Contracts and Sales Flashcards
What is a contract? General definition:
A contract is a promise or set of promises, for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.
Common Law vs. Article 2 Sale of Goods: defined
Generally, the common law governs contracts. However, special rules have been developed for contracts involving the sale of GOODS, and those rules are contained in Article 2 of the UCC. Article 2 has adopted much of the common law of contracts, but where the common law and Article 2 differ, Article 2 prevails in a contract for the sale of goods.
“Sale” defined
A sale is a contract in which title to GOODS passes from the seller to the buyer for a price.
“Goods” defined
Article 2 defines “goods” as all THINGS MOVABLE at the time they are identified as the goods to be sold under the contract. Thus, Article 2 applies to sales of most tangible things, but does not apply to the sale of real estate, services, or intangibles, or to construction contracts. Goods associated with real estate (e.g., growing crops and uncut timber, and fixture removed from the land) MAY fall under Article 2 under certain circumstances.
Contracts involving Goods and Nongoods
If a sale involves both goods and services (e.g., contract to paint a portrait), a court will determine which aspect is dominant and apply the law governing that aspect to the whole contract. However, if the contract divides payment between goods and services, then Article 2 will apply to the sale portion and the common law will apply to the services portion.
Merchants v. Nonmerchants
A number of the rules of Article 2 depend on whether the seller and/or buyer are merchants. Article 2 generally defines “merchant” as one who regularly deals in goods of the kind sold or who otherwise by his profession holds himself out as having special knowledge or skills as to the practices or goods involved. For many of the ARticle 2 provisions dealing with general business practices (e.g., Statute of Frauds, confirmatory memos, firm offers, modification), almost anyone in business can be deemed a merchant. However, a few Article 2 provisions (e.g., the implied warranty of merchantability) are narrower and require a person to be a merchant with respect to goods of the kind being sold.
Types of Contracts: As to Formation
Contracts are frequently described as express, implied, or quasi. Only the first two are actually contracts, and they differ only in the manner in which they are formed.
Express contract:
formed by LANGUAGE, oral or written.
Implied in Fact Contract:
formed by manifestation of assent other than oral or written language, i.e., BY CONDUCT (e.g., if a person sits in a barber’s chair and the barber cuts his hair, a contract has been formed by the parties’ conduct).
Quasi-Contract or Implied in Law Contract:
NOT CONTRACTS AT ALL. They are constructed by courts to AVOID UNJUST ENRICHMENT by permitting the plaintiff to bring an action in restitution to recover the amount of the benefit conferred on the defendant. Their only relationship to genuine contracts is historical.
Types of Contracts: As to Acceptance (list)
bilateral or unilateral
Bilateral Contracts:
EXCHANGE OF MUTUAL PROMISES
The traditional bilateral contract is one consisting of the exchange of mutual promises, i.e., a promise for a promise, in which each party is both a promisor and promisee.
Unilateral Contracts:
ACCEPTANCE BY PERFORMANCE
The traditional unilateral contract is one in which the offeror request performance rather than a promise. Here, the offeror-promisor promises to pay upon the COMPLETION OF THE REQUESTED ACT by the promisee. Once the act is completed, a contract is formed. In such contracts, there is one promisor and one promisee.
Modern View: Most contracts are ____.
Bilateral.
Under A2 and R2, unless clearly indicated otherwise by the language or circumstances, ALL offers are “doubtful” or “indifferent” offers, which means they may be accepted by promising or beginning performance.
Modern View: Unilateral Contracts Limited to Two Circumstances
Under A2 and R2, a traditional unilateral contract (i.e., a contract that can only be formed by full performance) occurs in only two situations:
- where the offeror clearly (unambiguously) indicates that COMPLETION OF PERFORMANCE IS THE ONLY MANNER OF ACCEPTANCE–the offeror is the master of the offer and may create the offer in this fashion; and
- where there is an OFFER TO THE PUBLIC, such as a reward offer, which so clearly contemplates acceptance by performance rather than a promise that only the performance requested in the offer will manifest acceptance.
Types of Contracts: As to Validity
- Void contract
- Voidable contract
- Unenforceable contract
Void contract:
A void contract is one that is totally WITHOUT ANY LEGAL EFFECT from the beginning (e.g., an agreement to commit a crime). It CANNOT BE ENFORCED BY EITHER PARTY.
Voidable contract:
A voidable contract is one that one or both parties may ELECT TO AVOID (e.g., by raising a defense that makes it voidable, such as infancy or mental illness.)
Unenforceable Contract:
An unenforceable contract is an agreement that is otherwise valid but which may not be enforceable due to VARIOUS DEFENSES extraneous to contract formation, such as the statute of limitations or Statute of Frauds.
Creation of a Contract: what three questions will a court ask to determine whether there was in fact a contract?
- Was there mutual assent?
- Was there consideration or some substitute for consideration?
- Are there any defenses to creation of the contract?
Mutual Assent–Offer and Acceptance: in general
Mutual assent is often said to be an agreement on the “same bargain at the same time”–“a meeting of the minds.” The process by which parties reach this meeting of the minds generally is some form of negotiation, during which, at some point, one party makes a proposal (an offer) and the other agrees to it (an acceptance). An actual subjective meeting of the minds is not necessary. Rather, courts use an OBJECTIVE MEASURE, by which each party is bound to the APPARENT INTENTION that he manifested to the other(s).
The Offer:
An offer creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror. For a communication to be an offer, it must create a REASONABLE EXPECTATION in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. In deciding whether a communication creates this reasonable expectation, you should ask the following 3 questions:
- Was there an expression of a PROMISE, UNDERTAKING, OR COMMITMENT to enter into a contract?
- Were there CERTAINTY AND DEFINITENESS in the essential terms?
- Was there COMMUNICATION of the above to the offeree.
The Offer: Promise, Undertaking, or Commitment
For a communication to be an offer, it must contain a promise, undertaking, or commitment to enter into a contract, rather than a mere invitation to begin preliminary negotiations; i.e., there must be an INTENT to enter into a contract. The criteria used to determine whether communication is an offer include the following:
- language
- surrounding circumstances
- prior practice and relationship of the parties
- method of communication
- industry custom
The Offer: Promise, Undertaking, or Commitment–LANGUAGE
The language used may show an offer was or was not intended. Technical language such as “I offer” or “I promise” is useful to show that an offer was made, but it is not necessary. Also, certain language is generally construed as merely contemplating an invitation to deal, preliminary negotiations, or “feelers,” rather than being an offer. This includes phrases such as “I quote,” “I am asking $30 for,” and “I would consider selling for.” No mechanical formula is available.
The Offer: Promise, Undertaking, or Commitment–SURROUNDING CIRCUMSTANCES
The circumstances surrounding the language will be considered by courts in determining whether an officer exists. For example, where the statement is made in jest, anger, or by way of bragging, and the statement is reasonably understood in this context, it will have no legal effect. However, where the statement is subjectively intended to be in jest but reasonably understood by the hearer to have been made seriously, the statement is an offer because it is interpreted objectively (i.e., according to a reasonable person’s expectations).
The Offer: Promise, Undertaking, or Commitment–PRIOR PRACTICE AND RELATIONSHIP OF THE PARTIES
In determining whether certain remarks constitute an offer rather than preliminary negotiations, a court will look to the prior relationship and practice of the parties involved.
The Offer: Promise, Undertaking, or Commitment–METHOD OF COMMUNICATION
- Use of Broad Communications Media: the broader the communications media, the more likely it is that the courts will view the communication as merely a SOLICITATION OF AN OFFER. (except reward offers)
- Advertisements, Etc: Advertisements, catalogs, circular letters, and the like containing price quotations are USUALLY construed as mere INVITATIONS FOR OFFERS. They are announcements of prices at which the seller is willing to receive offers. However, in certain situations, courts have treated advertisements as OFFERS where the language of the advertisement can be constructed as containing a promise, the terms are certain and definite, and the offeree(s) is clearly identified. (defendant store advertised a particular coat worth $140 for $1 on a “first come, first served” basis)
The Offer: Promise, Undertaking, or Commitment–INDUSTRY CUSTOM
The courts will also look to generally accepted custom in the industry in determining whether the proposal qualifies as an offer.
