Contracts Flashcards
When does common law apply to contracts
The common law governs if a contract deals with services or real estate (e.g., hiring someone to mow your lawn).
When does the UCC apply to contracts
The UCC governs if a contract deals with goods (e.g., agreement to buy 100 reams of paper from a paper supply company).
what is the rule for mixed contracts classification
mixed contracts must fall into one class or the other but there is a limited exception for divisible contracts (contracts that can divide the goods and services portions into separate mini-contracts)
generally, predominant purpose of the contract determines whether the common law or UCC governs
If the predominant purpose of the contract involves the purchase or sale of goods, the UCC applies. If the predominant purpose of the contract involves services or real estate, the common law applies.
3 requirements to form a valid contract
A traditional, enforceable contract is formed when there is:
(1) Mutual assent (a valid offer + valid acceptance of that offer);
(2) Consideration; AND
(3) No defenses to formation that would invalidate the otherwise valid contract.
what are two parts of the mutual assent
offer and acceptance
what is a valid offer
the offeror must: manifest an OBJECTIVE willingness to enter into an agreement; AND Create a power of acceptance in the offeree (i.e., the offeree can simply say, “I accept” and know that he has concluded the deal)
the offer is governed by an __________ test
The offer is governed by an objective test, which means that outward appearances of words and actions are determinative – not subjective hidden intentions (e.g., If a person makes an offer as a practical joke with his fingers crossed behind his back but his outward words and actions demonstrate willingness to enter the agreement, it is a valid offer. The offeror’s subjective intent is irrelevant).
Advertisements are considered ________ rather than offers
invitation to deal
However, advertisements that are very specific and leave nothing open to negotiation may constitute offers.
an offer must be directed at a _______ offeree
specific
Generally, an offer must be directed to a specific offeree. However, there is a limited exception for contest offers and reward offers that promise something to anyone who accomplishes a certain task (e.g., a posted sign that offers a cash reward for finding lost puppy is a valid offer).
what are the terms required in an offer (compare common law and UCC)
Certain terms MUST be specified in the offer in order for the offer to be valid.
Under the common law, all essential terms must be specified in the offer. Generally, this includes the following four terms: parties, subject, quantity, and price
Under the UCC, the law is more willing to plug the gaps. Unlike the common law, PRICE IS NOT REQUIRED in the offer. Generally, only three terms are required under the UCC: parties, subject quantity)
UCC requirements and output contracts rule
Requirements and output contracts are valid under the UCC even though they do not specify an exact quantity.
In a requirement contract, the seller agrees to sell as much as the buyer would require.
In an output contract, the seller agrees to sell his entire production to the buyer.
how can an offer be terminated
If a valid offer is terminated at any time before acceptance, the offer is invalidated.
An offer is terminated if any of the following occur at any time BEFORE acceptance: revocation, constructive revocation, offeree rejects offer, counteroffer, offeror dies, reasonable amount of time passes, OR subject matter of the offer becomes illegal or is destroyed.
define irrevocable offers
there are four types of offers that are irrevocable: option contracts, firm offers, unilateral contact where performance has started, and detrimental reliance
define option contracts
An agreement where consideration is given in exchange for a promise to keep an offer open (e.g., “I promise not to revoke this offer for one week if you pay me an additional $100 to keep the offer open.”).
define firm offers
UCC only
a merchant (someone who regularly deals in the type of good at issue – i.e., a businessperson) can make a firm offer to buy or sell goods. A firm offer will either last as long as stated in the offer or for a reasonable time period not to exceed 90 days.
