Contracts I

Question 1

Consideration

Answer 1

Every contract requires consideration on both sides of the transaction. Consideration consists of:

• (1) a bargained for exchange between the parties, and
• (2) that which is bargained for must be of legal value.

To establish a bargained for exchange, the promise must induce the detriment and the detriment must induce the promise.

Legal value requires that the thing exchanged have some worth. Legal value is established if there is either:

• (1) a detriment to the promisee or
• (2) a benefit to the promisor.

Question 2

Gratuitous Promise

Answer 2

A promise made without consideration is gratuitous and normally unenforceable.

An executory gratuitous promise lacks consideration and therefore is unenforceable as a contract. However, if the gratuitous promise is executed, then the promisor can not rescind the promise.

Question 3

Conditional Gift

Answer 3

A conditional gift pairs the concept of the gratuitous promise and a condition. The occurrence of the condition activates the gratuitous promise. A condition is an event that must occur to trigger some legal effect or outcome.

An event is the uncertain occurrence of something that is not within the control of the promisor. It could be something within or outside the control of the promisee. It must be something where there is some uncertainty as to whether it will occur. The passage of time is not a condition because it is certain that time will pass.

Conditional gifts are unenforceable, unless the condition is within the control of the promisor.

Question 4

Adequacy of Consideration

Answer 4

Mere inadequacy of consideration will not void a contract. There is no requirement that the things exchanged be of equal value. Gross inadequacy of consideration may be relevant to prove a defense to formation. If the purported consideration is nominal, then it is just a mere formality or pretense of a bargain and will not serve as consideration for a promise.

Question 5

Illusory Promise

Answer 5

A promise or apparent promise is not consideration if by its terms the promisor reserves a choice of alternative performance unless each of the alternative performances would have been consideration if it alone had been bargained for.

Consideration is illusory if it makes the performance of one party optional. The restatement allows for an exception if the promisor’s alternative performance would be consideration.

Question 6

Output v. Requirements Contracts

Answer 6

An output contract obligates the buyer and seller for the purchase and sale of all the output that the seller produces of a certain good. In an output contract, the seller obligates himself to sell a particular good only to the buyer, and the buyer is obligated to purchase all that the seller produces of a particular type of good.

A requirements contract obligates the buyer and seller for the purchase and sale of all that the buyer requires of a particular type of good. In a requirements contract, the buyer obligates himself to purchase a particular type of good only from a particular seller. The seller is obligated to have enough of the good to sell in order to meet the buyer’s requirements.

The UCC provides a good faith test in estimates of the quantity. Additionally, a party may not request a quantity that is “unreasonably disproportionate” from the estimate or past orders.

Question 7

Past Consideration

Answer 7

A promise based on consideration received in the past is generally unenforceable since it was not bargained for. There are exceptions in moral obligations.

Question 8

Moral Obligation

Answer 8

Moral obligation will not serve as consideration for the enforcement of a promise; however, it may be relevant as an independent basis to prevent unfairness or unjust enrichment. Exceptions:

• (a) Promises to pay debts barred by statute of limitations
• (b) A debt discharged by bankruptcy
• (c) Debts of a minor reaffirmed upon age of majority
• (d) Promissory restitution

Question 9

Preexisting Legal Duties

Answer 9

If the purported consideration for a promise consists of something that the promisee is already legally obligated to perform, then there is no bargain. Preexisting legal duties may be of two types:

• (1) public legal duties, such as the duty of a police officer to protect the public, and
• (2) contractual legal duties–i.e., unperformed preexisting contractual promises.

Question 10

Accord and Satisfaction

Answer 10

An accord and satisfaction is the common law term for a special type of settlement agreement. The accord is the new agreement in which an obligee agrees to accept some sort of different performance than was originally promised in the first contract. The accord, taken alone, will not discharge the prior contract. It merely suspends the right to enforce it in accordance with the terms of the accord contract. The satisfaction is the actual performance of the accord.

If an accord has been made, then the obligee cannot go back and sue under the original contract. However, if the obligor does not perform his new duty under the accord, then the obligee has a choice to enforce either the original duty or the substituted duty under the accord.

The new duty under the accord has to be (1) additional or different, or (2) there has to be a settlement of an honest dispute.