The Offer: Definite and Certain Terms: defined
An offer must be definite and certain in terms. The basic inquiry is whether enough of the essential terms have been provided so that a contract including them would be CAPABLE OF BEING ENFORCED. The principle is that the parties make their own contract; the courts do not make it for them. What is essential for the requisite certainty in an offer depends on the kind of contract contemplated. Typically, the following are important:
- the IDENTITY OF THE OFFEREE;
- the SUBJECT MATTER; and
- the PRICE to be paid.
However, a promise generally will be enforceable even if it does not spell out every material term, as long as it contains some OBJECTIVE STANDARD for the court to use to supply the missing terms.
The Offer: Definite and Certain Terms: IDENTIFICATION OF THE OFFEREE
To be considered an offer, a statement must sufficiently identify the offeree or a class to which she belongs to justify the inference that the offeror intended to create a power of acceptance.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER
The subject matter of the deal must be certain, because a court can enforce a promise only if it can tell with reasonable accuracy what the promise is.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: real estate transactions
LAND AND PRICE TERMS REQUIRED
An offer involving realty must identify the LAND and the PRICE terms. The land must be identified with some particularity but a deed description is not required. Most courts will NOT supply a missing price term.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods
QUANTITY TERM REQUIRED
In a contract for sale of goods, the QUANTITY being offered must be certain or capable of being made certain.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods–“Requirements” and “Output” Contracts
In a requirements contract, a buyer promises to buy from a certain seller all of the goods the buyer requires, and the seller agrees to sell that amount to the buyer. In an output contract, a seller promises to sell to a certain buyer all of the goods the seller produces, and the buyer agrees to buy that amount from the seller. Although no specific quantity is mentioned in offers to make these contracts, the offers are sufficiently definite because the quantity is CAPABLE of being made certain by reference to objective, extrinsic facts (i.e., the buyer’s actual requirements or the seller’s actual output).
- Quantity Cannot be Unreasonable Disproportionate: It is assumed that the parties will act in good faith; hence, there may not be a tender of or a demand for a quantity UNREASONABLY DISPROPORTIONATE to 1. any stated estimate, or in the absence of a stated estimate 2. any normal or otherwise comparable prior output or requirements.
Established Business v. New Business: A number of courts have sometime refused to enforce such agreements if the promisor did not have an established business. The courts in these cases reason that,due to lack of any basis for estimating quantity, the agreement is illusory or the damages too speculative. A2 avoids this problem by reading a “good faith” agreement into the contract; i.e., the promisor must operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods–Reasonable Range of Choices
An offer allowing a person to specify an item within a reasonable range of choices may be sufficiently definite to result in a contract if accepted.
The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: Services
NATURE OF WORK REQUIRED
The nature of the work to be performed is required in an offer for services.
The Offer: Definite and Certain Terms: MISSING TERMS:
The fact that one or more terms are left open DOES NOT PREVENT THE FORMATION of a contract if it appears the parties INTENDED TO MAKE A CONTRACT and there is a REASONABLY CERTAIN BASIS for giving a remedy. In such a case, the majority of jurisdictions and A2 hold that the COURT CAN SUPPLY REASONABLE TERMS for those that are missing. These terms will be supplied, however, only where they are consistent with the parties’ intent as otherwise expressed. Note that the more terms the parties leave open, the less likely it is that they intended to enter into a binding agreement.
The Offer: Definite and Certain Terms: MISSING TERMS: price
Except in contracts for real property, the failure to state the price does not prevent the formation of a contract if the parties intended to form a contract without the price being settled. For example, if parties enter into a contract for services and the price is not included in the offer, a court might imply the service provider’s usual price for the services, the normal price for such services in the area, etc.
- A2 Gap Filler
A2 includes some very specific “gap fillers” for situation where certain terms are not included in a contract for the sale of goods. Under A2, the price will be a REASONABLE PRICE AT THE TIME OF DELIVERY if: - Nothing is said as to price;
- The price is left to be agreed to by the parties and they fail to agree; or
- The price is to be fixed by some external factor or third party and it is not so set.
- Price Fixed by Party Under Article 2
Under Article 2, a contract will be formed even if the parties agree that one of the parties will fix the price in the future (e.g., price to be set by seller at the time of delivery). However, the party to whom the contract gives the right to fix the price must act in GOOD FAITH. If that party does not fix the price in good faith, the other party may either cancel the contract or fix a reasonable price herself.
The Offer: Definite and Certain Terms: DISTINGUISH–VAGUE TERMS:
The presumption that the parties’ intent was to include a reasonable term goes to supplying MISSING terms. However, the presumption CANNOT be made if the parties have INCLUDED a term that makes the contract too vague to be enforced. The problem then is that the parties have manifested an intent that cannot be determined.
Examples:
- An agreement to divide profits “on a liberal basis” is too vague to be enforced.
- An agreement to purchase a parcel of land for $8,000 or less is also too vague.
The Offer: Definite and Certain Terms: DISTINGUISH–VAGUE TERMS: vagueness can be cured by
PART PERFORMANCE
Where part performance supplies the needed clarification of the terms, it can be used to cure vagueness.
The Offer: Definite and Certain Terms: DISTINGUISH–VAGUE TERMS: uncertainty can be cured by
If uncertainty results because of the offeree is given a choice of alternative performances, the offer becomes definite when the offeree communicates her choice.
The Offer: Definite and Certain Terms: DISTINGUISH–VAGUE TERMS: focus on the contract
The CONTRACT, as distinguished from the offer) must be definite and certain in its terms–hence, even if the offer lacks certainty, the problem can be cured if there is some way the offer is capable of being made certain, e.g., by part performance of acceptance.
The Offer: Definite and Certain Terms: TERMS TO BE AGREED ON LATER
Often, an offer will state that some term is to be agreed on at a future date. If the term is a MATERIAL term, the offer is TOO UNCERTAIN. The courts will not supply a reasonable term, as the parties have provided otherwise. However, A2 permits a reasonable PRICE term to be supplied by the court under these circumstances if the other evidence indicates that the parties intended to form a contract.
The Offer: Communication to the Offeree
To have the power to accept, the offeree must have knowledge of the offer. Therefore, the proposal must be communicated to her.
Termination of the Offer:
The power of acceptance created by an offer ends when the offer is terminated. The mutual assent requirement obviously cannot be met where the termination occurs before acceptance is effective. Thus you must establish whether the offer has been terminated, and if so, in what fashion.
Termination of the Offer: Termination by Offeror–Revocation
A revocation is the retraction of an offer by the offeror. A revocation terminates the offeree’s power of acceptance if it is communicated to her BEFORE SHE ACCEPTS.
Revocation by Direct Communication
Revocation directly communicated to the offeree by the offeror terminates the offer.
Revocation by publication: offers made by publication can be terminated by publication of revocation THROUGH COMPARABLE MEANS.
Revocation by Indirect Communication
The offer may be effectively terminated if the offeree INDIRECTLY receives:
- correct information
- from a reliable source
- of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.
Revocation effective when ____.
RECEIVED
A revocation is generally effective when RECEIVED by the offeree. Where revocation if by publication, it is effective when PUBLISHED.
When a communication is received:
At common law, a written communication is considered to have been “received” when it comes into the possession of the person addressed (or of someone authorized by him to receive it) or when it is deposited in some place authorized as the place for this or similar communication to be deposited. The communication NEED NOT BE READ by the recipient to be effective. Similarly, under the UCC, a person receives notice when 1. it comes to his attention, or 2. it is delivered at a place of business through which the contract was made or another location held out by that person as the place for receipt of such communications. An organization receives a communication at the time it is brought (or should have been brought) to the attention of the individual conducting the transaction.
Limitations on Offeror’s Power to Revoke
Offers can be revoked at will by the offeror, even if he has promised not to revoke for a certain period, except under certain situations where the offeror’s power to terminate the offer is limited:
- options
- merchant’s firm offer under a2
- detrimental reliance
- part performance–true unilateral contract offers
- part performance–offer indifferent as to manner of acceptance
Limitations on Offeror’s Power to Revoke: Options
An option is a distinct contract in which the OFFEREE GIVES CONSIDERATION for a promise by the offeror not to revoke an outstanding offer.