A firm offer MUST: be in writing, contain an explicit promise not to revoke and be signed by the merchant
define acceptance
An acceptance is a manifestation of a willingness to enter into the agreement by the offeree
must be according to the rules of the offer
is silence a form of acceptance
silence generally does not manifest willingness unless there is a past history of silence serving as acceptance
acceptance for bilateral contracts
For bilateral contracts, the start of performance manifests acceptance.
acceptance for unilateral contracts
For unilateral contracts, the start of performance only makes the offer irrevocable – the offer is only accepted once performance is complete
define mailbox rule
An ACCEPTANCE that is sent by mail, email, or fax is valid at the moment of dispatch (not when the letter is received), UNLESS:
The offeree-sender uses the wrong address or has improper postage,
offeror expressly stipulates that the acceptance is valid upon receipt,
option contract is involved,
offeree-sender sends a termination letter BEFORE the acceptance letter
OR offeror detrimentally relies on a termination BEFORE he receives the acceptance letter.
define counteroffer
A counteroffer operates as both a rejection that terminates the original offer AND as a formation of a new offer.
what is the mirror image rule
Under the common law, the terms in the acceptance MUST match the terms of the offer exactly – otherwise it is not an acceptance, it is a counteroffer (i.e., the terms of the offer and acceptance must mirror each other exactly).
UCC 2-207 determines
whether there is a valid acceptance and whether the addtional terms will be part of the contract
what is the UCC 2-207 battle of the forms rule
Under the UCC, the acceptance does NOT have to mirror the offer. UCC § 2-207(1) determines whether the purported acceptance (containing new terms) will operate as an acceptance or as a counteroffer:
A definite and seasonable expression of acceptance or written confirmation;
Which is sent within a reasonable amount of time;
Operates as an ACCEPTANCE even though it states terms additional to or different from those offered or agreed upon;
UNLESS acceptance is expressly made conditional upon assent to the additional or different terms.
under the UCC, the ADDITIONAL terms will govern the contract if BOTH parties are merchants UNLESS
The initial offer expressly limited acceptance to its terms;
The additional terms materially alter the deal; OR
The offeror objects to the additional terms within a reasonable amount of time.
define the knockout rule
Most courts apply the knockout rule with UCC § 2-207(2) to determine whether the new terms control or whether UCC gap fillers must be implemented.
Under the knockout rule, a distinction is made between “different” and “additional” terms.
different vs additional terms for purposes of knockout rule
A different term is a term that was not included in the original offer that conflicts with the terms of the original offer (e.g., offeree changes the price term from $5,000 to $4,000 and sends it back to the offeror).
An additional term is a term that was not included in the original offer that does NOT conflict with the original offer (e.g., offeree adds a choice of law provision that was not included in the original offer and sends it back to the offeror).
what happens to different terms under the UCC knockout rule
different terms in the original offer and acceptance knock each other out creating a gap in the contract
UCC gap fillers are then used to plug this gap (regardless of whether the parties are merchants).
what happens to additional terms under the knock out rule of the UCC
The knockout rule does not apply to additional terms added by the offeree. UCC § 2-207(2) will determine whether the additional terms control or whether UCC gap fillers must be implemented.
define consideration
Consideration involves a transfer of legal value in a bargained-for exchange.
consideration if present if:
promisee incurs a legal detriment OR the promisor receives a legal benefit and the promise induces the detriment AND the detriment induces the promise
define legal detriment for the purposes of consideration
A legal detriment generally consists of: promising to do something the party has no prior legal duty to do,
performing an action that the party is not otherwise obligated to undertake;
OR refraining from or promising to refrain from exercising a legal right which the party is otherwise entitled to exercise.
Promising not to sue will constitute a legal detriment as long as ___________________________
the party promising not to sue has an honest and good faith belief in the validity of the claim
gift promises are _______________
NOT consideration
A promises to give B his truck for free. Here, B incurs no legal detriment and A’s promise to give B his truck is not induced by any action or forbearance from B. This is a gift promise, not bargained-for consideration.
conditional promises are __________
NOT consideration
A promises to give B his truck if B will drive 30 minutes away to pick the truck up from A’s house. Here, A’s promise to give B his truck is not induced by B coming to pick the truck up. Thus, A is not bargaining for B to come. This is a conditional gift, not bargained-for consideration.
Preexisting legal duties are _________________
NOT consideration
A promises to pay B $100 if B refrains from smoking crack-cocaine for 6 months. Here, B already has a preexisting legal duty imposed by law to refrain from smoking crack-cocaine. Thus, B incurs no legal detriment, which means consideration is not present.
