Contracts - Formation of a Contract

Question 1

What is the definition of a contract?

Answer 1

A contract is:

(1) AN AGREEMENT that is
(2) LEGALLY ENFORCEABLE.

Question 2

What are the three critical issues in determining if there is an agreement?

Answer 2

(1) Is the initial communication an offer?
(2) Has the offer terminated?
(3) Has there been an acceptance prior to termination?

Question 3

What is the general test for determining when an initial communication is an offer?

Answer 3

General Test: Manifestation of Commitment

An offer is one person’s manifestation of willingness to contract. Ask whether a reasonable person in the position of the offeree would believe that his or her assent creates a contract.

Look for words or conduct showing commitment by the possible offeror).

Question 4

Is a communication offer if its missing a price term in sale of

(1) Real Estate
(2) A Good?

Answer 4

(1) No - Communication is not an offer, price and description are required for a communication to be an offer to sell real estate.
(2) Yes - Communication for an offer to sell a good does not need to contain a price.

Question 5

Is a communication an offer if it has vague or ambiguous material terms?

Answer 5

No, an offer cannot contain vague or material terms under either CL or UCC.

Look out for words like APPROPRIATE, FAIR, REASONABLE!

Question 6

What are requirement/output contracts and do they fail for vagueness?

Answer 6

Output/Requirement contracts are a contract for the sale of goods that state the quantity of goods to be delivered under the contracts in terms of the buyer’s requirements or seller’s output. [Key words: All, only, exclusively, solely]

They do not fail for vagueness or being ambiguous.

Question 7

Can a buyer increase a requirement contract without creating a new offer?

Answer 7

Yes, buyer can increase requirements so long as the increase is in line with prior demand. No unreasonably disproportionate limitation on increase. [i.e 1000 lbs to 1020 lbs]

Question 8

Is an advertisement or price quotations an offer?

General Rule and Exceptions

Answer 8

General Rule: No not an offer.

Exception:

(1) An advertisement can be a unilateral offer if it is in the nature of a reward (Carbolic Smoke Ball)
(2) An advertisement can be an offer if it specifies quantity and expressly indicates who can accept.
(3) Price quotation can be an offer if sent in response to an inquiry.

Question 9

What are the four methods for terminating an offer?

Answer 9

(1) Lapse to time - time stated in the offer or a reasonable time [i.e. offer can’t stay open for five years]
(2) Death of a party prior to offer - death or incapacity of either party after the offer, but before acceptance, terminates the offer [Exception: Irrevocable offers]
(3) Words or conduct of offeror that constitute a REVOCATION - see next card
(4) Words or conduct of the offeree that constitue a REJECTION.

Question 10

How does is a offer revoked by an offeror?

Answer 10

An offer is revoked when:

(a) Later unambiguous statement by offeror to offer of unwillingness or inability to contract OR
(b) Later unambiguous conduct by offeror indicating an unwillingness or inability to contract that offeree is aware of.

Question 11

What types of offers are irrevocable?

Answer 11

(1) An Option - an offer cannot be revoked if the offeror has not only made an offer, but also (i) promised not to revoke AND (ii) this promise is supported by payment or other consideration
(2) UCC Firm Offer Rule: An offer cannot be revoked for up to three months if
(i) offer to buy or sell goods
(ii) signed written promise to keep the offer open; AND
(iii) party is a merchant (Generally any person in business
(3) Reliance: An offer cannot be revoked if there has been
(i) reliance that is
(ii) reasonably forseeable and
(iii) determential
(4) Unilateral Contract: The start of performance pursuant to an offer to enter into a unilateral contract makes that offer irrevocable for a reasonable time to complete performance. [MERE PREPARATION DOES NOT CONSTITUTE PERFORMANCE.

Question 12

What are the three methods including the words or conduct of the offeree can REJECT an offer?

Answer 12

Three Methods of indirect rejection

(1) Counteroffer - in general counteroffers terminate an offer and create a new offer. Counteroffer do not terminate an option. Distinguish counter offers from bargaining.
(2) Conditional Acceptance - Conditional acceptance terminates an offer look for “if, only oif, provides, so long as, but, on condition that.
* At CL - A Conditional acceptance rejects the offer and become a counter offer.
* Under UCC - It just rejects
(3) Additional Terms [only applies at CL - not sale of goods] Mirror Image Rule

CL - A response to an offer that adds new terms is treated like a counteroffer rather than an acceptance. Not a rejection under UCC - See 2-207.