Limitations on Offeror’s Power to Revoke: Merchant’s Firm Offer Under Article 2
Under Article 2, 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. Under A2:
- If a MERCHANT
- Offers to sell goods in a SIGNED WRITING; and
- The writing GIVES ASSURANCES THAT IT WILL BE HELD OPEN (e.g., “this offer will be held open for 10 days,” “this offer is firm for 10 days”)
- The offer IS NOT REVOCABLE for lack of consideration during the time stated, or if no time is stated, for a reasonable time (but in even may such period exceed THREE MONTHS).
NOTE: As with the Statute of Frauds requirements, the signed writing requirement for a merchant’s firm offer may be satisfied by an electronic record and an electronic signature.
Limitations on Offeror’s Power to Revoke: Detrimental Reliance
Where the offeror could reasonably expect that the offeree would rely to her detriment on the offer, and the offeree does so rely, the offer will be held IRREVOCABLE AS AN OPTION CONTRACT FOR A REASONABLE LENGTH OF TIME. At the very least, the offeree would be entitled to relief measured by the extent of any detrimental reliance. The case law indicates that this may be limited to those situations in which the offeror would REASONABLY CONTEMPLATE RELIANCE by the offeree in USING THE OFFER BEFORE IT IS ACCEPTED.
Limitations on Offeror’s Power to Revoke: Part Performance–True Unilateral Contract Offers–IMPLIED CONTRACT FOR A REASONABLE TIME
Under R1 and R2, as well as A2, an offer for a true unilateral contract becomes IRREVOCABLE ONCE PERFORMANCE HAS BEGUN. Note that the unilateral contract will not be formed until the total act is complete. However, once the offeree begins to perform, she is given a REASONABLE TIME TO COMPLETE PERFORMANCE, during which time the offer is irrevocable. Note also that the offeree is NOT BOUND to complete performance–she may withdraw at any time prior to completion.
R2 says an option contract is formed upon the start of the performance by the offeree, making the offer irrevocable for a reasonable period. It is as if the offeree had paid consideration to keep it open.
Part Performance: preparation to perform
The rules limiting the offeror’s power to revoke an offer for a unilateral contract apply only if the offeree has EMBARKED on performance. They do not apply when the offeree is only preparing to perform. Note, however, that substantial preparations to perform MAY CONSTITUTE DETRIMENTAL RELIANCE sufficient to make the offeror’s promise binding to the extent of the detrimental reliance.
Part Performance: Offeror Refuses to Accept Performance
What happens if performance is tendered by the offeree but refused by the offeror? If the offeror’s cooperation is necessary for performance, his withholding of it upon the tender of part performance is the equivalent of part performance.
Part Performance–Offer Indifferent as to Manner of Acceptance
As noted above, most offers are indifferent as to the manner of acceptance, and, thus, a bilateral contract may be formed UPON THE START OF PERFORMANCE by the offeree. Therefore, once the offeree BEGINS PERFORMANCE, the contract is complete an REVOCATION becomes IMPOSSIBLE. Notification of the start of performance may be necessary.
Termination by Offeree: Express rejection
An express rejection is a statement by the offeree that she does not intend to accept the offer. Such a rejection will terminate the offer.
Termination by Offeree: Counteroffer as rejection
A counteroffer is an offer made by the OFFEREE to the offeror that contains the same subject matter as the original offer, but differs in its terms. A counteroffer serves as a rejection of the original offer AS WELL AS A NEW OFFER. This usually happens in two situatuions:
- Counteroffer combined with an express rejection.
- Acceptance conditional upon additional terms, e.g., I’ll take it at that price, but only if it is also equipped with air conditioning.
Note: A2 provides for exceptions to the above general treatment in the “battle of the forms” provision.
Distinguish Counteroffer from Mere Inquiry
An inquiry will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration. The test is whether a REASONABLE PERSON would believe that the original offer had been rejected.
Examples:
1. The offeree says to the offeror, “Would you consider lowering your price by $5,000?” This, without more, is merely an inquiry, not a rejection.
- The offeree says to the offeror, “I couldn’t possibly pay your asking price but could pay $5000 less.” This is more than a mere inquiry because of the certitude involved and will be treated as a counteroffer.
A rejection is effective ___.
When received by the offeror.
Revival of offer:
If an offer is rejected, the offeror may restate the same offer and create a new power of acceptance. Some courts refer to this as the revival of the offer. It is more precise to suggest that a new offer, although the same as the original offer, has been made.
Rejection of option:
Because an option is a contract to keep an offer open, a rejection of or a counteroffer to an option does NOT constitute a termination of the offer. The offeree is still free to accept the original offer within the option period unless this offeror has DETRIMENTALLY RELIED on the offeree’s rejection.
Offer: Lapse of Time
MUST ACCEPT WITHIN SPECIFIED OR REASONABLE TIME: The offeree must accept the offer within the time period specified or, if no time period is specified, within a reasonable time. If she does not do so, then she will have allowed the offer to terminate.
LOOK TO WHEN OFFER IS RECEIVED BY OFFEREE: If the offer provides that it will expire within a particular period of time, that period commences when the offer is received by the offeree. If the offer is delayed in transmission and this fact IS OR SHOULD HAVE BEEN APPARENT TO THE OFFEREE, the offer terminates at the time it would have expired had there been no delay. All relevant facts must be considered in determining whether this knowledge is present. These include, e.g., date of letter, postmark, and any subsequent statements made by the offeror.
Termination of Offer by Operation of Law: list
- Termination by Death or Insanity of Parties
- Termination by Destruction of Subject Matter
- Termination by Supervening Legal Prohibition of Proposed Contract
Termination by Death or Insanity of Parties
If either of the parties dies or is adjudicated insane prior to acceptance, the offer is terminated. It is NOT necessary that the death or insanity be COMMUNICATED to the other party. Note, however, that the offer will NOT terminate in this fashion if the rules limiting an offeror’s power to terminate are applicable (such as an option).
Acceptance: defined
An acceptance is a manifestation of assent to the terms of an offer. Through this manifestation of assent, the offeree exercises the power given her by the offeror to create a contract.
Who may accept offer:
- Party to Whom Offer is Addressed or Directed
2. Offeree’s Power of Acceptance Cannot be Assigned (Exception: Option contracts)
Acceptance of Offer for Unilateral Contract: rules
- Most courts hold that an offer to form a unilateral contract is not accepted until performance is completed. 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.
- Notice: required to notify the offeror within a reasonable time after performance has been completed. If a required notice is not given, a contract is formed, but the offeror’s duties are discharged for failure of an implied condition subsequent. However, no notice is required if:
- The offeror waived notice; or
- The offeree’s PERFORMANCE WOULD NORMALLY COME TO THE OFFEROR’S ATTENTION within a reasonable time.
COMPARE ARTICLE 2
Provides that when a contract is accepted by the beginning of performance, if the offeree fails to notify the offeror of the acceptance within a reasonable time, the offeror may treat the offer as having LAPSED BEFORE ACCEPTANCE.
Acceptance of Offer for Bilateral Contract: Exception to general rule that acceptance must be communicated
Waiver in Offer: If an offer provides that an acceptance need not be communicated, then no communication of the acceptance is required.
Acceptance of Offer for Bilateral Contract: Silence as acceptance
Although the offeree cannot be forced to speak under penalty of having her silence treated as an acceptance, if the offeree silently takes offered benefits, the couts will often find an acceptance. This is especially true if prior dealings between the parties, or trade practices known to both, create a commercially reasonable expectation by the offeror that silence represents an acceptance. In such a case, the offeree is under a duty to notify the offeror if she does not intend to accept.
Method of acceptance
Unless otherwise provided, an offer is construed as inviting acceptance in ANY REASONABLE MANNER and by any medium reasonable under the circumstances. Any objective manifestation of the offeree’s counterpromise is usually sufficient.
- Act as Acceptance: the offeror is master of the offer and can require an act to signify acceptance.