Past consideration is _________________
NOT consideration
A’s truck catches fire as A is
demonstrating the truck’s safety features to B. After the fire erupts, B rushes over and saves A. A promises to pay B $100 for therescue. Here, B’s detriment (saving A’s life) was not induced by A’s promise. This is past consideration, not bargained-for consideration.
pretense of consideration is ____________
not consideration
A and B are cousins. A wishes to
give B his truck that is valued at $10,000 as a gift for B’s birthday. Attempting to form an enforceable contract, A “sells” B his truck for $1 solely to meet the consideration requirement. Here, A is not induced to give B his truck for the $1. This is merely a pretense of consideration, not bargained-for consideration
illusory promises are ____________
NOT consideration
A promises to buy B’s truck if “he feels like it.” Here, A is not committing to the deal. This is an illusory promise, not bargained-
for consideration.
contract modification under common law
Under the common law, contract modifications MUST be supported by consideration.
The common law follows the preexisting duty rule, which means that a promise to do something that a party is already legally obligated to do (by contract or otherwise) is NOT consideration.
contract modification under UCC
Under the UCC, there is no consideration requirement. A contract modification is valid if it is made in good faith (i.e., the UCC does NOT apply the preexisting duty rule).
three consideration substitutes
promissory estoppel, quasi-contract, moral obligation + subsequent promise
define promissory estoppel
promises may still be enforced without consideration if:
promisor should reasonably expect the promise to induce action or forbearance from the promisee
The promise does induce such action or forbearance to the promisee’s detriment; AND
Injustice can be avoided only by enforcement of the promise.
recovery usually limited to reliance damages
define quasi contracts
may be enforced to avoid unfair results if: The plaintiff confers a measurable benefit on the defendant; The plaintiff reasonably expected to get paid; AND It would be unfair to let the defendant keep the benefit without paying.
recovery is limited to restitution
define Moral Obligation + Subsequent Promise
moral obligation plus a subsequent promise can be binding
Tom’s truck catches fire. Brady rushes over and extinguishes the flames saving Tom’s life. Grateful, Tom promises to pay Brady $100 for the rescue. Here, this is NOT bargained-for-consideration. However, Brady could argue that the promise should be enforced due to the strong moral obligation involved.
list the six defenses to contract formation
incapacity, mistake, misrepresentation, duress and undue influence, illegality, and unconscionability
list the three types of incapacity
infancy, mental illness, and intoxication
infancy
Unless a statute provides otherwise, a person has the capacity to incur only voidable contractual duties until the beginning of the day before the person turns 18.
can a minor rescind a contract
yes, a minor may disaffirm (rescind) the contract and avoid liability under it
If the minor chooses to disaffirm the contract, the minor must return anything that he received under the contract that still remains in his possession at the time of disaffirmance
no obligation to return anything that has been negligently squandered or destroyed
can a minor affirm a contract?
yes a minor can affirm (enforce) the contract and hold the adult party liable under it
A minor may affirm the contract expressly or implicitly by failing to disaffirm the contract within a reasonable amount of time after turning 18 thereby ratifying the contract.
mental illness
A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect, the individual is unable to:
Understand in a reasonable manner the nature and consequences of the transaction, OR
Act in a reasonable manner in relation to the transaction AND the other party has reason to know of his condition.
a party to a contract who is mentally ill CANNOT disaffirm the contract if:
The contract was made on fair terms; AND
The other party is without knowledge of the mental illness or defect (e.g., the
the mentally ill party is in a lucid state at the time of contracting).
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that due to intoxication, the individual is unable to:
Understand in a reasonable manner the nature and consequences of the transaction, OR
Act in a reasonable manner in relation to the transaction.
