Contracts and Advanced Sales Flashcards
What are the three questions to ask when you get a contracts question?
1) Has an enforceable contract been made?
2) Has the contract been performed (or has performance been excused in any way)?
3) What are the remedies for breach?
The law of contracts spans two parallel universes. What are they? What falls under each?
Common Law and the UCC. Common law governs real estate transactions and services. The UCC governs when dealing with goods.
Always figure out FIRST THING when reading a Bar Exam question which “universe” are you in. The laws differ in both.
What are mixed contracts? How do they affect whether you are under Common Law rules or the UCC? What are Divisible Contracts?
These are contracts dealing with elements of both goods and services.
All or Nothing Rule - You cannot be in common law and UCC at the same time. You must fall under one or the other.
Predominant Purpose Rule - Look to see which plays a bigger role (the good or the service). If the good makes up more of the contract, then you are under the UCC. If the service makes up the majority of the contract, then you are under Common Law.
Divisible Contracts are the exception to the All or Nothing Rule. This is where an agreement is divided into multiple mini contracts. If properly divided, part of the contract is under the UCC, and the other is under Common Law (ex: $950 for a hot-water heater (UCC) and $50 to install (CL)).
What are the four elements to whether a contract has been formed?
1) Agreement (offer and acceptance);
2) Consideration (and related theories for when you have to keep your promises);
3) Defenses to formation (incapacity, duress, etc); AND
4) Statute of Frauds compliance
“All Contracts Don’t Stink”
What are the two parts of the “agreement” in a contract. Explain both.
THE OFFER - The manifestation of a willingness to enter into an agreement (by the offeror) that creates a power of acceptance (in the offeree). Governed by an OBJECTIVE STANDARD (secret intent does not matter). Ask whether the outward appearance of words and actions manifests an offer. Does the offeror display an OBJECTIVELY SERIOUS INTENT TO BE BOUND (look at for situations involving anger or humor).
THE ACCEPTANCE - The offeree must accept the offer according to the rules of the offer (the offeror is master of the acceptance). An acceptance is a manifestation of a willingness to enter into the agreement. Acceptance is governed by the OBJECTIVE TEST (has there been an outward appearance of words or actions that manifests an acceptance?).
T/F - An offer must usually be specifically directed at someone in order for that person to accept.
True
The Exception - Contest Offers or Reward Offers that promise something to anyone who accomplishes a certain task.
Are expressions of opinion considered offers?
No.
Ex: Saying how much you think something is worth is NOT an offer.
With regard to the actual contract itself, how specific must the language be to be binding?
It depends:
1) Common Law - ALL ESSENTIAL TERMS must be covered in the agreement. This includes: (a) parties; (b) subject; (c) price; and (d) quantity.
2) UCC - Fills in the gaps. You still must have: (a) parties; (b) subject; and (c) quantity. UCC DOES NOT REQUIRE THE PRICE TO BE IN THE CONTRACT. The law will fill it in with a reasonable price if necessary.
It is true that contracts for goods under the UCC must generally always list the quantity to be provided. Are there any valid exceptions?
Yes:
1) Requirements Contracts - “I promise to buy all the materials I will need over the next year from you.”
2) Output Contracts - “I promise to sell you all the materials I make over the next year.”
Both are valid even without a quantity term because they provide a formula for how to calculate the missing quantity term.
How are advertisements viewed with regard to offers?
Advertisements are generally INVITATIONS TO DEAL which are NOT OFFERS.
Two Exceptions:
1) Reward Advertisements; and
2) Advertisements that are VERY SPECIFIC and LEAVE NOTHING OPEN TO NEGOTIATION, including how acceptance can occur.
What are the six ways that an offer can be terminated? Can the offer ever be revived?
1) Express Revocation by Offeror - The offeror revokes the offer;
2) Constructive Revocation - The offeree learns that the offeror has take an action that is ABSOLUTELY INCONSISTENT with a continuing ability to contract (ex: offeree of a house contract learns the offeror sold the house);
3) Express Rejection by Offeree - The offeree rejects the offer effectively terminating it (“NO . . . I mean YES!” is a termination of the offer);
4) Counter Offer - The offeree makes a counter offer that effectively rejects and terminates the original offer (be careful to distinguish between counter offers and mere counter-inquiry or indecision);
5) Death - The offeror dies effectively revoking the offer (if after the agreement has been reached, then death does not cancel the contract unless special circumstances are present); and
6) A REASONABLE AMOUNT OF TIME PASSES
The offeror can ALWAYS throw out a new offer with the exact same terms as the offer before. This is called REVIVAL.