Question 13

How does the UCC treate an additional or determine term (2-207)? It raises two questions

Answer 13

(1) Is there a contract?

Under the UCC, a response to an offer that adds additional or different terms, but does not make the new terms a condition of acceptance is generally treated as an acceptance. [Seasonable expression of acceptance]

(2) Is the additional term a part of the contract?

Additional term is not a part of the contract unless both parties are merchant. Even if both parties are merchants, its not a part of the contract if the adddtional term is “material” [fact question] or if the additional term is objected to by original offeror.

Question 14

What can the offer control about the acceptance?

Answer 14

Offer can control:

(1) method of acceptance
(2) time that a distance acceptance is effective or
(3) whether the offeree must give notice that it has accepted performance.

Question 15

In general if the offeree starts to perform constitute acceptance?

Answer 15

Yes, starting to perform is treated as an implied promise to perform and so there is a bilateral contract.

Exception: State of performance is not acceptance of unilateral contract offer. Completion of performance is required.

If offer requires performance for acceptance - it means completed performance.

Question 16

What are the four general rules for when various communications are effective between parties.

Answer 16

(1) All communications other than acceptance are effective only when received.
(2) Acceptance is generally effective when mailed (i.e. the “mailbox rule”).
(3) If a rejection is mailed before an acceptance is mailed, then neither is effective until received.
(4) You cannot use the mailbox rule to meet na option deadline.

Question 17

Is there an acceptance when the seller sends the wrong goods?

Answer 17

General: Yes, acceptance, but there is a breach.

Accommodation Exception:

IF the goods are sent with an explanation (i.e. sorry out of red, here is blue), then there is a counteroffer and no breach.

Question 18

Who can accept an offer?

Answer 18

Generally, an offer can be accepted only be

(1) A person who knows about the offer at the time she accepts
(2) Who is the person to whom it was made.

Offers cannot be assigned; options can be assigned unless the option otherwise provides.

Question 19

What are the 11 reasons that an agreement may not be legally enforceable?

Answer 19

(1) Lack of consideration or a consideration substitute for the promise at issue;
(2) Lack of capacity of the person who made that promise;
(3) Statute of Frauds
(4) Existing laws that prohibit the performance of agreement
(5) Public policy; (6) Misrepresentations
(7) Nondisclosure; (8) Duress;
(9) Unconstitutionality
(10) Ambiguity in the words of the agreement
(11) Mistakes at the time of the agreement as to the material facts affecting the agreement.

Question 20

Three steps to determine if consideration is present:

Answer 20

(1) Identify the promise breaker;
(2) Ask whether the person asked for something in return for her promise;
(3) Look at the person who is trying to enforce the promise and ask what requested legal detriment that person sustained.

In summary: Look for bargained for legal detriment (MA - legal benefit)

Note:

An illusory promise (i.e. one part reserve the right to terminate the agreement) is not consideration.

The adequacy of consideration is not relevant for contract law.

Question 21

Is past consideration sufficient consideration?

Answer 21

General rule: No, not consideration

Exception: The promisor expressly requests something to the promisee and the promisee expects payment.

Question 22

Is a pre-existing contractual or statutory duty consideration? [Common law rule]

Answer 22

No, doing what you are already legally obligated to do is not new consideration for a new promise to pay you more to do merely that. Under common law new consideration is required for contract modification.

Exception: Addition to or change in performance can ask as new consideration

Exception: Unforeseen difficulty so severe as to excuse performance. [i.e. agreeing to do the same performance for more money to overcome the difficulty]

Exception: Third-party promise to pay for same performance

Question 23

How does the UCC treat pre-existing legal duties as consideration?

Answer 23

Does not have a pre-existing legal duty rule.

New consideration is not required to modify a sale of goods contract.

Good faith is the test for changes to an existing sale of goods contract.

Question 24

Is the promise to forgive balance of debt consideration? [Part payment as consideration for release]

Answer 24

(1) if the debt is due and undisputed, then part payment is not consideration for release.
(2) If the debt is not yet due or its disputed, then it can be consideration for a release.