Offers to Buy Goods for Current or Prompt Shipment–Acceptance
Under A2, an offer to buy goods for current or prompt shipment is construed as inviting acceptance either by a PROMISE TO SHIP or by CURRENT OR PROMPT SHIPMENT of conforming or nonconforming goods.
Shipment of Nonconforming Goods: acceptance
The shipment of nonconforming goods is an acceptance creating a bilateral contract as well as a BREACH of the contract unless the seller seasonably notifies the buyer that a shipment of nonconforming goods is offered only as an ACCOMMODATION. The buyer is not required to accept accommodation goods and may reject them. If he does, the shipper is not in breach and may reclaim the accommodation goods, because her tender does not constitute an acceptance of the buyer’s original offer.
Acceptance must be unequivocal: Common law rule
Traditional contract law insisted on an absolute and unequivocal acceptance of each and every term of the offer (the “mirror image rule”). At common law, any different or additional terms in the acceptance make the response a REJECTION AND COUNTEROFFER.
DISTINGUISH THIS FROM:
- Statements that Make Implicit Terms Explicit
- “Grumbling Acceptance”
- Request for Clarification
Article 2 Rule–Battle of the Forms Provision and Acceptance
A2 has abandoned the mirror image rule, providing instead that the proposal of additional or different terms by the offeree in a definite and timely acceptance does NOT constitute a rejection and counteroffer, but rather is EFFECTIVE AS AN ACCEPTANCE, unless the acceptance is EXPRESSLY made conditional on assent to the additional or different terms. Whether the additional or different terms becomes part of the contract depends on whether or not both parties are merchants.
Article 2: Conditional Acceptance
When an acceptance is made expressly conditional on the acceptance of new terms, it is a rejection of the offer. It can be considered a counteroffer only to the extent that the original offeror may EXPRESSLY ASSENT to the new terms and thus form a contract. It is not considered a counteroffer that may be accepted by performance. If the parties ship or accept goods after a conditional acceptance, a contract is formed by their conduct, and the new terms are not included. The contract consists of all terms on which their writings agree, plus supplementary terms supplied by the UCC.
Acceptance: Bilateral Contracts Formed by Performance
Sometimes in business, a contract is not formed by the parties’ communications, either because:
- the mirror image rule has not been satisfied; or
- in a contract for the sale of goods, the original offeror’s form contains a clause objecting in advance to any new or inconsistent term and the offeree sends a response with new or different terms that states it is not an acceptance unless the original offeror agrees to these terms.
Clearly, no contract is formed at this point. But, as is sometimes the case, if the parties begin to perform as if they formed a contract, a contract is formed.
COMMON LAW RATIONALE: the last communication sent to the party who performed is a counteroffer and the performance is considered acceptance of the counteroffer.
SALE OF GOODS: A2 specifically provides that conduct by both parties that recognizes the existence of a contract is sufficient to establish the contract.
Acceptance: When Effective–The Mailbox Rule
Acceptance by mail or similar means creates a contract at the MOMENT OF DISPATCH, provided that the mail is properly addressed and stamped, UNLESS:
- the OFFER STIPULATES that acceptance is not effective until received; or
- an OPTION CONTRACT is involved (an acceptance under an option contract is effective only upon RECEIPT).
NOTE: Because in most states a revocation is effective only upon receipt, under the mailbox rule if the offeree dispatches an acceptance BEFORE HE RECEIVES A REVOCATION sent by the offeror, a contract is formed. This is true even though the acceptance is dispatched after the revocation is dispatched and received after the revocation is received.
Offeree Sends Rejection, Then Acceptance–Mailbox Rule _____.
DOES NOT APPLY
If the offeree sends a rejection and then sends an acceptance, the mailbox rule does not apply. Whichever one is RECEIVED FIRST is effective.
Offeree Sends Acceptance, Then Rejection–Mailbox Rule ____.
GENERALLY APPLIES
If the offeree send the acceptance first, the mailbox rule applies; i.e., a contract is created upon dispatch of the acceptance. However, if the offeror received the rejection first and CHANGED HIS POSITION IN RELIANCE on it, the offeree will be ESTOPPED from enforcing the contract.
Acceptance by Unauthorized Means:
An acceptance transmitted by unauthorized means or improperly transmitted by authorized means may still be EFFECTIVE IF IT IS ACTUALLY RECEIVED by the offeror while the offer is still in existence.
UCC Auction Contracts Rules: Goods Auctioned in Lots
In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.
UCC Auction Contracts Rules: When Sale is Complete
A sale by auction is complete when the auctioneer so announces by the FALL OF THE HAMMER or in another customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid, the auctioneer may, in his discretion, reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
UCC Auction Contracts Rules: Auction With Reserve or Without Reserve
An auction sale is with reserve unless the goods are explicitly put up without reserve. WITH RESERVE means the AUCTIONEER MAY WITHDRAW THE GOODS at any time until he announces completion of the sale. In an auction without reserve, once the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case, a bidder may retract his bid until the auctioneer announces completion of the sale, but a bidder’s retraction does not revive any previous bid.
UCC Auction Contracts Rules: A bid on seller’s behalf
Except at a forced sale, if the auctioneer knowingly receives a bid on the seller’s behalf, or the seller makes or procures such a bid (in order to drive up the price of the goods), and notice has not been given that liberty for such bidding is reserved, the winning bidder may at his option avoid the sale or take the goods at the price of the LAST GOOD FAITH BID prior to the completion of the sale.
Consideration: elements
- BARGAINED FOR EXCHANGE between the parties;
- that which is bargained for must be considered of LEGAL VALUE or, as it is traditionally stated, it must constitute a benefit to the promisor OR a detriment to the promisee. At the present time, the DETRIMENT element is emphasized in determining whether an exchange contains legal value.
Consideration: Bargained-For Exchange
This element of consideration requires that the promise induce the detriment AND the detriment induce the promise.
Consideration: gift
If either of the parties intended to make a gift, he was not bargaining for consideration and this requirement will not be met.
Act or Forbearance by Promisee Must Be of Benefit to Promisor: It is not enough that the promisee incurs detriment; the detriment must be the PRICE of the exchange, and not merely fulfillment of certain conditions for making the gift. The test is whether the act or forbearance by the promisee would be of benefit to the promisor. In other words, if the promisor’s motive was to induce the detriment, it will be treated as consideration; if the motive was no more than to state a condition of a promise to make a gift, there is no consideration.
- Economic Benefit Not Required
The benefit to the promisor need not have economic value. Peace of mind or the gratification of influencing the mind of another may be sufficient to establish bargained-for consideration, provided that the promisee is not already legally obligated to perform the requested act.
“Past” or “Moral” Consideration: general rule
NOT SUFFICIENT CONSIDERATION
If something was already given or performed before the promise was made, it will not satisfy the “bargain” requirement. The courts reason that it was not given in exchange for the promise when made.
“Past” or “Moral” Consideration: exceptions
There is substantial disagreement with the general rule. Thus, the courts have sought to avoid it application by creating exceptions.
- Debt Barred by a Technical Defense: If a past obligation would be enforceable except for the fact that a technical defense to enforcement stands in the way (e.g., statute of limitations), the courts will enforce a new promise if it is IN WRITING or has been PARTIALLY PERFORMED. However, the court will enforce the contract only to the extent of the new promise.
- Promise to Pay Arising Out of Past Material Benefit–Material Benefit Rule
Under a modern trend, SOME courts will enforce a promise if it s based on a material benefit that was previously conferred by the promisee on the promisor and if the promissee did not intend to confer the benefit as a gift. This includes situations in which the promisee performed an act at the promisor’s request or performed an unrequested act during an emergency. R2 follows this rule, but adds that the promise if unenforceable to the extent it is disproportionate to the benefit conferred.
Consideration: Legal Value–Adequacy of Consideration
Courts of law will NOT inquire into the adequacy of consideration. If a party wishes to contract to sell an item of high market value of relatively low price, so be it. However, COURTS OF EQUITY may inquire into the relative values and deny EQUITABLE REMEDY (such as an order for specific performance) if they find a contract to be unconscionable.
Token consideration:
If the consideration is only token (i.e., something totally devoid of value), it will usually not be legally sufficient. The courts reason that this indicates a gift rather than a bargained for consideration.
