcement of the entire contract or specific terms of the contract.
under common law, a contract is a legally enforceable agreement. In most instances, contract formation requires a bargain in which there is a manifestation of mutual assent to the exchange and also consideration. A valid contract is formed when there is an offer, and acceptance, and consideration.
