Contracts [Highly Tested Rules] Flashcards
What is the implied covenant of good faith and fair dealing?
UCC:
Under the UCC, every contract imposes an implied obligation of good faith in its performance and enforcement
* “Good faith” is “honesty in fact and the observance of reasonable commercial standards of fair dealing”
Common Law:
The common law also imposes a duty of good faith and fair dealing
* A breach of this duty usually involves exercising discretion in a way that deprives the other party of the benefits of their bargain
What are the essential terms of a contract?
- Quantity (UCC): In a contract for the sale of goods, the quantity term must be certain or capable of being made certain
- Time: If the time for performance is not specified, the law implies that it is to be performed within a “reasonable” time
- Identity of Parties: Must sufficiently identify the parties
- Price: Required for real estate contracts. If not specified in a contract for the sale of goods, Article 2 provides that the price will be a “reasonable price at the time of delivery”
- Subject Matter: Must be certain and identified
Specific Types of Contracts:
* Real Estate: Must identify the land and price terms
* Sale of Goods: The quantity of goods must be certain or capable of being made certain
How can an offer be terminated?
An offer can be terminated by:
1. Rejection: An express rejection of the offer by the offeree; effective when received by the offeror
2. Counteroffer: Under common law, a counteroffer made by the offeree to the offeror regarding the same subject matter as the original offer but on different terms constitutes both a rejection and a new offer (note: might not be rejection and counteroffer under Article 2 “battle of the forms” provision)
3. Revocation: An offeror can revoke an offer any time before it has been accepted, either (a) by directly communicating the revocation to the offeree or (b) indirectly, if the offeree receives correct information, from a reliable source, of acts of the offeror that would indicate to a reasonable person that the offeror no longer intends to contract (e.g., selling a good that is the subject of the offer to someone else); effective when received by the offeree
4. Lapse of Time: An offer terminates if not accepted within the time specified by the offeror, or if no deadline is specified, a “reasonable” time
5. Death or Incapacity: An offer is terminated automatically by operation of law if either the offeror or offeree dies or loses the legal capacity to enter into a contract (exception: option supported by consideration)
6. Destruction of Subject Matter: An offer terminates by operation of law when the subject matter of the offer is destroyed
7. Supervening Illegality: When the subject matter of the offer is subsequently made illegal, the offer terminates by operation of law
When can an offer be revoked, and when are offers irrevocable?
An offer can be revoked at will by the offeror before acceptance, even if the offeror promised not to revoke for a certain period, except in the following circumstances:
1. Options: An option is a distinct contract in which the offeree gives consideration for the offeror’s promise not to revoke an outstanding offer for a specified period of time
2. Merchant’s Firm Offer (UCC): Under Article 2, if (i) a merchant offers to buy or sell goods (ii) in a signed writing, and (iii) the writing gives assurances that it will be held open, then the offer is not revocable for lack of consideration during the time stated, or if no time is stated, a “reasonable” time (not to exceed 3 months for offers not supported by consideration)
> BUT NOTE:If the offeree pays consideration for the temporary irrevocability, it is an option contract and the 3-month limit does not apply; it can be held open for as long as the parties specify
3. Detrimental Reliance: When the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held temporarily irrevocable as an option contract for a reasonable length of time
4. Beginning Peformance: An offer becomes temporarily or permanently irrevocable once the offeree begins performance, depending on whether the offer is for a unilateral or bilateral contract
> Unilateral Contract: An offer for a unilateral contract becomes temporarily irrevocable once the offeree begins performance, and the offeree must be given a reasonable time to complete performance (substantial preparations to perform do not make the offer irrevocable but may constitute detrimental reliance)
> Bilateral Contract: An offer for a bilateral contract may be accepted by the offeree beginning performance, in which case revocation becomes impossible (note: notification of the start of performance may be necessary)
What is an acceptance, and what are the methods of acceptance?
An acceptance is a manifestation (by words or conduct) of assent to the terms of an offer
* Acceptance must be within the time specified in the offer or, if no time is specified, within a “reasonable” time
* Only the offeree or a member of a class of offerees may accept an offer, but the power to accept an offer under an option contract is transferable
* The offeree must know of the offer in order to accept it
What is the mirror image rule?