If the intoxicated party wishes to avoid liability under the contract, he must…
he must act promptly upon recovery to disaffirm the contract and is required to return any value received, if possible
Necessaries Doctrine
When necessaries (e.g., food, shelter, clothing, healthcare, etc.) are furnished to a party who lack capacity (minors, mentally ill, and intoxicated parties), the party who lacks capacity is liable for the reasonable value of the services or goods (not the agreed-upon price) under a quasi-contract theory of restitutionary recovery.
two types of mistake
mutual and unilateral
define mutual mistake
occurs when both parties are mistaken as to a basic assumption on which the agreement is made
who many rescind due to mutual mistake and for what reason
The adversely affected party may rescind the deal if: mistake of fact that existed at the time the deal was made, mistake relates to a basic assumption of the contract, mistake has a material impact on the deal, AND impacted party did not assume the risk of mistake
impacted party assumes the risk of mistake when
He is aware, at the time the contract is made, that he has only limited knowledge regarding the facts to which the mistake relates but treats his limited knowledge as sufficient; OR
The risk is allocated to him by agreement of the parties (e.g., “as is” contracts).
define unilateral mistake
A unilateral mistake is a mistake made by one party that is unknown to the other party.
how may a contract be rescinded if there is a unilateral mistake
The adversely affected party may rescind the deal if:
(1) There is a mistake of fact, existing at the time that the deal is made;
(2) The mistake relates to a basic assumption of the contract;
(3) The mistake has a material impact on the deal;
(4) The impacted party did NOT assume the risk of mistake; AND
(5) The mistake would make the contract unconscionable OR the other side knew of, had reason to know of, or caused the mistake.
define misrepresentation
A misrepresentation is a statement at the time of contracting that is NOT TRUE. It can be intentional (fraudulent) or accidental.
what must a party to show to assert the defense of misrepresentation
To assert this defense, the party must show:
(1) A misrepresentation of a present fact (not opinion);
(2) That is material OR fraudulent (knowingly or reckless); AND
(3) That is made under circumstances in which it is justifiable to rely on the representation.
define duresst
A contract is VOID if a party to the contract is compelled by physical duress, such as the threat to inflict physical harm
a contract is viodable if ____________
A contract is VOIDABLE by the adversely affected party if the
adversely affected party’s assent is induced by an improper threat that leaves the
adversely affected party no reasonable alternative.
define threat for the purposes of duress as a contract defense
a threat is improper if:
(1) What is threatened is a crime or tort,
(2) What is threatened is a criminal prosecution;
(3) What is threatened the use of civil process AND the threat is made in bad faith;
(4) The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient; OR
(5) The resulting exchange is NOT on fair terms; AND: threatened act would harm the recipient and would not significantly benefit the party making the threat; effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat; OR What is threatened is otherwise a use of power for illegitimate ends.
define undue influence as a contract formation defense
A contract is VOIDABLE by the adversely affected party if the adversely affected party’s assent is induced:
Due to the adversely affected party’s susceptibility to pressure; AND
The other side’s application of excessive pressure.
define illegality as a defense to contract formation
If the consideration or performance under a contract is illegal or contrary to public policy, the contract is VOID and will not be enforced (e.g., a contract to commit murder). However, a contract entered into in furtherance of an illegal purpose will generally be enforced (e.g., hiring an unsuspecting taxi driver to get somewhere in order to commit a murder).
Performance will be __________ if a contract that was legal when formed subsequently becomes illegal.
discharged
define unconscionability as a contract formation defense
If a contract is so unfair or oppressive to one party such that it shocks the conscience of the court, a court may find it unconscionable and refuse to enforce it.
2 types of unconscionability
procedural - occurs when there is a defect in the bargaining process
substantive - terms of the deal are grossly unfair and one-sided in one party’s favor.
Some courts will only refuse to enforce a contract if both types of unconscionability are present. Other courts may refuse to enforce a contract if only one type is present.
2 types of unconscionability
procedural - occurs when there is a defect in the bargaining process
substantive - terms of the deal are grossly unfair and one-sided in one party’s favor.
Some courts will only refuse to enforce a contract if both types of unconscionability are present. Other courts may refuse to enforce a contract if only one type is present.