Are offers always revocable by the offeror? Explain in detail.
Generally, the offeror is normally free to revoke an offer at any time prior to acceptance. However, an irrevocable offer can arise in four situations:
1) Option - Offeree pays CONSIDERATION to keep the offer open for the stated amount of time. The offer cannot be revoked during the option period. MERE PROMISE TO KEEP THE OFFER OPEN IS NOT ENOUGH.
2) Merchant’s Firm Offer - Seller HAS TO BE A MERCHANT (basically a business person who REGULARLY DEALS in the type of goods at issue). Must be WRITTEN, with an EXPLICIT promise not to revoke, and must be SIGNED BY THE MERCHANT. The offer must be kept open for a stated period or a reasonable period NOT TO EXCEED 90 DAYS.
3) Part Performance - In a unilateral contract offer (promise for an act), the offer cannot be revoked by the offeror if the offeree has started performance. The law gifts the offeree the right to finish acceptance.
4) Detrimental Reliance - An offer cannot be revoked if the offeree REASONABLE AND DETRIMENTALLY RELIES on the offer in a FORESEEABLE MANNER (this is common in contractor/subcontractor agreements).
What is the difference between a unilateral offer and a bilateral offer?
A unilateral offer is a promise for an act.
A bilateral offer is a promise for a promise.
What happens when a seller tries to accept an offer by shipping the wrong goods? What about accommodations?
The UCC treats this as ACCEPTANCE of the offer PLUS BREACH of the contract.
HOWEVER, be aware of situations on the bar exam where the offeree sends goods as an “accommodation.” These are mere counter offers and will not be held as an acceptance plus breach.
T/F - You can accept an offer directed at someone else.
False, the offer must be directed at you in order to accept it.
T/F - With regard to award offers, you must KNOW about the offer in order to accept it.
True.
You can’t return a cat, later find out there was a reward for it, and go back and try to accept.
What is the Mailbox Rule, and what does it apply to?
This rule states that ACCEPTANCE sent by mail is VALID WHEN SENT.
Does not apply:
1) If the offeree sends something else first (rejection, counteroffer);
2) To other types of communication (revocations, rejections); or
3) To Option Contracts (those acceptions are valid when received).
It is UNCLEAR whether it applies to other media (fax, e-mail, etc.) I did get a bar exam practice question on this (rejection sent first, acceptance sent second), and the answer was valid acceptance because the acceptance was opened first.
If you send a rejection of an offer by mail, and immediately change your mind and send an acceptance by mail (both letters arrive at the same time), what is the result? How does the mailbox rule apply?
It depends on what the offeror opens first. The mailbox rule is lost because the rejection sent destroyed the ability to accept through the mailbox rule.
T/F - Unlike an Offer, Acceptance does not generally have to be communicated to the offeror.
False.
You generally must communicate your acceptance (just like an offer) to the other party in order for it to become effective.
Is acceptance by silence ever allowed? If so, when?
This shows up when you have a reward offer or some other unilateral offer. Can also show up when there is a PAST HISTORY of silence as acceptance. Can also show up when the offeror says acceptance must come via silence; if this is the case, the offeree must intend to accept the offer by silence.
What are implied-in-fact contracts? Are they enforceable?
This is where communication of acceptance occurs without writing or speaking but rather with gestures or actions. These are enforceable.
Example - Walk into a hair salon, get a hair cut without saying a word. You have an implied-in-fact contract). You must pay for the haircut.
What happens if the offeree accepts but includes new or different terms in their acceptance than those in the original offer? Explain in detail.
COMMON LAW (services and real estate) - we follow the Mirror Image Rule meaning that the terms in the Acceptance MUST MATCH EXACTLY the term sin the Offer. If it doesn’t match, then we have a rejection and a counter offer instead of an acceptance.
UCC (2-207(1)) - Still have acceptance as long as the acceptance is not made conditional on express assent to the additional or different terms. The additional terms will simply be stricken provided 2-207(2) doesn’t apply.
UCC (2-207(2)) - The new terms will control if ALL of the following are true: (1) both parties are merchants; (2) the new terms don’t materially alter the deal; (3) the offer is not expressly limited to its original terms; AND (4) the offeror does not object within a REASONABLE TIME to the new terms.
What classifies as adequate consideration to form a contract?
First ask who is the one making a promise that needs to be supported by law (that person is the promisor / the other person is the promisee).
