Contract Law Learning Questions - Set 3 Flashcards
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:
A
An option contract
B
A merchant’s firm offer
C
A unilateral contract
D
A confirmatory memo contract
B
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 three months).
An option contract is a distinct contract in which the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer for a period of time.
An offer for a unilateral contract is one that can be accepted only by full performance. Note that the beginning of performance may create an option so that the offer is irrevocable. However, the offeree is not obligated to complete performance merely because he has begun performance, as only complete performance constitutes an acceptance of the offer.
A confirmatory memo is not an offer. It is a method of satisfying the Statue of Frauds in contracts between merchants. The confirmatory memo rule states that if one party, within a reasonable time after an oral agreement has been made, sends to the other party a written confirmation of the understanding that is sufficient under the Statute of Frauds to bind the sender, it will also bind the recipient if: (i) he has reason to know of the confirmation’s contents; and (ii) he does not object to it in writing within 10 days of receipt.
Which of the following is required for a merchant’s firm offer under Article 2?
A
Consideration paid by the offeree to keep the offer open
B
A written assurance signed by the offeror
C
Both the offeree and offeror are merchants
D
A specific time frame that the offer will remain open
B
Under Article 2, a merchant’s firm offer arises when a merchant offers to buy or sell goods in a signed writing and the writing 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 three months). For a merchant’s firm offer, it is not necessary that both parties be merchants; only the offeror must be a merchant. A merchant’s firm offer is enforceable even if no consideration has been paid by the offeree to keep the offer open.
An option contract is a distinct contract in which __________ a promise not to revoke an outstanding offer.
A
An offeror gives written assurances regarding
B
An offeree gives consideration for
C
A merchant makes
D
A nonmerchant makes
B
An offer normally can be revoked at will by the offeror. 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.
Even if an offeror gives written assurances regarding a promise not to revoke for a certain period, the revocation-at-will rule applies unless the offeror’s power to terminate the offer has been limited in some way, such as by the creation of an option contract. Note that if the offeror could reasonably expect that the offeree would rely to her detriment on the written assurances and the offeree does so rely, the offer could be held irrevocable as an option contract, but the assurances alone are generally not enough to make an offer irrevocable.
Under the Merchant’s Firm Offer rule in Article 2, a promise to keep an offer open will be enforceable without the payment of consideration when a merchant offers to buy or sell goods in a signed writing that gives assurances that the contract will be held open for a specified period of time. This is not the same as an option contract, which is a distinct contract and generally requires that the offeree give some consideration for the promise not to revoke.
Which of the following statements is correct?
A
Both an ordinary option contract and a merchant’s firm offer require that the offeree give consideration
B
An ordinary option contract requires that the offeree give consideration, whereas a merchant’s firm offer does not
C
Neither an ordinary option contract nor a merchant’s firm offer requires that the offeree give consideration
D
A merchant’s firm offer requires that the offeree give consideration, whereas an ordinary option contract does not
B
An ordinary option contract is a distinct contract in which the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer.
In contrast, under Article 2’s merchant’s firm offer provision, there are circumstances in which a promise to keep an offer open is enforceable even if no consideration has been paid to keep the offer open: A merchant’s firm offer arises when a merchant offers to buy or sell goods in a signed writing and the writing gives assurances that the offer will be held open.
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?
A Yes, because it was an offer that could be revoked at will.
B No, because the owner created an option contract by promising to keep the offer open for 90 days.
C No, because the employee detrimentally relied on the offer.
D No, because the offer constitutes a merchant’s firm offer.
A
Yes because it was an offer that could be revoked at will.
Detrimental reliance can limit an offeror’s power to revoke where the offeror could reasonably expect that the offeree would rely to his detriment on the offer, and the offeree does so rely. However, this usually is limited to those situations in which the offeror would reasoanbly contemplate reliance by the offeree in using the offer before it is accepted, e.g. when a general contractor uses a subcontractor’s bid in making its own offer. Here, the offer itself included a promise by the owner to give the employee time to secure financing after the offer was accepted. Therefore, the owner had no reason to anticipate that the employee would take immediate steps to raise the purchase money before he even accepted the offer.