Statute of Frauds definition
The following contracts are NOT valid unless they satisfy the statute of frauds (usually requires that the contract be a signed writing):
marriage
suretyship
contracts that cannot be performed within one year
UCC - a contract for the purchase/sale of goods for more than $500
Real estate
modifications and statute of frauds rule
The statute of frauds applies to a modification ONLY IF the contract as modified (not the original contract) falls within the statute of frauds.
how is the statute of frauds satisfied?
by writing and by performance
Once it is determined that the statute of frauds is triggered the next issue is whether the statute of frauds has been satisfied. There are two main ways to satisfy the statute of frauds – by writing and by performance.
statute of frauds satisfaction by writing
A writing will satisfy the statute of frauds if the writing:
(1) Is signed by the party against whom enforcement is sought;
(2) Shows that a contract was formed; AND
(3) Includes the requisite terms. (The requisite terms under the common law are parties, subject, quantity, and price. The requisite terms under the UCC are parties, subject, and quantity.)
statute of frauds satisfaction by performance for service contracts under one year provision rule
Under the common law, FULL performance of a services contract by either side satisfies the statute of frauds. Part performance does NOT satisfy the statute of frauds.
statute of frauds for real estate contracts
In most jurisdictions, real estate contracts can satisfy the statute if:
(a) The seller FULLY performs (i.e., conveys the land to the buyer); OR
(b) The buyer performs two of the following three actions:
(i) The buyer takes possession of the property;
(ii) The buyer makes payment in full or part; AND/OR
(iii) The buyer makes substantial improvements to the land.
statute of frauds satisfaction for UCC goods contracts for $500 or more
satisfied by PAWS:
performance, admission in court, written confirmation between merchants, or specially manufactured goods
PAWS
define performance
Under UCC § 2-201(3)(c), the statute of frauds is satisfied for the quantity of goods for which payment has been made and accepted or which have been received and accepted
(the contract is not enforceable under this provision beyond the quantity of goods for which payment has been made and accepted or which have been received and accepted).
PAWS define admission in court
Under UCC § 2-201(3)(b), the statute of frauds is satisfied if the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract for sale was made
(the contract is not enforceable under this provision beyond the quantity of goods admitted).
PAWS
define written confirmation between merchants
Under UCC § 2-201(2), the statute of frauds is satisfied if:
After an oral agreement between merchants;
Either party sends a signed, written confirmation of the oral
contract (must be signed by the sender); AND
The written confirmation is received by the other merchant to the oral agreement; UNLESS
The party receiving the written confirmation gives a written notice of objection within 10 days after receipt of the written confirmation.
PAWS
define specially manufactured goods
Under UCC § 2-201(3)(a), the statute of frauds is satisfied when a seller makes a “substantial beginning” toward manufacture of custom goods that are to be specially made for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business under circumstances that reasonably indicate that the goods are for the buyer.
complete integration (parol evidence rule)
If the writing completely expresses all of the terms of the parties’ agreement, then it is a complete integration.
ALL other expressions or statements, written or oral, made prior to the writing, as well as any oral expressions made contemporaneously with the writing, are inadmissible.
_____________ is usually strong evidence that the writing is a complete integration.
Merger Clause
partial integration (parol evidence rule)
f the writing sets forth the parties’ agreement about some terms, but not all the terms, then it is a partial integration.
Other expressions or statements, written or oral, made prior to the writing, as well as any oral expressions made contemporaneously with the writing, are admissible to supplement the writing so long as the evidence does NOT contradict the terms of the writing.
Parol evidence rule does not apply if any of the follow exceptions exist
Defenses. Extrinsic evidence may be offered to establish a defense to the formation or enforcement of a contract (e.g., incapacity, mistake, duress, lack of consideration, etc.).
Separate Deals. Extrinsic evidence may be offered if it represents a distinct and separate contract.
Condition Precedents. Extrinsic evidence may be offered if a party asserts that there was an oral agreement that the written contract would not become effective until a condition occurred.