Sham consideration:
Parties to a written agreement often recite that it was made in consideration of $1 or some other insignificant sum. Frequently this recited sum was not in fact paid and, indeed, it was never intended to be paid. Most court hold that evidence may be introduced to show that the consideration was not paid and no consideration was given in its stead.
Consideration: Possibility of Value:
Where there is a possibility of value in the bargained for act, adequacy of consideration will be found even though the value never comes into existence.
Legal Benefit and Legal Detriment Theories: Majority Rule
The majority of courts still adhere to the view that DETRIMENT TO THE PROMISEE in performing an act or making a promise is the exclusive test of consideration. The fact that this act or promise may confer a legal benefit on the other party, taken alone, is not sufficient consideration.
Legal Benefit and Legal Detriment Theories: Minority and First Restatement
The minority and R1 view is stated in the alternative: Either DETRIMENT OR BENEFIT to the other party will suffice.
Legal Benefit and Legal Detriment Theories: R2
Departs from the use of the benefit/detriment test. The only question it would ask about consideration is whether something was BARGAINED FOR AND GIVEN (or promised to be given) in exchange.
Detriment and Benefit Defined: legal detriment to Promisee
Legal detriment will result if the promisee does something he is under no legal obligation to do or refrains from doing something that he has a legal right to do. It is important to remember that the detriment to the promisee need not involve any actual loss to the promisee or benefit to the promisor.
Detriment and Benefit Defined: legal benefit to Promisor
A legal benefit to the promisor is simply the reverse side of legal detriment. In other words, it is a forbearance or performance of an act by the promisee which the promisor was not legally entitled to expect or demand, but which confers a benefit on the promisor.
Preexisting Legal Duty Not Consideration: Exceptions
- New or Different Consideration Promised (doesn’t matter how slight)
- Promise to perform a Voidable Obligation (ratification)
- Preexisting Duty Owed to Third Party
- Honest Dispute as to Duty (modifying agreement seen as a compromise and a detriment to each party)
- Unforeseen Circumstances if RISES TO THE LEVEL OF IMPRACTICABILITY
- Modification of Contract for the Sale of Goods sought in GOOD FAITH are binding without consideration under A2.
- Existing Debts: payment of a smaller sum not sufficient consideration for a promise by the creditor to discharge the debt unless NEW OR DIFFERENT (e.g., payment before maturity or to one other than the creditor or payment in a different medium–stock instead of cash)
Consideration: Forbearance to Sue
The promise to refrain from suing on a claim may constitute consideration. If the claim is VALID, the forbearance to sue is, of course, sufficient consideration. If the claim is INVALID and the claimant is aware of this fact, he has no such right; his suit is no more than the wrongful exercise of power. But even if the claim is invalid, in law or in fact, if the claimant reasonably and in good faith believes his claim to be valid, forbearance of the legal right to have his claim adjudicated constitutes detriment and consideration.
Illusory Promises: defined
Consideration must exist on both sides of the contract; that is, promises must be mutually obligatory. There are many agreement in which one party has become bound, but the other has not. Such agreements lack mutuality, i.e., at least one of the promises is “illusory.” If so consideration fails.
Requisite mutuality will be found to exist in certain situations even though the promisor has some choices or discretion: list
- Requirements and Output Contracts
- Conditional Promises
- Right to Cancel or Withdraw
- Exclusivity Agreements–Best Efforts Implied
- Voidable Promises
- Unilateral/Option Contracts
- Suretyship Promises
- Right to Choose Among Alternative Courses
Requirement of mutuality: requirements and output contracts
Enforceable because consideration exists, as the promisor is suffering a legal detriment; he has parted with the legal right to buy (or sell) the goods he may need (or manufacture) from (or to) another source.
Requirement of mutuality: Conditional Promises
Enforceable, no matter how remote the contingency, UNLESS the “condition” is entirely within the promisor’s control.
PROMISE CONDITIONED ON SATISFACTION is not illusory, because the buyer cannot reject the goods unless the buyer is truly dissatisfied. The buyer has a duty to act in good faith in such a situation.
Requirement of mutuality: Right to Cancel or Withdraw
Although reservation of an unqualified right to cancel or withdraw at any time may be an illusory promise, the consideration is valid if this right is in ANY WAY RESTRICTED, e.g., the right to cancel upon 60 days notice. Note that A2 implies a requirement of reasonable notice even if it is not specified in the contract.
Requirement of mutuality: Exclusivity Agreements–Best Efforts Implied
A court may find an implied promise furnishing mutuality in appropriate circumstances (such as exclusive marketing agreements). The courts will usually find an implied promise to use best efforts and sustain agreements that might otherwise appear illusory.
Requirement of mutuality: Unilateral/Option Contracts
Unilateral: Enforceable because one has begun performance, or option contracts, enforceable because one has begun performance.
Option contracts: enforceable because one has purchased time to decide.
Requirement of mutuality: suretyship promises
A suretyship contract involves a promise to pay the debt of another. A suretyship contract is not enforceable unless it is supported by consideration. If a suretyship is compensated, the requirement of consideration is not much of an issue, because the compensation will serve as consideration for the surety’s promise. If, however, the surety is gratuitous (i.e., surety is not paid for his service), the consideration requirement may cause problems. The timing becomes important in determining whether adequate consideration is present in a gratuitous surety situation.
Surety makes promise before (or at the same time as) creditor performs or promises to perform – is there consideration?
CONSIDERATION PRESENT
If the gratuitous surety makes his promise to pay BEFORE (or at the SAME TIME as) the creditor performs or promises to perform, the CREDITOR’S performance or promise will serve as consideration for the surety’s promise, because the creditor has incurred a detriment in exchange for the surety’s promise.
Surety makes promise after creditor performs or promises to perform– is there consideration?
GENERALLY NO CONSIDERATION TO SUPPORT SURETY’S PROMISE
If a gratuitous surety does not make his promise until AFTER the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety’s promise because of the preexisting legal duty rule–the creditor has not incurred any new detriment in exchange for the surety’s promise. The the surety’s promise is unenforceable.
Exceptions:
- Obtaining Surety is Condition Precedent
- Additional Consideration
Requirement of mutuality: Right to Choose Among Alternative Courses
A promise to choose one of several alternative means of performance is illusory unless EVERY ALTERNATIVE involves SOME LEGAL DETRIMENT to the promisor. However, if the power to choose rests with the PROMISEE or some THIRD PARTY not under the control of the promisor, the promise is enforceable as long as AT LEAST ONE ALTERNATIVE involves some legal detriment.
SELECTION OF VALUABLE ALTERNATIVE CURES ILLUSORY PROMISE: even if a promisor retains the power to select an alternative without legal detriment, his ACTUAL selection of an alternative involving legal detriment would cure the illusory promise.
Promissory Estoppel or Detrimental Reliance:
CONSIDERATION IS NOT NECESSARY if the facts indicate that the promisor should be estopped from not performing. Under R1, a promise is enforceable if necessary to prevent injustice if:
- The promisor should reasonably EXPECT TO INDUCE ACTION OR FORBEARANCE;
- OF A DEFINITE AND SUBSTANTIAL CHARACTER;
- AND SUCH ACTION OR FORBEARANCE IS IN FACT INDUCED.
R2: no longer requires that the action or forbearance be “of a definite and substantial character.” It also provides that the remedy “MAY BE LIMITED AS JUSTICE REQUIRES.”
Typically, if the elements for promissory estoppel are present, a jurisdiction following R1 will award expectation damages (i.e., what was promised under the contract), while a jurisdiction following R2 might award reliance damages (i.e., whatever the promisee spent in reliance on the promise), which usually is something less than expectation damages, but theoretically can exceed them.
Requirement That No Defenses Exist: defined
Even if an agreement is supported by valuable consideration or a recognized substitute, contract rights may still be unenforceable because there is a defense to a formation of contract, because there is a defect in capacity (making the obligation voidable by one of the parties), or because a defense to enforcement of certain terms exists.
Defenses to Formation of Contract: 3 categories
- absence of mutual assent; 2. absence of consideration; 3. public policy considerations that deny contractual status to the agreement.