Second, is there a benefit to the promisor OR a detriment to the promisee? YOU ONLY NEED ONE / NOT BOTH.
Third, was this bargained for? (Did the parties think they were making a deal when they exchanged promises?)
If yes to both questions, you have adequate consideration.
T/F - Not doing something you are legally entitled to do is a legal detriment that will be adequate consideration to form a contract.
True
Even if it is “not watching TV for a whole week.”
T/F - Gift promises and conditional gifts count as bargained for consideration.
False. They are not bargained for consideration.
You want to ask if there is some way to sue for breach.
Example - “I promise to give you my Jeep if you come to my house to pick it up.” I’m not bargaining for you to come pick up by jeep. There is no consideration here. I can’t sue you if you don’t come pick up the jeep.
T/F - Nominal consideration is generally not going to be adequate consideration.
True.
However, as long as the exchanged item has subjective value to the person receiving it, consideration will be adequate.
What are illusory promises? Are they enforceable?
A promisor who fails to clearly commit to the deal has made an illusory promise and has offered no consideration. These are unenforceable.
Example: “I promise to buy your Jeep for $5,000 on December 1, if I feel like it.”
Is past consideration considered adequate consideration?
No
Is the promise not to sue considered adequate consideration?
Yes AS LONG AS there is an HONEST BELIEF in the validity of the claim and a REASONABLE BASIS for that belief. You are giving up a legal right to your detriment (that is consideration).
What is the Preexisting Duty Rule? How is it relevant in contract law?
This is a COMMON LAW rule which means that a promise to do something that you are already legally obligated to do (by prior contract or otherwise) is NOT consideration. This comes up in contract issues involving MODIFICATION.
NOTE: This rule can be passed (and the modification will be valid) if there is a change in performance (new consideration), a third party comes in and promises to pay, OR unforeseen difficulties arise that would normally excuse the performance.
UNDER THE UCC - the Preexisting Duty Rule is NOT FOLLOWED. Instead, modifications to a contract will be valid so long as there is GOOD FAITH. Such modifications will be binding even without new consideration.
Is promising partial payment for release from a debt obligation binding? Explain.
It depends:
1) If the debt is CURRENTLY DUE AND UNDISPUTED, then the modification to the debt repayment terms are NOT BINDING.
2) If there is NOT CURRENTLY DUE OR there is some DISPUTE as to what is currently owed, then the modification to the repayment terms will be BINDING, and the release from debt is final.
What is Promissory Estoppel?
If the following occur, then the promisee will prevail in a claim to enforce a contract:
1) A promise is made that would be REASONABLY EXPECTED to induce reliance;
2) The promisee does indeed take detrimental action in reliance on the promise; AND
3) Injustice can only be avoided by enforcement of the promise.
What is a Quasi-Contract? What are the elements? What damages are recoverable for breach?
Also called a contract “implied-in-law.” This is where one party conferred a benefit to another party, and it would be unfair if the party receiving the benefit did not have to pay.
The elements are:
1) The plaintiff confers a MEASURABLE BENEFIT on the defendant;
2) The plaintiff REASONABLY EXPECTED to get paid; AND
3) It would be unfair to let the defendant keep the benefit without paying.
Damages - Limited to the fair value of the benefit conferred (RESTITUTION).
Look for this in situations where the defendant had a good opportunity to decline OR had no opportunity to decline.
Ex - D has a heart attack and P calls and hires a Doctor (paying the doctor). D will have to pay P back.
What is known as the “Half-Theory?” Does anyone use it? Can you give an example of how it works?
Few jurisdictions use this because, normally, past consideration is NOT consideration.
However, it may be argued in some jurisdictions that a MORAL OBLIGATION PLUS SUBSEQUENT PROMISE TO PAY creates a binding contract.
Example: I swing by and pick you up in my boat to save you from sharks. Thankful, you promise to pay me $500. Is there bargained for consideration? NO. Can you at least argue the Half Theory? Sure (but you probably won’t win).
Does a seal on a document act as consideration substitution in most jurisdictions?
No.
What are the seven defenses to contract formation? Explain what is required for each.
1) Misunderstanding - There is a MATERIAL TERM that is open to two or more reasonable interpretations (subjective test applies here). Each side attaches a different meaning to the term, AND NEITHER side KNOWS OR SHOULD KNOW of the confusion.