A hotelier opening a new inn in the Pacific Northwest sent letters to all known hotel and motel suppliers on June 1, alerting them to his need for such items as ice buckets, televisions, linen, and mattresses. The hotelier received a 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, which had recently opened a hotel on the East Coast. 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?
A No, because the hotelier is not a hotel supply merchant.
B No, because the company’s offer was to remain open for more than three months.
C Yes, because the company promised in a signed writing to hold the offer open.
D Yes, because the hotelier never read the company’s July 2 fax.
C
The hotelier will prevail. Ice buckets are movable goods; therefore, Article 2 of the UCC applies. The June 8 letter from the supply company is a firm offer under UCC section 2-205. No consideration is required, because the company is a “merchant” (i.e., one who ordinarily deals in goods of the kind sold) of ice buckets. Where a time period for the offer is stated, the period of irrevocability is that period, except that the period cannot exceed three months. Here, the three-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. (A) is incorrect because section 2-205 does not require that the offeree of a firm offer be a merchant; it requires that the offeror be a merchant, and the company is (see above). (B) is incorrect because a firm offer that states a period longer than three months is still firm for the first three months. (D) is incorrect because the hotelier’s knowledge, or lack thereof, of the “revocation” of the company’s offer is irrelevant because it was invalid; the fact that the company made a firm offer prevents it from revoking the offer within the stated time, not to exceed three months.
An art collector was interested in buying a painting from his neighbor. The neighbor told the collector that he could have the painting for $30,000. The collector wanted to think the purchase over. Therefore, 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. On September 20, the collector telephoned his neighbor and told him, “The more I think about it, the less I think that I want your painting.” The neighbor responded, “That’s your decision to make.” On September 26, one of the neighbor’s friends was visiting him, saw the painting, and offered his friend (the neighbor) $35,000 for it.
On September 27, the neighbor mailed a $50 check to the collector with a letter stating that he was terminating his offer to the collector regarding the painting and refunding 10% of the money that the collector paid him to keep the offer open. He mailed the letter at 11:59 p.m. on September 27. The collector received the letter at 11:30 a.m. on September 29. On September 28, at 9:30 a.m., the collector mailed a letter to his neighbor stating that he had decided to purchase the painting and a certified check in the amount of $30,000 was enclosed. Two hours later, the neighbor sold the painting to his friend for $35,000. The neighbor received the collector’s letter on October 1 and immediately mailed the check back to the collector.
Can the collector maintain a successful legal action against his neighbor?
A Yes, because the neighbor sold the painting after the collector’s effective acceptance, and before the neighbor’s revocation became effective.
B Yes, because in his revocation the neighbor did not refund the full $500 to the collector.
C No, because the neighbor effectively revoked his offer before the collector accepted.
D No, because the collector’s power to accept lapsed before he effectively accepted.
D
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. Thus, (D) is correct. (A) is wrong because, for the reasons discussed above, the collector did not effectively accept before his option expired. (C) is wrong for two reasons: (i) a revocation is not effective until received; and (ii) because the contract is an option, the offeror’s power to terminate the offer through revocation is limited. Even if the revocation had arrived earlier, the neighbor lacked the power to revoke. (B) is irrelevant. Returning the consideration, in and of itself, would not give the offeror the power to revoke in an option situation.
A farmer who supplies several local bakeries with grains wanted to sell his rye before the growing season was over. The farmer sent the following e-mail to a local baker: “Will sell my unprocessed 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 chief competitor by e-mail later that same day. The baker was delighted to receive the offer, but needed a day or so to figure out how much rye she needed. When she 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?
A The farmer has a contract with the baker and her competitor for 15 bushels each.
B The farmer has a contract with the baker’s competitor for 20 bushels and a contract with the baker for the remaining 10 bushels.
C The farmer has a contract with the baker for 20 bushels and a contract with her competitor for 20 bushels.
D The farmer has a contract with neither the baker nor her competitor.
C
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. (A) and (B) are incorrect because they do not reflect the terms of the contracts agreed to by the parties. If a seller is unable to fully perform because of an unforeseen circumstance (i.e., impracticability), he must allocate deliveries between customers. First, this is not an unforeseen circumstance. Second, allocating between customers does not change those contracts. It is still a breach, and the customers may cancel the contract. (D) is incorrect because, as explained above, the farmer has a contract with both the baker and her competitor.