Defenses to Formation of Contract: Absence of Mutual Assent: list 5
- Mutual Mistake as to Existing Facts
- Compare–Unilateral Mistake
- Mistake by Intermediary (Transmission)
- Ambiguous Contract Language
- Misrepresentation
Defenses to Formation of Contract: Absence of Mutual Assent: MUTUAL MISTAKES AS TO EXISTING FACTS
When both parties entering into a contract are mistaken ABOUT EXISTING FACTS (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party if:
- The mistake concerns a BASIC ASSUMPTION on which the contract is made;
- The mistake has a MATERIAL EFFECT on the agreed-upon exchange; and
- The party seeking avoidance DID NOT ASSUME THE RISK of the mistake.
Assumption of risk: commonly occurs when one party is in a position to know the risks better than the other party or where the parties knew that their assumption was doubtful (i.e., where the parties were consciously aware of their ignorance). In other words, to be a defense, it must be a mistake, not a mere uncertainty.
Mistake in value generally not a defense because both parties usually assume the risk that their assumption as to value is wrong.
Defenses to Formation of Contract: Defenses to Formation of Contract: Unilateral Mistake
If only one of the parties is mistaken about facts relating to the agreement, the mistake will NOT prevent formation of a contract. However, if the nonmistaken party KNEW OR HAD REASON TO KNOW OF THE MISTAKE made by the other party, the contract is voidable by the mistaken party.
Unilateral Mistake May Be Canceled in Equity: there is authority in a number of cases that contracts with errors, such as mistakes in COMPUTATION, may be canceled in equity, assuming that the nonmistaken party has NOT RELIED on the contract. There is also modern authority indicating that a unilateral mistake that is SO EXTREME that it outweighs the other party’s expectations under the agreement will be a ground for cancellation of the contract.
ERROR IN JUDGMENT: an error in judgment by one of the parties as to the value or quality of the work done or goods contracted for will NOT prevent formation of a contract, even if the nonmistaken party knows or has reason to know of the mistake made by the other party.
Defenses to Formation of Contract: Mistake by the Intermediary (Transmission)
When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message AS TRANSMITTED is operative unless the other party knew or should have known of the mistake.
Defenses to Formation of Contract: Ambiguous Contract Language
Contract language with at least two possible meanings leads to different results depending on the awareness of the parties.
- Neither Party Aware of Ambiguity–No Contract UNLESS both parties happened to intend the same meaning.
- Both Parties Aware of Ambiguity–No Contract UNLESS both parties in fact intended the same meaning.
- One Party Aware of Ambiguity–Contract enforced according to the intention of the party who was unaware of the ambiguity.
- Subjective Intention of Parties Controls
Defenses to Formation of Contract: Misrepresentation: list
- Fraudulent Misrepresentation;
2. Nonfraudulent Misrepresentation
Defenses to formation: Fraudulent Misrepresentation
(Fraud in the Inducement)–Contract Voidable: Misrepresentation is a false assertion of fact. Fraudulent if intended to induce a party to enter into a contract and the maker knows or believes the assertion if false or knows that he does not have a basis for what he states or implies with assertion. A fraudulent assertion can be inferred from conduct.
Concealment and Nondisclosure: an action intended to prevent another from learning a fact is the equivalent of asserting that a fact does not exist. Similary, if a party frustrates an investigation by the other party or falsely denies knowledge of a fact, it can be considered a misrepresentation. Note, however, that nondisclosure without concealment is usually not a misrepresentation. A party is not required to tell everything he knows to the other party, but if the nondisclosure is either MATERIAL OR FRAUDULENT, the contract is voidable for misrepresentation.
Distinguish: Fraud in the Factum
If one of the parties was tricked into giving assent to the agreement under circumstances that prevented her from appreciating the significance of her action, the agreement cannot be enforced; it is VOID.
Misrepresentation: justified reliance
A party’s reliance on a misrepresentation must be justified for the contract to be voidable; i.e., he is not entitled to relief if the reliance was unreasonable under the circumstances. However, the mere fact that the misrepresentation could have been revealed by the exercise of reasonable care does not mean reliance was unjustified. For example, a party’s failure to read a contract or use care in reading it will not necessarily preclude him from avoiding the contract.
Misrepresentation: Innocent Party May Rescind Agreement
The innocent party need not wait until she is sued on the contract, but may take affirmative action in equity to RESCIND the agreement. The right to rescind the agreement exists even if the terms are fair or beneficial to the misled party. The right to void or rescind such a contract may be lost, however, if the party so induced affirms the contract in question.
Remedies for Fraud;`
In addition to rescission, remedies for material misrepresentation or fraud include all remedies available for breach. In a contract for the sale of goods, neither rescission nor the return of the goods is inconsistent with the claim for damages. Note that the time period to bring an action for fraud does not run until the party knows or should have known of the fraud.
Defenses to Formation of Contract: Absence of Consideration
If the promises exchanged at the formation stage lack the elements of bargain or legal detriment, no contract exists. In this situation, one of the promises is always illusory.
Defenses to Formation of Contract: Public Policy Defenses to Contract Formation–Illegality
If either the CONSIDERATION OR THE SUBJECT MATTER of a contract is illegal, this will serve as a defense to enforcement. Contracts may be illegal because they are inconsistent with the Constitution, violate a statute, or are against public policy as declared by the courts.
Defenses to Formation of Contract: Some Typical Cases of Illegality
- Agreements in restraint of trade;
- Gambling contracts;
- Usurious contracts;
- Agreements obstructing administration of justice;
- Agreements inducing breach of public fiduciary duties; and
- Agreements relating to torts or crimes.
Defenses to Formation of Contract: Effect of Illegality
- Generally Contract is Void
- Effect Depends on Timing of Illegality:
If the subject matter or consideration was illegal at the time of the offer, there was NO VALID OFFER. If it became illegal after the offer but before acceptance, the supervening illegality operates to REVOKE THE OFFER. If it became illegal after a valid contract was formed, the supervening illegality operates to DISCHARGE THE CONTRACT because performance has become impossible.
3.
Defenses to Formation of Contract: Illegal Purpose
If the contract was formed for an illegal PURPOSE but neither the consideration nor the subject matter is illegal, the contract is only VOIDABLE by the party who 1. did not know of the purpose; or 2. knew but did not facilitate the purpose AND the purpose does not involve “serious moral turpitude.” If both parties knew of the illegal purpose and facilitated it, or knew and the purpose involves serious moral turpitude, the contract is VOID and unenforceable.
Limitations on Illegality Defense: list
- Plaintiff Unaware of Illegality: if the plaintiff contracted without knowledge that the agreement was illegal and the defendant acted with knowledge of the illegality, the innocent plaintiff may recover on the contract.
- Parties Not in Pari Delicto: a person may successfully seek relief if he was not as culpable as the other.
- Licensing–Revenue Raising v. Protection: if a contract is illegal solely because a party does not have a required license, whether the contract will be enforceable depends on the reason for the license (if the license is merely to raise revenue, the contract is generally enforceable; if the license is for the protection of the public, the contract is void)
Defenses Based on Lack of Capacity: list
- Legal Incapacity to Contract;
2. Duress and Undue Influence
Legal Incapacity to Contract: defined
Individuals in certain protected classes are legally incapable of incurring binding contractual obligations. Timely assertion of this defense by a promisor makes the contract VOIDABLE at his election.
Legal Incapacity to Contract: list
- Contracts of Infants
- Mental Incapacity
- Intoxicated Persons
Who is an infant?
The age of majority in most jurisdictions is 18. however, in many states, married persons under 18 are considered adults.
Effect of Infant’s Contract
Infants generally lack capacity to enter into a contract binding on themselves. However, contractual promises of an adult made to an infant are binding on the adult. In other words, a contract entered into between an infant and an adult is VOIDABLE BY THE INFANT BUT BINDING ON THE ADULT.
Disaffirmance of Infant contract:
An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. If a minor chooses to disaffirm, she must return anything that she received under the contract THAT STILL REMAINS at the time of disaffirmance. However, there is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed.