Question 25

What are the three consideration substitutes?

Answer 25

(1) A written promise to satisfy an obligation for which there is a legal defense is enforceable without consideration.
(2) Promissory estoppel (detrimental reliance):
(a) Elements:
(i) Promise;
(ii) Reliance that is reasonable, detrimental, and foreseeable; AND
(iii) Enforcement necessary to avoid injustice
(b) Comparison of consideration and promissory estoppels.
(3) Seals: Seals are a consideration substitute in Mass.

Question 26

Who lacks capacity to contract?

Answer 26

(1) Infant - Under 18
(2) Mental incompetents - lack ability to understand agreement
(3) Intoxicated person if other person has reason to know

Question 27

Can a person who lacks capacity disaffirm a contract?

Answer 27

Yes, right to disaffirm by person without capacity.

However, there is an implied affirmation when a person who lacks capacity retains benefits after gaining capacity.

Question 28

What is a quasi-contract liability for necessaries?

Answer 28

A person who does not have capacity is legally obligated to pay for things that are necessary such as food, clothing, medical care or shelter.

Based on quasi-contract law, not contract law.

Question 29

What is the purpose of the Statute of Frauds?

Answer 29

SoF is a statute designed to prevent fraudulent claims of the existence of a contract.

Makes it harder for make such a fraud or fradulent claim by requiring the claimant to have objective proof (proof other than just testimony that a contract exists) - before the claimant gets its day in court.

Question 30

What proof is required to satisfy the Statute of Frauds?

Answer 30

Generally proof of either:

(1) Performance; OR
(2) Writing signed by the defendant.

If a contract claim is “within the Statute of Frauds” then the Statute of Frauds’ requirement of objective proof (performance or a writing) must be satisfied to get through the SoFs barrier to get to trial.

Question 31

What are the four types of contracts that fall within the SoFs?

Answer 31

(1) Promises to answer for the debts of another [suretyship]. [Narrowly construed]
(2) Service contract not “capable” of being performed within a year from the time of the contract (i.e. more than one year).
* Capable means theoretically possible with unlimited resources** Ignore what actually happened.
* Performance for life is not within the SoF.
(3) Transfers of interest in real estate (with the exception for leases of a year or less).
(4) Sale of goods for $500 or more.
(5) In Mass - Article 2A applies - You are within the statute of frauds if the total payments under a lease are $1,000 or more.

Question 32

How do courts construe “answer for” the debts of another?

Answer 32

Answer for is not merely a promise to pay someone else’s debts, but rather a promise to pay another person’s debts only if that person does not herself pay. [LOOK FOR A GUARANTEE]

“Main Purpose” Exception: If the “main purpose of the obligation allegedly guaranteed was to benefit the guarantor, then not even that guarantee is within the statute of frauds.

Question 33

What is the rule for performance and transfer of real estate to satisfy the SoF?

Answer 33

Part performance satisfies the SoF in transfers of real estate.

Part performances requires any two of the three:

(i) improvements to the land;
(ii) payment;
(iii) possession.

*MASSACHUSETTS REQUIRES ALL THREE

Question 34

What is the rule for performance and service contracts to satisfy the SoF?

Answer 34

Full performance by either party satisfies the Statute of Frauds.

Part performance of a services contract does not satisfy the SoF. May be able to get a remedy under quasi-contract law.

Question 35

Does the Seller’s part performance satisfy the SoF for sale of goods contracts for ordinary goods?

[Buyer’s part performance is unsettled law]

Answer 35

General Rule is that part performance of a contract for the sale of goods satisfies the SoF, but only to the extent of part performance.

If the goods are delivery - SoF is satisfied.

If the goods are not delivered - SoF is not satisfied. No contact.

Question 36

Does the Seller’s part performance satisfy the SoF for sale of goods contracts for specially manufactured goods?

Answer 36

If the contract is for the sale of goods that are to be specially manufactured, then the SoF is satisfied as soon as the seller make a “substantial beginning.”

Done enough work that it is clear that what she is working on is specially manufactured. [I.e MTO]

Question 37

How does a writing satisfy the statute of frauds for applicable law other than article 2?

Answer 37

(1) Material terms test - Who and What AND

The contents of the writings must meet the material terms test by stating the who and the what.

