Contracts II Flashcards
Promissory Estoppel
(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.
UCC Merchant Definition
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.
Mirror Image Rule (Common Law)
An offeree’s acceptance must match every term in the offer exactly; otherwise it is a counteroffer.
Last Shot Rule (Common Law)
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.
UCC § 2-207 Framework
Section 2-207 contemplates two additional types of responses from an offeree that might form a contract: (1) an acceptance with varying terms and (2) a conditional acceptance. The analysis breaks into two steps:
- Step 1 → Has a contract formed?
- Step 2 → If yes, are the additional or different terms incorporated into the contract?
Acceptance With Varying Terms (UCC § 2-207)
Step 1 → Has a contract formed?
- Under the common law, we would label an acceptance with varying terms as a counteroffer; however, in the UCC, we treat an acceptance with varying terms as an acceptance that forms a contract.
- The UCC requires that the varying acceptance be a definite and seasonable expression or a written confirmation sent within a reasonable time. The varying acceptance forms a contract even though there are different or additional terms.
Step 2 → Are the additional or different terms incorporated into the contract? The question of whether the terms are included turns in part on whether both parties are merchants:
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(a) At least one party is not a merchant:
- If at least one of the parties is not a merchant, the additional or different terms are not part of the contract.
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(b) Both parties are merchants: If both parties are merchants, the additional or different terms become part of the contract unless one of the exceptions occurs:
- (1) If the original offer expressly limits acceptance to the terms of the offer, then any additional terms are automatically rejected and do not become part of the contract.
- (2) If the additional terms materially alter the contract, then those terms are not part of the contract. Terms materially alter the contract if it would result in surprise or hardship by the other party. One test is whether the terms increase the party’s risk profile.
- (3) The terms are not incorporated if the other party has objected or sends notice of their objection within a reasonable time.
Conditional Acceptance (UCC § 2-207)
Step 1 → Has a contract formed?
- The conditional acceptance is treated as a counteroffer, which then must be accepted in turn by the original offeror in order to form a contract. There are three basic responses the original offeror could make:
- (1) Agree to the offeree’s new terms: Contract forms and the additional or different terms are included.
- (2) Reject the offeree’s new terms: No contract forms.
- (3) Not respond but act as if there is a contract: The contract forms through the conduct of the parties.
Step 2 → Are the additional or different terms incorporated into the contract?
- The Knockout Rule → The following will occur: (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.
Statute of Frauds
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.
Writing Requirements (Statute of Frauds Common Law)
- (1) Signed by defendant
- (2) Includes essential terms (parties, subject matter, price, timing)
Writing Requirements (Statute of Frauds UCC)
- (1) Signed by defendant
- (2) Identifies the quantity
- (3) Identifies the goods
Merchant’s Confirmatory Memo (Statute of Frauds UCC)
The merchant’s confirmatory memo provides that a merchant may be held accountable even without having signed any writing. This only occurs if:
- (1) both parties are merchants;
- (2) the defendant merchant receives a written and signed confirmation from the other party and does not object to the confirmation in writing within ten days;
- (3) the signed memo has enough detail that it would be sufficient to hold the plaintiff merchant accountable under the statute of frauds; and
- (4) the defendant merchant knows or has reason to know the contents of the confirmatory memo.
Statute of Frauds Exceptions (Common Law)
- (1) Promissory estoppel
- (2) Courtroom admission
- (3) Full performance by both (all categories)
- (4) Full performance by one party (only year-long contracts)
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(5) Part performance by one party (only land contracts)
- Buyer must have done at least 2 of the following:
- (a) made payment
- (b) took possession
- (c) made substantial improvements
- Buyer must have done at least 2 of the following:
Statute of Frauds Exceptions (UCC)
- (1) Promissory estoppel
- (2) Courtroom admission
- (3) Specially manufactured goods
- (4) Part performance by one party
Specially Manufactured Goods (UCC Statute of Frauds Exception)
- (1) The goods were specially manufactured for the buyer,
- (2) the specially manufactured goods are not suitable for sale to others (meaning other than the buyer) in the ordinary course of the seller’s business, and
- (3) seller has made either (a) a substantial beginning in manufacturing the goods or (b) commitments for the procurement of the supplies necessary for manufacturing.
Minor Incapacity Rule
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.
Mental Incapacity Rule
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.
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(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.
Tests for Mental Incapacity
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:
- (a) 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.
- (b) 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.
Note: The burden of proof is on the person seeking to avoid the contract.
Intoxication Rule
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. The intoxicated person may reaffirm the contract upon becoming lucid. Contracts for necessities are not voidable.
Duress Rule
Courts have expanded the duress doctrine to include not only physical duress but also economic duress. As a matter of public policy, contracts entered into through physical duress are automatically void. However, contracts formed through economic duress are only voidable at the option of the victim.
A contract is voidable by the victim if:
- (1) a party was induced to enter into the contract
- (2) by an improper threat made by the other party, and
- (3) the victim has no reasonable alternative.
The improper threat may be:
- (a) a crime or tort,
- (b) threat of criminal prosecution,
- (c) a frivolous or bad faith use of the civil legal system (threat to sue), or
- (d) a threat to breach the duty of good faith and fair dealing under a contract.
Undue Influence Rule
Courts focus on four elements to show undue influence:
- (1) inducement,
- (2) unfair persuasion,
- (3) undue susceptibility to domination by another party, and
- (4) an inequitable result.
In proving unfair persuasion and undue susceptibility, courts apply a sliding scale as to the weight between the two elements.
Undue susceptibility to domination by another party may be present either because there is (a) some weakness in the mind, or (b) because the parties are in some relationship of trust.
Misrepresentation Rule
Four elements must be met to succeed in a misrepresentation defense:
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(1) There must be a false statement of fact.
- Note: Incorrect opinions are not false statements of fact.
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(2) There must be a fraudulent or material misrepresentation.
- (A) Fraudulent → The maker had the intent to induce an acceptance, and knew or should have known that the statement was false.
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(B) Material → There are two ways in which a misrepresentation can be material:
- (a) A reasonable person would likely be induced by the misrepresentation to enter the contract; or
- (b) The maker knows that this specific recipient would likely be induced even though a reasonable person might not be so induced.
- (3) There must be an inducement. If the misrepresentation substantially contributes to a party’s decision to enter the contract, then the party has been induced by the misrepresentation. Note that the misrepresentation does not need to be the only or even the primary reason.
- (4) There must be a justifiable reliance. This means that the reliance must have been reasonable. The reliance will not be justifiable if the plaintiff knew or should have known that the statement was false or that it was obviously incorrect.
Nondisclosure Rule
Generally, there is no requirement to disclose all of the facts in a business transaction, but the victim may seek rescission if there are any non-disclosed facts which:
- (1) have a material effect on the transaction;
- (2) are not readily observable; and
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(3) are not known to the victim and are in any of the following circumstances:
- (a) where a disclosure is required by statute;
- (b) where a party intentionally conceals the non-disclosed facts;
- (c) where the uninformed party is entitled to know the facts because of a relationship of trust and confidence between the parties (e.g., financial advisor, attorney, guardian, doctor, family member; buyer-seller is NOT one of these relationships); or
- (d) there is a duty to correct a mistake of the uninformed party.