Exceptions: most states have created a small number of statutory exceptions to the rule that minors can disaffirm their contracts (e.g., student loan agreements, insurance contracts, agreements not to reveal an employer’s proprietary information, etc.)
Affirmance of infant contract upon Majority:
An infant may affirm, i.e., choose to be bound by his contract, upon reaching majority. He affirms either expressly or by conduct, e.g., FAILING TO DISAFFIRM the contract WITHIN A REASONABLE TIME AFTER REACHING MAJORITY.
Legal Incapacity to Contract: Mental Incapacity
One whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative. He may likewise affirm during a lucid interval or upon complete recovery, even without formal restoration by judicial action. In other words, the contract is VOIDABLE. As in the case of infants, mentally incompetent persons are liable in quasi-contract for necessities furnished to them.
Legal Incapacity to Contract: Intoxicated Persons
One who is so intoxicated that he does not understand the nature and significance of his promise may be held to have made only a VOIDABLE promise if the other party had reason to know of the intoxication. The intoxicated person may affirm the contract upon recovery. Once again, there may be quasi-contractual recovery for necessities furnished during the period of incapacity.
Duress and Undue Influence: defined
Contracts induced by duress or undue influence are VOIDABLE and may be rescinded as long as not affirmed.
Duress: 2 types
- Physical compulsion: contract is void.
- Improper threat that leaves victim no reasonable alternative: contract voidable by the victim.
Economic Pressure Generally Not a Defense
Economic Duress as a defense must have the two elements:
- The party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; and
- There are no adequate means available to prevent the threatened loss.
Undue Influence:
Unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relationship between them is justified in assuming that the person will not act in a manner inconsistent with his welfare. The elements of undue influence are often described as undue susceptibility to pressure by one party and excessive pressure by the other. Other factors considered are the unfairness of the resulting bargain and the availability of independent advice.
Defenses to Enforcement: defined
Defects in the subject matter of a bargain or in the capacity of one party to contract arise at the formation stage and make the agreement void or voidable. Other defenses, however, involve failure of the agreement to qualify for judicial relief and may arise at the formation state or later.
Defenses to Enforcement: list
- Statute of Frauds
2. Unconscionability
Statute of Frauds: writing requirement
The Statute of Frauds does not require that the contract be in writing; it requires only that there be one of more writings signed by the person sought to be held liable on the contract that reflect the MATERIAL TERMS of the contract (e.g., in a land sale contract, a description of the property and the price are required; in a contract for the sale of goods, the quantity is required). Thus, a letter (even of a nonparty) or receipt, or even a check indicating a quantity of goods on the memo line, could be sufficient.
ELECTRONIC RECORD SATISFIES WRITING REQUIREMENT: such as an email.
Statute of Frauds: signature requirement
The signature requirement is liberally construed by most courts. It need not be handwritten; it can be printed or typed. A party’s initials or letterhead may also be sufficient.
ELECTRONIC SIGNATURE: The signature requirement may be satisfied by electronic signature. As with paper signatures, whether a record is “signed” is a question of fact. No specific technology is necessary to create a valid signature. If the requisite intent is present, one’s name as part of an email may suffice as a signature, as may the firm name on a fax.
Statute of Frauds: Agreements covered
- Executor or Administrator Promises to Personally Pay Estate Debts.
- Promises to Pay the Debt of Another (Suretyship Promises)
- Promises in Consideration of Marriage
- Interest in Land
- Performance Not Within One Year
- Goods Priced at $500 or More
Statute of Frauds: Promises to Pay Debt of Another requirements
- Must Be a Collateral Promise: A promise to answer for the debt of default of another must be evidenced by a writing. The promise may arise as a result of a tort or contract, but it must be collateral to another person’s promise to pay, and not a primary promise to pay.
- Main Purpose Must Not Be Pecuniary Interest of Promisor: If the main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is NOT WITHIN THE STATUTE OF FRAUDS even though the effect is still to pay the debt of another.
Statute of Frauds: Promises in Consideration of Marriage
A promise the consideration for which is marriage must be evidenced by a writing. This applies to promises that induce marriage by offering something of value (other than a return promise to marry–e.g., “if you marry my son, I will give the two of you a house.”
Statute of Frauds: Interest in Land–what is an interest in land
- Sale of real property
- Leases for more than one year
- Easements for more than one year
- Minerals (or the like) or structures if they are to be severed by the buyer. If they are to be severed by the seller, they are not fixtures, but goods.
- Mortgages and most other security liens
Statute of Frauds: items not within the statute
Even though the end result of some contracts may be an interest in land, they still do not come within the Statute. For example, a contract to build a building or a contract to buy and sell real estate and divide the profits do not come within the Statute.
Statute of Frauds: Effect of Performance on Contracts
If the seller conveys to the purchaser (i.e., fully performs), the seller can enforce the buyer’s oral promise to pay. Similarly, the purchaser may be able to specifically enforce a land contract if the “PART PERFORMANCE DOCTRINE” is applicable. Under the doctrine, conduct (i.e., part performance) that UNEQUIVOCALLY INDICATES that the parties have contracted for the sale of the land will take the contract out of the Statute of Frauds. What constitutes sufficient part performance varies among the jurisdictions. Most require AT LEAST TWO of the following: payment (in whole or in part), possession, and/or valuable improvements.
Statute of Frauds: effective date
The date runs from the DATE OF THE AGREEMENT and not from the date of performance.
Statute of Frauds: contracts not within the statute
- possibility of completion within one year, even though actual performance may extend beyond the one-year period
- Right to terminate within year–majority view is that nonperformance is not performance within one year, and so the contract is still within the Statute of Frauds.
- Lifetime Contracts: capable of performance within one year since a person can die at any time.
Statute of Frauds: sale of goods priced at $500 or more
A contract for the sale of goods for a price of $500 or more is within the Statute of Frauds and generally must be evidenced by a signed writing to be enforceable. Note that a writing is sufficient even though it omits or incorrectly states a term but the contract is NOT ENFORCEABLE BEYOND THE QUANTITY OF GOODS SHOWN IN THE WRITING.
Statute of Frauds: goods priced at $500 ore more – when writing not required for enforceability
- Specially Manufactured Goods: seller has, under circumstances that reasonably indicate that the goods are for the buyer, made a SUBSTANTIAL BEGINNING in their manufacture or COMMITMENTS for their purchase before notice of repudiation is received.
- Admissions in Pleadings or Court: if the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in court that the contract for sale was made, the contract is enforceable without a writing (but that in such a case the contract is not enforceable beyond the quantity of goods admitted.)
- Payment or Delivery of Goods: If goods are either received or accepted or paid for, the contract is enforceable. However, the contract is not enforceable beyond the quantity of goods accepted or paid for.
Statute of Frauds: goods priced at $500 ore more – Merchants–Confirmatory Memo Rule
In contracts between merchants, 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: (1) he has reason to know of the confirmations’ contents; and 2. he does not object to it in writing within 10 days of receipt.
Statute of Frauds: Effect of Noncompliance with the Statute
Under the majority rule, noncompliance with the Statute of Frauds renders the contract unenforceable at the option of the party to be charged (i.e., the party being charged may raise the lack of a sufficient writing as an affirmative defense). If the Statute is not raised as a defense, it is waived.
Statute of Frauds: Promissory Estoppel
Promissory Estoppel is sometimes applied in cases where it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim. When a defendant falsely and intentionally tells a plaintiff that the contract is not within the Statute or that a writing will subsequently be executed, or when his conduct foreseeably induces a plaintiff to change his position in reliance on an oral agreement, courts may use the doctrine to remove the contract completely from the Statute of Frauds.
Statute of Frauds: Remedies if Contract is Within Statute
If a contract is within the Statute of Frauds, because there is noncompliance with the Statute and no applicable exception, in almost all cases a party can sue for the REASONABLE VALUE of the services or part performance rendered, OR the RESTITUTION of any other benefit that has been conferred. This recovery would be in QUANTUM MERUIT rather than a suit on the contract. The rationale is that it would be unjust to permit a party to retain benefits received under the failed contract without paying for them.