(2) The writing has been signed by the defendant. [Thus, can assert the SoF defense]

Question 38

How does a writing satisfy the statute of frauds under Article 2?

Answer 38

(1) The writing must simply indicate that there is a contract for the sale of goods and contain the quantity term [how many].
(2) Generally, the writing must be signed by the defendant with a limited exception for transaction between two merchants where there is a DELAY in responding.

Question 39

How is the SoF satisfied for Article 2A?

Answer 39

(1) must expressly say its a lease
(2) Describe the lease goods
(3) must state the terms

I assume it must also be signed by D

Question 40

When can a judicial admission satisfy the SoF?

Answer 40

If the D asserting a SoF defense admits in a pleading or testimony that he had enter into an agreement with P then no SoF defense. Purpose of SoF is fulfilled b/c it protect against fraudulent or otherwise false claims of an agreement.

Question 41

Can estoppel satisfy the SoF?

Answer 41

Some cases hold that P’s reliance on the D’s oral promise can estop the D from asserting a SoF defense.

Question 42

When does the Rules or Law Require that a person have WRITTEN authorization in order to execute a contract for some else?

Answer 42

Authorization must be in writing only if the contract to be signed is within the SoF. [i.e the authorization must be of equal dignity with the contract.

Question 43

When does the SoF apply for written proof of contract modification?

Answer 43

Yes, if the deal with the alleged change would be within the SoF, then the alleged modification must be in writing.

(1) Look at the deal with the alleged change and
(2) Determine whether the deal with the alleged change would be within the SoF.

Question 44

Are contract provisions requiring all modifications to be writing effective/valid?

Answer 44

Under CL - provisions requiring that all modifications be in writing are not effective.

Under UCC, contract provision requiring written modifications are effective unless waived.

Question 45

Is an agreement enforceable if it has illegal subject matter? what about if D has an illegal purpose?

Answer 45

If the subject matter is illegal, the agreement is not enforceable.

If the subject matte is legal, the agreement is enforceable if P did not have reason to know D’s illegal purpose.

Question 46

What the two common agreements that are found unenforceable as a matter of public policy?

Answer 46

(1) Exculpatory agreement that exempts intentional or reckless conduct from liability.
(2) Covenant not to compete without a reasonable need or reasonable time and place limits.

Question 47

When is an agreement not enforceable based on misrepresentation?

Answer 47

Look for:

(1) a statement of “fact” before the contract
(2) by one of the contracting parties or her agent
(3) that is false
(4) induces the contract

No wrongdoing required for material misrepresentations.

Question 48

When is an agreement not enforceable based on nondisclosure?

Answer 48

A person making a contract has no duty to disclose what she knows.

Wrongdoing requirement for nondisclosure as a defense.

Question 49

When is an agreement not enforceable based on duress?

Answer 49

(1) Physical duress
(2) Economic Duress - Two elements
(a) “Bad guy” - improper threat which is usually threat to breach existing contract. AND
(b) “Vulnerable guy” - no reasonable alternative

Question 50

When is an agreement not enforceable based on undue influence?

Answer 50

Look for:

(1) Special relationship between the parties AND
(2) Improper persuasion of the weaker by the stronger.

Question 51

When is an agreement not enforceable based on unconscionability?

Answer 51

Two Basic tests:

(1) Unfair surprise (procedural) and oppressive terms (substantive) are;
(ii) tested as of the time the agreeement was made AND
(iii) test is conducted by the court (not the jury).

Court may refuse to enforce all or part of the agreement.

Question 52

When is an agreement not enforceable based on ambiguity in words of agreement?

Answer 52

No contract if

(i) parties use a material term that is open to at least two reasonable interpretations; and
(ii) each party attaches a different meaning to the term; and
(iii) neither party know or has reason tp know the terms open to at least two reasonable interpretations.

Question 53

When is an agreement not enforceable based on mutual mistake of material existing fact?

Answer 53

Only if both parties are mistaken (not just uncertain) about existing facts. But not relief for mistake if the person seeking relief bears the risk of mistake.

Question 54

When is an agreement not enforceable based on unilateral mistake of material existing fact?

Answer 54

Courts generally reluctant to allow a party ot avoid a contract for a mistake made by only one party.

There will be relief for situations in which the other party had reason to know the mistake. [Palpable mistake]