(Common Law)
At common law, each and every term of the offer must be accepted (the “mirror image rule”)
* Any different or additional terms in the acceptance make it a rejection and counteroffer
What is the result when the terms of an acceptance vary from the terms of an offer under the UCC?
(UCC)
Article 2 of the UCC does NOT follow the mirror image rule–any “expression of acceptance” or “written confirmation” that includes additional or different terms is still effective as an acceptance UNLESS the acceptance is expressly made conditional on the original offeror’s assent to such new terms
* Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants (“battle of the forms”)
One or More Parties Are Non-Merchants
If any party to the contract is NOT a merchant, the additional or different terms are considered mere modification proposals and do not become part of the contract
Both Parties Are Merchants
* Additional Terms: If BOTH parties are merchants, additional terms in the acceptance will be included in the contract unless:
(i) they materially alter the original terms of the offer (e.g., changing risk, remedies);
(ii) the offer expressly limits acceptance to the original terms; or
(iii) the offeror objects within a reasonable time after receiving notice of the additional terms
* Different Terms: There is a split of authority over whether terms in the acceptance that are different from (i.e., conflicting) those in the original offer become part of the contract–some courts treat different terms like additional terms (following the above test), but the majority of courts follows the “knockout rule” whereby conflicting terms are knocked out of the contract (any gaps are filled by the UCC’s gap-filler provisions)
What is the mailbox rule?
The “mailbox rule” provides that an acceptance by mail or similar means is effective at the moment of dispatch (assuming properly addressed and stamped) UNLESS:
1. the offer stipulates that acceptance is not effective until received;
2. an option contract is involved (acceptance under an option contract is effective upon receipt);
3. the offeree first sends a rejection and then subsequently sends an acceptance (the first to arrive is effective); or
4. the offeree first sends an acceptance and then subsequently sends a rejection (mailbox rule makes acceptance effective, unless (i) the rejection arrives first and (ii) the offeror detrimentally relies on it)
What does “bargained-for exchange” require?
The bargained-for exchange element of consideration requires that the promise induce the detriment and the detriment induce the promise
* There is no bargain involved (i.e., no consideration) when one party gives a gift to another
* A promisee’s act or forbearance (or promise to act or forbear) is sufficient consideration if it benefits the promisor (need not be economic; includes the gratification of influencing the mind of another)
* A promise given in exchange for something already done does NOT satisfy the bargain requirement
What does “legal value” mean?
The legal value element of consideration means that which is bargained for must constitute a benefit to the promisor or a detriment to the promisee
* In general,** courts do NOT inquire into the** adequacy or fairness of consideration, but (1) something entirely devoid of value is insufficient and (2) a de minimis sum recited in the contract is insufficient if not paid
What is an “illusory promise”?
An illusory promise is one made by a party that does NOT actually bind the party to their detriment and is insufficient consideration
* When the promisor has the unfettered right to choose among alternatives, and they do NOT all involve legal detriment to the promisor, the promise is illusory
* Requirements and output contracts may facially appear to involve an illusory promise, but the promisor suffers a legal detriment by parting with the legal right to buy (or sell) the goods they may need (or manufacture) from (or to) a source other than the promisee
What is the “preexisting legal duty” rule?
The preexisting legal duty rule is the principle that the promise to perform, or the performance of, an existing legal duty is not consideration because it is not “bargained for” by the other party UNLESS:
1. new or different consideration is promised;
2. the promise is to ratify a voidable obligation (e.g., a promise to ratify a minor’s contract after reaching majority);
3. the preexisting duty is owed to a third person rather than to the promisor;
4. there is an honest dispute as to the duty; OR
5. there are unforeseen circumstances sufficient to discharge a party (e.g., impracticability), or, under the modern view, if the modification is fair and equitable in view of circumstances not anticipated when the contract was made
What is required to modify a contract at common law?
Traditionally, at common law a contract cannot be modified unless the modification is supported by new consideration
* The modern view permits modification if (1) the modification is due to circumstances that were unanticipated by the parties when the contract was made and (2) it is fair and equitable
What is required to modify a contract under the UCC?