2) Incapacity - Minors (under 18) cannot contract. Mental illness is a defense if the person cannot understand the nature and consequences of his actions; OR cannot act in a reasonable manner and the other side KNOWS this. Intoxication means incapacity ONLY IF the other side KNOWS.
3) Mistake - A belief that is not in accord with a PRESENT fact.
MUTUAL MISTAKE - The ADVERSELY AFFECTED PARTY may rescind the contract if there was: (a) a mistake of fact existing at the time the deal was made; (b) the mistake relates to a basic assumption of the contract and has a MATERIAL impact on the deal; and (c) the impacted party DID NOT ASSUME THE RISK of mistake.
UNILATERAL MISTAKE - can let the adversely affected party rescind if all of the elements of mutual mistake are met plus: (a) the mistake would make the contract UNCONSCIONABLE; or (b) the other side KNEW of, had reason to know of, or caused the mistake.
4) Fraud/Misrepresentation/Nondisclosure - must show: (a) a misrepresentation of a present fact (not opinion); (b) that is material or fraudulent (intentional); and (c) that is made under circumstances in which it is justifiable to rely on the misrepresentation.
FRAUD IN THE EXECUTION is when you trick someone into signing something that they don’t even know is a contract.
A misrepresentation can arise out of NONDISCLOSURE of KNOWN DEFECTS if there is ACTIVE CONCEALMENT or a FIDUCIARY RELATIONSHIP exists.
5) Duress - Can be physical or economical threats of force that improperly deprives a party from making a meaningful choice to enter into a contract.
Distinguish this from UNDUE INFLUENCE where a party puts very intense sales pressure on another party who is weak minded or susceptible to high-pressure sales tactics.
6) Illegality - Illegal contracts are unenforceable. However, a contract entered into legally in furtherance of an illegal act is not illegal and will still be enforced. Contracts against public policy are illegal.
As far as damages, the law generally leaves the parties where they are, but the MODERN TREND is to provide restitution damages to the less guilty party.
7) Unconscionability - Court determines that a contract is unconscionable if it SHOCKS THE CONSCIENCE. Some courts require both Procedural Unconscionability (hidden term) and Substantive Unconscionability (a rip off).
What happens if you make a contract with a person who lacks capacity?
The contract is VOIDABLE meaning that the incapacitated party can disaffirm. HOWEVER, you are always LIABLE TO PAY FOR NECESSITIES (food, clothing, shelter, etc.)
The incapacitated party can ratify the deal by keeping the benefits of the contract after the capacity is obtained.
What are the various situations in which the Statute of Frauds applies and must be complied with?
1) Marriage Contracts (prenups)
2) Suretyships (guaranteeing the debt of another) - SoF doesn’t apply here if the main purpose of agreeing to pay the debt of another is for the surety’s own economic advantage (“The Main Purpose Exception”)
3) A contract that by its terms cannot (in any possible way) be performed within ONE YEAR from its making. Look out for situations where a guy contracts for life (he could die within a year, thus you don’t need SoF compliance). NOTE: leases of one year or less are not in SoF world.
4) UCC: SoF applies to all goods contracts for a price of $500 OR MORE (if for $500, need SoF compliance).
5) ALL contracts for the sale of an INTEREST in real property.
How can the Statute of Frauds be satisfied? Explain
1) Writing, OR
2) Performance
If by writing, it must be signed by the party whom the contract is asserted against. The writing must cover the following facts: (a) that a contract has been made; (b) the identification of the parties; and (c) contain the essential terms of the deal. If for goods, you don’t need the price term.
Services Contracts - Need FULL PERFORMANCE to satisfy the Statute of Frauds here. Part performance is NOT enough.
Real Estate Contracts - Part performance can satisfy by obtaining two of the following: (1) Possession; (2) Payment; and (3) Improvements to the land.
Goods - Part Performance will satisfy the Statute of Frauds BUT ONLY for the quantity DELIVERED AND ACCEPTED.
Custom-made or Specially Manufactured Goods - ARE EXEMPTED FROM THE STATUTE OF FRAUDS AS SOON AS THE MAKER MAKES A SUBSTANTIAL BEGINNING TOWARD PRODUCTION.
A judicial admission about the existence of a contract satisfies the SoF under the UCC.
IF BOTH PARTIES ARE MERCHANTS - Failure to object to a CONFIRMING MEMO within 10 DAYS will satisfy the SoF.
Do you need a signed writing to authorize an agent to form a contract that is in Statute of Frauds world?
Yes
This is known as the “Equal Dignity Rule.”