Ambiguity and Interpretation. Extrinsic evidence may be offered for the purpose of interpreting or clarifying an ambiguity in the agreement.
how are express warranties created under the UCC
Any affirmation of fact or promise, any description of the goods, or any sample or model which is made part of the basis of the bargain
Disclaimers that grossly conflict with express warranties are _____________
unenforceable
e.g., broad disclaimers such as, “all warranties, express or implied, are disclaimed” are not enforceable
A seller is liable for breach of contract if she violates an express warranty.
Implied Warranty of Merchantability
Under the UCC, all merchants make an implied warranty (unless disclaimed) that the goods being sold are fit for their ordinary commercial purposes.
disclaimers for implied warranties of merchantability
A merchant can disclaim the implied warranty of merchantability if the language used to disclaim is conspicuous.
Language of “as is” or “with all faults” or language that puts the buyer on notice will be sufficient for disclaiming the implied warranty of merchantability.
The disclaimer may be made orally so long as the term _________________ is used.
“merchantability”
inspection for implied warranty of merchantability
If the buyer, before entering into the contract, has examined the goods or a sample as fully as the buyer desires, or has refused to examine the goods, then there is NO implied warranty of merchantability with respect to defects that an examination ought to have revealed to the buyer.
Implied Warranty of Fitness for a Particular Purpose definition
A warranty that the goods are fit for a particular purpose is implied whenever the seller has reason to know that the buyer has a particular use for the goods, and the buyer is relying upon the seller’s skill to select the goods.
seller need NOT be a merchant for this warranty to apply
Disclaimers for an implied warranty of fitness for a particular purpose
can be disclaimed by general language (e.g., “as is”), but the disclaimer MUST be in writing and conspicuous
define conditions
A condition is another way to shift risk by stating that one party’s contractual obligations will kick in only if some future event takes place.
what is an express condition
An express condition in a contract makes performance conditional upon the completion of the condition (look for language like: “only if,” “provided that,” “on the condition that,” or “only in the event that,” etc.).
Express conditions must be __________, unless the condition is ___________
satisfied strictly
excused by waiver (party receiving protection waives with words or conduct OR party receiving the protection of the condition wrongfully interferes or hinders the occurrence of the condition when judged by a good faith standard)
good faith and faith dealing
All contracts contain an implied obligation which requires the parties to a contract to act in good faith and deal fairly with one another without:
(1) Breaking their word;
(2) Using deceptive means to avoid obligations; OR
(3) Denying what the other party obviously understood.
substantial perforamance
Under the common law, substantial performance is required, which means that performance will be satisfied so long as there is NOT a material breach of the contract.
If there is a material breach, the non-breaching party’s performance is excused. If the breach is not material, the non-breaching party’s performance is not excused.
perfect tender rule
Under the UCC, perfect tender is required, which means that a seller must deliver conforming goods in accordance with the terms of the contract
smallest nonconformity is a breach that allows the buyer to reject all or a portion of the goods.
exceptions to the perfect tender rule
The parties can contractually change the default rules to include discussion of substantial performance instead of perfect tender
installment contracts
If the seller fails to tender perfect goods, the buyer MUST give the seller a chance to cure the nonconformity if: time for performance under the contract has NOT yet expired OR seller has reasonable grounds to believe that the buyer would accept a replacement for the nonconformity.
If a buyer fails to reject nonconforming goods after having had a reasonable opportunity to inspect the goods, the buyer is deemed to have ______________.
accepted the goods
revocation of acceptance under perfect tender rule
buyer may revoke his acceptance if:
the nonconformity substantially impairs the value of the goods;
revocation occurs within a reasonable time after buyer discovers defect;
AND either buyer accepted the goods:
1) on the reasonable assumption that the nonconformity would be cured and it has not been seasonably cured;
2) OR without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.
list all excuses
Impossibility and Impracticability
Frustration of Purpose
Accord and Satisfaction
Novation
define anticipatory repudiation
Under the common law, anticipatory repudiation occurs when a promisor clearly and unequivocally repudiates a promise before the time for performance is due (by words or conduct).