Under the UCC, no consideration is necessary to modify a contract; all the parties need are good faith promises of new and different terms
* “Good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing
What is promissory estoppel?
A promise is enforceable absent consideration if the elements for promissory estoppel are present:
1. the promisor should reasonably expect to induce the promisee’s action or forebearance;
2. such action or forbearance is actually induced; and
3. enforcing the promise is necessary to prevent injustice
What are contract FORMATION defenses?
“SAMMI DUI”
Defenses to formation of a contract include:
1. Statute of Frauds
2. Ambiguity
3. Mistake: Mutual Mistake and Unilateral Mistake
4. Misrepresentation
5. Incapacity
6. Duress and Undue Influence
7. Unconscionability
8. Illegality
What is the Statute of Frauds, and what types of agreements does it apply to?
“MY LEGS”
Although an oral contract is valid in most instances, the following types of agreements are unenforceable UNLESS evidenced by a writing that is signed by the party sought to be bound (i.e., the defendant):
1. Marriage: Promises in consideration of marriage
2. Year: Promises that, by their terms, are incapable of being performed within one year
3. Land: Promises creating an interest in land (real estate sale contracts, leases for >1 year, easements of >1 year, mortgages and other security liens, fixtures, mineral rights)
4. Executors and Administrators: Promises by an estate executor or administrator to pay the estate’s debts out of their own funds
5. Goods Priced at $500 or More (UCC): Contracts for the sale of goods for a price of $500 or more
6. Suretyship: A promise to answer for the debt or default of another (unless the promisor’s main purpose is to serve his own pecuniary interest)
What is the Statute of Frauds writing requirement?
To satisfy the Statute of Frauds, the contract must:
1. be memorialized in one or more writings;
2. indicate that a contract has been made;
3. state the essential terms of the contract with reasonable certainty (including the subject matter); AND
4. the writing must be signed by the party to be charged
When does the Statute of Frauds writing requirement not apply at common law?
At common law, the Statute of Frauds (“SOF”) writing requirement does NOT apply in the following circumstances:
1. Contract Modifications: A written contract can be modified orally UNLESS the contract, as modified, falls within the SOF
> Contractual provisions prohibiting oral modification are NOT effective
2. Promissory Estoppel: Promissory estoppel may be applied if it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim
3. Full Performance of Services Contract: An oral services contract that cannot be completed within one year is still enforceable if one party has fully performed
4. Doctrine of Part Performance: An oral contract to purchase real property may be enforceable under the doctrine of part performance, if the purchaser can show at least two of the following:
(i) the purchaser took possession;
(ii) the purchaser paid the purchase price or a substantial portion thereof; and/or
(iii) the purchaser made valuable improvements
5. Judicial Admissions: If the party against whom enforcement is sought admits that the contract was made in pleadings, testimony, or otherwise in court, the contract is enforceable as if that party signed a writing
When does the Statute of Frauds writing requirement not apply under the UCC?
Under the UCC, the Statute of Frauds (“SOF”) writing requirement does not apply in the following circumstances:
1. Specially Manufactured Goods: If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course, the contract is enforceable without a writing if the 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
2. Judicial Admissions: If the party against whom enforcement is sought admits that the contract was made in pleadings, testimony, or otherwise in court, the contract is enforceable without a writing (but only to the extent of the quantity of goods admitted)
3. Merchants’ Confirmatory Memo: When one merchant, within a reasonable time after an oral agreement has been made with another merchant, sends the other merchant a written confirmation of the oral agreement that is sufficient to bind the sender under the Statute of Frauds, the confirmatory memo will also bind the recipient merchant if the recipient (i) has reason to know its contents and (ii) does not object within 10 days of receipt
> NOTE: Must involve two merchants
4. Promissory Estoppel: Promissory estoppel may be applied if it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim
5. Buyer Paid for or Accepted Goods: A contract for the sale of goods is enforceable without a writing when the buyer has paid for or accepted the goods
> If the goods have only been partially paid for or accepted, the contract is only enforceable to the extent of the partial payment or acceptance
When is mutual mistake a defense to formation?