Question 11

Novation

Answer 11

A novation occurs when the parties agree to replace an existing obligor with a new obligor. A valid novation will discharge the duties of the original obligor, however, strict requirements must be followed. A novation requires:

• (1) a previous valid obligation;
• (2) an agreement by all parties to change the obligations;
• (3) a rescission of the prior contract; and
• (4) the formation of a new contract.

Question 12

UCC Modification Rule

Answer 12

The UCC differs significantly from the common law in that no consideration is required for a modification of a contract involving goods. The UCC authors recognized that businesspeople regularly modify contracts without offering new consideration.

UCC Article 2 requires that modifications be made in good faith. This limit helps to guard against situations where the modification is made under duress. “Good faith” is defined in Article 2 as honesty in fact and the observance of reasonable commercial standards of fair dealing.

Question 13

Goods Severed From Realty

Answer 13

A contract for the sale of minerals or structures is considered a service if they are to be severed by the buyer. If they are to be severed by the seller, they are goods.

If the subject matter is growing crops, timber to be cut, or other things attached to realty capable of severance without material harm to the realty, it is always a contract for the sale of goods.

Question 14

Predominant Purpose Test

Answer 14

Factors to consider include:

• (1) The language of the contract → Does the language emphasize goods over services or vice versa? What was the underlying purpose of the contract?
• (2) The nature of the business of the supplier of goods and services → Does the seller primarily sell goods, or does the supplier provide a service?
• (3) The intrinsic value of the goods vs. the cost of the service → Under the terms of the contract, which costs more–goods or the service?

Question 15

Gravamen Test

Answer 15

The gravamen test focuses on the nature of the complaint rather than the character of the transaction. The test asks, “Did the essence of the complaint arise from the performance of services or from the goods sold?”

Question 16

Promissory Estoppel

Answer 16

(1) A promise (2) which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and (3) which does induce such action or forbearance is binding if (4) injustice can be avoided only by enforcement of the promise. (5) The remedy granted for breach may be limited as justice requires.

Question 17

Quasi-Contract/Implied In Law

Answer 17

A court may order restitution if:

• (1) the plaintiff has conferred a benefit on the defendant;
• (2) the defendant has knowledge or appreciation of the benefit;
• (3) the defendant has accepted or retained the benefit conferred; and
• (4) the circumstances are such that it would be inequitable for the defendant to retain the benefit without paying fair value for it.

Exceptions → Restitution is not available if:

• (a) the plaintiff is an officious intermeddler; or
• (b) the benefit conferred by the plaintiff was a gift.

Question 18

Promissory Restitution

Answer 18

(1) The promisor made a promise to the promisee (2) in recognition of a previously received benefit, (3) the benefit was conferred by the promisee to the promisor, and (4) the promise is binding to the extent necessary to prevent injustice.

A promise is not binding under promissory restitution:

• (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
• (b) to the extent that its value is disproportionate to the benefit.

The restatement lists the following factors to take into consideration when determining if there is injustice by not enforcing the promise:

• (1) the definite and substantial character of the benefit received,
• (2) the formality in the making of the promise,
• (3) part performance of the promise, and
• (4) reliance on the promise or the probability of such reliance.

Question 19

Objective Theory Rule (Mutual Assent)

Answer 19

A party’s manifestation of assent is judged by the objective reasonable interpretation of his outward expression and not by his subjective intent. Words and conduct of the parties will normally be given the same meaning that would be given by a reasonable person in the same circumstances.

Question 20

Whose Meaning Prevails Rule (Mutual Assent)

Answer 20

(1) Where the parties have attached the same meaning to a promise, agreement, or term, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise, agreement, or term, it is interpreted in accordance with the meaning attached to one of them if at the time of the agreement was made:

• (a) that party did not know of any different meaning attached by the other, or
• (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this section, neither party is bound by the meaning attached by the other, even if the result may be a failure of mutual assent.

Question 21

Elements of an Offer

Answer 21

An offer requires:

• (1) a manifestation of present intent to enter a bargain;
• (2) that it be stated in certain and definite terms;
• (3) that it be communicated to an identified person or persons; and
• (4) that an offeree be able to reasonably understand that a contract would result if accepted.

Question 22

Certainty Rule (Offer)

Answer 22

(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.

(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

Question 23

Advertisements and Price Quotes as Offers

Answer 23

Advertisements, catalogs, flyers, and price quotations are usually not offers but are merely invitations to bargain.