PART PERFORMANCE: If the part performance rendered takes the contract out of the Statute of Frauds, the performing party has the option of suing ON THE CONTRACT for the expectation damages, rather than merely in restitution for the value of the benefit conferred.
Statute of Frauds: contract made by agent
Must the agent’s authority to enter a contract on behalf of the principle be in writing? Most states say no except for contracts involving interests in real property. A few states would say yes as to all such contracts pursuant to the state’s EQUAL DIGNITIES statutes. However, even where written authority would be required, written authority may be dispensed with if the agent contracted in the presence and under the direction of the principal or if the principal later ratified the contract in writing.
Unconscionability: defined
The concept of unconscionability allows a court to REFUSE TO ENFORCE A PROMISE OF AN ENTIRE CONTRACT (or to modify the contract) to avoid “unfair” terms. It is sometimes said that there are two types of unconscionability: substantive unconscionability (i.e., unconscionability based on price alone) and procedural unconscionability (i.e., unconscionabilitybased on unfair surprise or unequal bargaining power). However, few cases recognize substantive unconscionability based on price alone. Instead, the cases have dealt mostly with procedural unconscionability.
Common instances of procedural unconscionability
- Inconspicuous risk-shifting provisions
- Contacts of adhesion–take it or leave it
- exculpatory clauses
- limitations on remedies
Inconspicuous risk-shifting provisions
standardized printed form contracts often contain a meterial provision that seeks to shift a risk normally borne by one party to the other. Examples:
- CONFESSION OF JUDGMENT clauses, which are illegal in most states
- DISCLAIMER ON WARRANTY provisions; and
- ADD ON CLAUSES that subject all of the property purchased from a seller to repossession if a newly purchased item is not paid for
Typically, such clauses are found in the fine print (boilerplate) in printed form contracts. Courts have invalidated these provisions because they are INCONSPICOUS OR INCOMPREHENSIBLE to the average person, even if brought to his actual attention.
Contacts of adhesion–take it or leave it
Courts will deem a clause unconsionable and unenforceable if the signer is unable to procure necessary goods, such as an automobile, from any seller without agreeing to similar provision. The buyer has no choice.
exculpatory clauses
An exculpatory clause releasing a contracting party from liability for his own INTENTIONAL wrongful acts is usually found to be unconscionable because such a clause is against public policy in most states. Exculpatory clauses for NEGLIGENT acts may be found to be unconscionable if they are inconspicuous, but commonly are upheld if they are in contracts for activities that are known to be hazardous (e.g., a contract releasing a ski hill operator for liability for neglgence will often be upheld.
limitations on remedies
A contractual clause limiting liability for damages to property generally will NOT be found to be unconscionable unless it is inconspicuous. However, if a contract limits a party to a certain remedy and that remedy FAILS OF ITS ESSENTIAL PURPOSE, a court may find the limitation unconscionable and ignore it.
Unconscionability: Timing
Unconscionability is determined by the circumstances as they existed AT THE TIME THE CONTRACT WAS FORMED.
Unconscionability: Effect if a Court Finds Unconscionable Clause
If court finds as a matter of law that a contract or clause was unconscionable WHEN MADE, the court may:
- refuse to enforce the contract
- enforce the remainder of the contract WITHOUT the unconscionable clause
- LIMIT THE APPLICATION OF ANY CLAUSE so as to avoid an unconscionable result.
General Rules of Contract Construction: list
- Construed as a whole: specific clauses will be subordinated to the contract’s general intent
- Ordinary meaning of words, unless it is clearly shown that they were meant to be used in a technical sense
- Inconsistency between provisions, written or typed provisions will prevail over printed provisions (which indicate a form contract)
- Custom and Usage, in particular business and particular locale
- Preference to Construe Contract as Valid and Enforceable
- Ambiguities Construed against the party preparing the contract, absent evidence of the intention of the parties, especially where not evidence of fraud, mutual mistake, duress, or knowledge by one party of unilateral mistake and both parties represented by counsel.
- Weight given to conflicting rules of construction (1. express terms; 2. course of dealing; 3. trade usage)
Parol Evidence Rule: defined
In interpreting and enforcing a contract, questions arise as to whether the written instrument is the complete embodiment of the parties’ intention. Where the parties to a contract express their agreement in WRITING with the INTENT that it embody the final expression of their bargain (i.e., the writing is an INTEGRATION), any other expressions–written or oral–made PRIOR TO the writing as well as any oral expressions CONTEMPORANEOUS WITH the writing, are INADMISSIBLE TO VARY THE TERMS OF THE WRITING.
Parol Evidence Rule: purpose
Not generally regarded as a rule of evidence, but a rule of SUBSTANTIVE CONTRACT LAW. It is designed to carry out the apparent intention of the parties and to facilitate judicial interpretation by having a single clean source of proof (the writing) on the terms of the bargain.
Parol Evidence Rule: Is the writing an integration? what two questions?
must answer two questions:
- Is the writing intended as a FINAL expression?
- Is the writing a COMPLETE or PARTIAL integration?
Parol Evidence Rule: Is the writing intended as a final expression?
Writings that evidence a purported contract are not necessarily the “final” expression of that contract. Thus, for example, the parties might only have intended such writings to be preliminary to a final draft. If so, the parol evidence rule will not bar introduction of further evidence. One should note that the MORE COMPLETE the agreement appears to be on its face, the more likely it is that it was intended as an INTEGRATION.
Parol Evidence Rule: Is the writing a complete or partial integration?
After establishing that the writing was “final,” one should determine if the integration was “complete” or only “partial.” In the former case, it may not be contradicted or supplemented; in the latter it cannot be contradicted, but may be supplemented by proving up consistent additional terms.
Note: if the agreement contains a MERGER CLAUSE reciting that the agreement is complete on its face, this clause strengthen the PRESUMPTION that all negotiations were merged in the written document.
Parol Evidence Rule: Is the writing an integration? Who makes the decision?
MAJORITY VIEW: question of fact, but unlike other fact questions, the judge decides, then if extrinsic evidence admitted, the jury decides whether the extrinsic evidence was part of the agreement.
Parol Evidence Rule: Is the writing an integration? How is determination made?
Two competing tests:
1. Corbin Test: (most courts) take into consideration the SPECIFIC CIRCUMSTANCES OF THE TRANSACTION INVOLVED and asks whether parties like these, situated as they are, would naturally and normally include in their writing the extrinsic matter that is sought to be introduced. If people like these under circumstances like this would normally include the extrinsic matter in their writing, it will be excluded under the parol evidence rule. Otherwise, the evidence will be admissible.
- Williston test: look only at the face of the written agreement and decide whether contracting parties (in general) would include the terms sought to be proved. If so, the evidence will be excluded.
Parol Evidence Rule: Extrinsic evidence outside the scope of rule: defined
Because the rule prohibits admissibility only of extrinsic evidence that seeks to vary, contradict, or add to an “integration” other forms of extrinsic evidence may be admitted where they will not bring about the result, i.e., they will fall outside the scope of the parol evidence rule.
Parol Evidence Rule: Extrinsic evidence outside the scope of rule: list
- Attacking validity
- Interpretation (
- Showing of “True Consideration”
- Reformation
Parol Evidence Rule: Extrinsic evidence outside the scope of rule: attacking validity
A party to a written contract can attach the agreement’s validity. The party acknowledges that the writing reflects the agreement, but asserts, most frequently, that the AGREEMENT NEVER CAME INTO BEING because of the following:
- formation defects (fraud, duress, mistakes, and illegality may be shown by extrinsic evidence)
- Conditions Precedent (where a party asserts that there was an oral agreement that the written contract would not become EFFECTIVE until a condition occurred, all evidence of the understanding may be offered and received)
- Distinguish from Condition Subsequent: parol evidence is not admissibable as to condition subsequent–an oral agreement that the party would not be obliged to PERFORM until the happening of an event.
Parol Evidence Rule: Extrinsic evidence outside the scope of rule: interpretation
If there is uncertainty or ambiguity in the written agreement’s terms or a dispute as to the MEANING of those terms, parol evidence can be received to aid the fact-finder in reaching a correct interpretation of the agreement. If the meaning of the agreement is plain, parole evidence is inadmissible.