If BOTH parties to a contract are mistaken about existing facts (not future happenings) relating to the agreement at the time it was made, the contract may be voidable by the adversely affected party if:
1. the mistake concerns a basic assumption on which the contract was made;
2. the mistake has a material effect on the parties’ bargain; AND
3. the adversely affected party did not assume the risk of the mistake
BUT: Mistakes in assumptions as to the value of the subject matter of the contract will generally NOT be remedied
When is unilateral mistake a defense to formation?
If only ONE party to a contract is mistaken about existing facts relating to the agreement at the time the contract was made, the unilateral mistake is generally NOT a defense to formation of a contract UNLESS:
1. the mistake concerns a basic assumption on which the contract was made;
2. the mistake has a material effect on the parties’ bargain;
3. the OTHER party knew or had reason to know of the mistake made by the mistaken party; AND
4. the mistaken party did not assume the risk of the mistake
When is incapacity a defense to formation?
Where one party to an agreement lacks legal capacity to enter into a contract, the contract is voidable by the party lacking capacity
* However, even when a contract is voidable by a party for lack of capacity, the incapacitated party is still liable in quasi-contract (restitution damages) for the value of any “necessaries” (items necessary for subsistence, health or education) received
When is a contract voidable by a minor?
In most jurisdictions, anyone under the age of 18 generally lacks capacity to enter into a contract binding on themselves; but contractual promises of an adult made to an infant are binding on the adult
* An infant (minor) may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority; the contract must be disaffirmed in its entirety
* Upon reaching the age of majority, a minor may affirm (i.e., choose to be bound by) the contract in its entirety
* Affirmance may be made expressly or by conduct, such as by failing to disaffirm the contract within a reasonable time after reaching majority
When is a contract voidable by a party with diminshed capacity?
Where one party’s mental capacity is so deficient that they are incapable of understanding the nature and significance of a contract, the contract is voidable by the party when lucid or by a later appointed legal representative
* Note that a mentally incompetent person has no ability to contract once a guardian has been appointed; any attempted contracts by an incapacitated person who is under a guardianship are void
When is a contract voidable by an intoxicated party?
A contract is also voidable by a party who, at the time of entering into the agreement:
1. was so intoxicated that they did not understand the nature and significance of their contractual promise; AND
2. the other party had reason to know of the intoxication
When is unconscionability a defense to formation?
The concept of unconscionability allows a court to modify or refuse to enforce an entire contract or a provision in it to avoid “unfair” terms that shock the conscience of the court, usually due to some unfairness in the bargaining process (procedural unconscionability)
* Unconscionability is determined by the circumstances as they existed at the time the contract was formed
What may a court do upon finding that a contract or clause was unconscionable?
If a court finds that a contract or clause of the contract was unconscionable when made, the court may:
1. refuse to enforce the entire contract;
2. enforce the remainder of the contract without the unconscionable clause; OR
3. limit the application of any clause so as to avoid an unconscionable result
What is a “final integration”?
When the parties to a contract express their agreement in a writing with the intent that it embody the final expression of their bargain, the writing is said to be a “final integration”
What is a “partial integration”?
A “partial integration” is a writing that does not contain a complete expression of the parties’ agreement
* The UCC presumes that all writings are partial integrations
What is a “merger clause”?
A merger clause recites that a writing is the complete agreement between the parties
* The presence of a merger clause is usually dispositive proof that a writing is a final integration in large commercial contracts, but the modern trend is to consider it as one factor in determining integration
What is the parol evidence rule?
The parol evidence rule provides that, when a writing is a final integration, extrinsic evidence of prior discussions or writings or contemporaneous discussions is INADMISSIBLE to vary, contradict or add to the terms of the writing
* If the writing is a partial integration, extinsic evidence may NOT be used to contradict the terms of the writing, but MAY be used to supplement the writing with consistent additional terms
What are exceptions to the parol evidence rule?
The parol evidence rule does NOT bar extrinsic evidence:
1. to correct clerical mistakes;
2. to show contract formation or enforcement defects;
3. to show conditions precedent to the contract’s effectiveness;
4. to show the “true consideration” paid;
5. to supplement a partial integration with consistent additional terms;
6. to show subsequent modifications of the writing;
7. to aid in the interpretation of ambiguous terms
> But parol evidence is inadmissible if the meaning is plain (the “plain meaning rule”)