A price quote could be an offer if (1) there are enough terms in the price quote to satisfy the certainty requirement, and (2) the objective meaning of the quote shows intent to enter into a bargain.

Exceptions:

• Misleading Advertising → Courts sometimes enforce deliberately misleading advertising, which intentionally lures customers into a store only to be told that the advertised item is unavailable. The store then tries to sell a higher-priced item, commonly referred to as the “bait and switch.”
• By Statute → Some states have passed statutes that require sellers to honor prices that are stated in an advertisement.
• Rewards → An advertisement that offers a reward is usually construed as an offer.

Question 24

Formation Rule (UCC)

Answer 24

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 Article 2 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.

Question 25

Acceptance

Answer 25

Acceptance of an offer is (1) a manifestation of assent (2) to the terms thereof made by the offeror (3) in a manner invited or required by the offer.

Question 26

Invitation of Promise or Performance

Answer 26

In case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offeror requests or by rendering the performance, as the offeree chooses.

If the offeree chooses performance, then the beginning of performance is deemed the acceptance and the offeree is contractually bound to complete performance.

Question 27

Termination of the Power of Acceptance

Answer 27

The power of acceptance may be terminated by:

• (a) rejection by the offeree,
• (b) revocation by the offeror,
• (c) counteroffer by the offeree,
• (d) lapse of time, or
• (e) death or incapacity of the offeror or the offeree.

Question 28

Revocation

Answer 28

An offer is generally freely revocable at any time before it has been accepted if the offeree receives notice of the revocation. Notice of the revocation may be received directly from the offeror or indirectly from another party or by other means. The revocation may be communicated by words or actions of the offeror.

Question 29

Counteroffer

Answer 29

(1) A counteroffer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree’s power of acceptance is terminated by his making of a counteroffer, unless either party has manifested a contrary intention.

Question 30

Lapse of Time

Answer 30

(1) An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time.

(2) What is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made.

Question 31

Silence as Acceptance

Answer 31

Silence is normally not acceptance. Exceptions:

• (a) Offeree indicates, by words or conduct, that silence is acceptance.
• (b) In past business dealings, the parties operated so that silence was acceptance.
• (c) The offeree has exercised dominion over the consideration that was offered.

Question 32

Mailbox Rule

Answer 32

When sent through the mail, an acceptance is effective on dispatch. Everything else–i.e., the offer, a rejection, a counteroffer, or revocation–is effective on receipt. Exceptions:

• (1) Offeror may stipulate that acceptance is not effective until receipt.
• (2) Acceptance under an option contract is not effective until receipt.
• (3) Federal government contracts.

Question 33

Option Contracts

Answer 33

An option contract is a contract that holds an offer open for a specified period of time. An option must be supported by consideration; otherwise, the offeror may revoke the offer.

According to the mailbox rule, acceptance under an option contract is not effective until receipt.

Question 34

Part Performance of a Unilateral Contract

Answer 34

(1) Where an offer invites an offeree to accept by rendering a performance and not by a reciprocal promise, an option contract is created when the offeree begins the invited performance.

(2) The offeror’s duty of performance under any option contract so created is conditional upon completion of the invited performance in accordance with the terms of the offer.

Question 35

Merchant’s Firm Offer Rule

Answer 35

(1) If a merchant (2) offers to buy or sell goods in a signed writing and (3) the writing gives assurances that it will be held open, (4) 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 no event may such period exceed three months).

Question 36

Definition of Merchant

Answer 36

Article 2 generally defines “merchant” as one who regularly deals in goods of the kind sold or who otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved.

Question 37

Inquiry v. Counteroffer

Answer 37

A mere inquiry regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer, is not ordinarily a counteroffer. The test is whether a reasonable person would believe that the original offer had been rejected.

Question 38

Preliminary Negotiations

Answer 38

If there is any wavering or uncertainty as to intent, then the courts will determine that the parties are in preliminary negotiations. The restatement provides that if a potential offeree knows or has reason to know that the other party making a statement does not intend to conclude a bargain until he has made a further manifestation of assent, then no offer has been made and the parties are in preliminary negotiations.

Question 39

Mirror Image Rule

Answer 39

An offeree’s acceptance must match every term in the offer exactly; otherwise it is a counteroffer.

Question 40

Last Shot Rule

Answer 40

The last shot rule applies to the following circumstances: In response to an offer, an offeree sends an acceptance that contains additional or different terms. The other party does not accept the new terms but performs as if the original offer was accepted. In such a scenario, the offeree is deemed to have sent a conditional acceptance, which the original offeror has accepted through performance. If a contract is formed in this fashion, then the offeree’s additional or different terms are incorporated into the contract.

Question 41

Knockout Rule

Answer 41

(1) Varying terms are knocked out, (2) the contract consists of terms that the forms agree on, and (3) the UCC implies any reasonable terms under Article 2 that are necessary.

Question 42

Statute of Frauds

Answer 42

The statute of frauds states that certain types of contracts are unenforceable unless the agreement is in writing and is signed by the party to be charged. The contracts which are subject to the statute of frauds include:

• (1) Marriage provision
• (2) Over one-year provision
• (3) Land sale contract
• (4) Executor payment of estate’s debts
• (5) Sale of goods of $500 or more
• (6) Suretyship agreement

The statute of frauds is both a formation requirement and an affirmative defense.

Question 43

Writing Requirements (Statute of Frauds Common Law)

Answer 43

A contract within the statute of frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged, which

• (a) reasonably identifies the subject matter of the contract,
• (b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and
• (c) states with reasonable certainty the essential terms of the unperformed promises in the contract.

Question 44

Writing Requirements (Statute of Frauds UCC)

Answer 44

In a breach of contract case under the UCC, courts need to know the quantity of goods to be sold in order to determine if there is a breach and a remedy.

The signature requirement generally uses the same set of rules as we have already covered. The writing must be signed by the defendant, and the mark must be made to authenticate the document.

Question 45

Merchant’s Confirmatory Memo (Statute of Frauds UCC)

Answer 45

The merchant’s confirmatory memo provides that a merchant may be held accountable even without having signed any writing. This only occurs if the defendant merchant receives a written and signed confirmation from the other party and the defendant merchant does not object to the confirmation in writing within ten days. The signed memo must have enough detail that it would be sufficient to hold the merchant who sent it accountable under the statute of frauds. The defendant merchant must also know or have reason to know the contents of the confirmatory memo. Also, both parties must be merchants for the rule to apply.

Question 46

Minor Incapacity Rule

Answer 46

A minor’s contracts are voidable by the minor at any time before reaching the age of majority or within a reasonable time after becoming an adult.

A minor who disaffirms a contract is entitled to recover all of the consideration he has conferred and, in return, the minor is expected to restore as much of the consideration as remains in the minor’s possession.

Contracts that are not subject to a minor’s incapacity defense include:

• (1) Contracts that provide for the necessities of life that are not otherwise available to the minor through a parent or guardian.
• (2) Where a minor misrepresents his age.
• (3) Where the minor willfully harms the property that is the subject of the contract.
• (4) Statutory exceptions, such as student loans, insurance, and certain employment contracts.

Question 47

Mental Incapacity Rule

Answer 47

Transactions are voidable by a party if the party by reason of mental illness or defect was incompetent at the time of contract formation. Upon becoming lucid, the incompetent may reaffirm the contract.

Exceptions:

• (a) A contract for an incompetent’s necessities is not voidable.
• (b) A contract is not voidable if:
  
  • (1) the contract has been performed in whole or in part;
  • (2) the other party did not know of the mental illness or defect, and
  • (3) the contract is on fair terms.

Question 48

Tests for Mental Incapacity

Answer 48

Although a party suffers from mental illness, that does not automatically mean they are incapacitated. There is a split authority on how to test for mental incapacity:

• Cognitive Test (Traditional) → The test is whether the person involved had sufficient mental ability to understand in a reasonable manner the nature and consequences of the transaction.
• Volitional Test (Modern) → A person lacks capacity to contract if (1) they are unable to act in a reasonable manner in the transaction and (2) the other party knows of this condition. Under this test, a party might understand the consequences of an action but cannot help themselves from acting in an irrational manner.

Note: The burden of proof is on the person seeking to avoid the contract.

Question 49

Intoxication Rule

Answer 49

A person who is so intoxicated as to be unable to understand in a reasonable manner the nature and consequences of the transaction may be held to have made a voidable promise if the other party had reason to know of the intoxication. Contracts for necessities are not voidable.