Formation Flashcards
Formation in General
For there to be valid contract formation, there must be mutual assets and consideration.
Mutual Assent Consists of a valid offer and acceptance.
Offer
An offer is a reasonable manifestation of intent to enter into a bargain, communicated to the offeree, so made as to justify a reasonable offeree in believing that acceptance is invited and will conclude it.
Criteria:
1) Show and objective intent to be bound
2) Be communicated to the offeree
3) Contain Clear and Definite Terms
Clear and Definite Terms
An offer must be definite and certain in its terms such that enough of the essential terms are present so that a contract including them is capable of being enforced.
This typically includes (1) the offeree (2) the subject matter and (3) the price.
Definiteness for Real Estate Contracts
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.
Definiteness for UCC
In contracts for the sale of goods, there need to be a finite quantity term or one that is subject to mathematical calculation, unless there is an output or requirement contract
Quantity Measurement for Output and Requirement Contracts
Requirement - measures the quantity by the buyer’s needs
Output - measures the quantity by the seller’s ability to produce
In an output or requirements contract, the quantity is the actual output or requirements that may occur in good faith, however no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate any normal or comparable or prior output or requirements may be tendered or demanded.
Definiteness for Employment and other Services
Employment - In contracts for employment, if the duration of the employment is not specified, the offer is construed as creating a contract terminable at will of either party
Services - The nature of the work to be performed must be included in the contract
Missing Terms
Even though one or more terms are left open, a contract does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy
Price - Except in contracts for real property, the failure to state a price doesn’t prevent formation if the parties intended to form a contract without price being settled
Time - if an agreement doesn’t specify the time in which an act is to be performed, the law implies that it is to be performed within a reasonable time.
Invitation to Offer
An invitation to an offer is an act that is intended to induce another party to make an offer. They are not considered to be an offer because they are indefinite and often lack material terms.
However, it will be construed as an offer if it invites acceptance without any further negotiation, requires some action on the part of the offeree, and is clear, definite, and unconditional. (Advertisements that are sufficiently definite and clear)
Termination of an Offer
An offer may be terminated by
1) Lapse of time
2) Rejection (or counteroffer)
3) Revocation
4) By Operation of Law (Death, Insanity, Destruction, Illegality)
Lapse of Time
An offeree must accept the offer within the time stated or, if no time stated, within a reasonable time. If not the offer lapses.
Conversation Rule - If an offer is made orally during a conversation, most courts hold the offer lapses if the offeree does not accept by the end of the conversation
Rejection
Express - A statement by the offeree that they do not intend to accept the offer will terminate the offer
Counteroffer - 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 terms - a counteroffer operates as a rejection of the original offer
Conditional Acceptance - When an acceptance is made expressly conditional on the acceptance of new terms, it is a rejection and counteroffer
NOTE - A rejection is effective when received by the offeror
Mere Inquiry
An inquiry won’t terminate the offer when it is consistent with the idea that the offeree is still keeping the original offer under consideration
The test is whether a reasonable person would believe that the original offer has been rejected.
Rejection when there is an Option Contract
Because an option contract keep the offer open, a rejection or a counteroffer to an option does not constitute a termination of the offer
The offeree is free to accept the original offer within the option period unless the offeror detrimentally relied on the offer’s rejection
Revocation
A revocation is a manifestation of intent to withdraw an offer. An offeror has the unencumbered right to revoke an offer at any time before acceptance, unless the offer is irrevocable.
By Publication - An offer made by publication can be directly revoked only by publication through comparable means
NOTE - A revocation is effective when received by the offeree (when there is a revocation by publication, it is effective when published)
Indirect Revocation
An offer may be revoked indirectly if the offeree receives
1) correct information
2) from a reliable third party
3) of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer
Termination by Operation of Law
Death or Insanity - Death or insanity of either party will terminate an offer, unless the offer is the kind that could not be terminated (irrevocable offers). Death or insanity need not be communicated to the other party.
Destruction - Destruction of the proposed subject matter of the offer will terminate the offer
Illegality - Supervening illegality will terminate the offer
Different Types of Irrevocable Offers
1) Options
2) Merchant Firm Offer
3) Foreseeable Detrimental Reliance
4) Beginning Performance in a True Unilateral Contract
Option Contract
An option is a distinct contract in which the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer. It must contain all of the elements of a contract to be valid.
NOTE - Acceptance under an option contract is valid upon receipt
Merchant Firm Offer
An offer by a merchant in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or, if no time state, for a reasonable time, but in no event shall such period of irrevocability exceed three months (90 days)
NOTE - Broad Merchant - anyone who is both in business and acting in his, her, or its business capacity
Foreseeable Detrimental Reliance
When the offeror could reasonably foresee that the offeree would rely to their detriment on the offer, and the offeree does rely, the offer will be held irrevocable as an option contract for a reasonable length of time.
Watch for subcontractor scenarios
Beginning Performance in a True Unilateral Contract
An offer for a true unilateral contract becomes irrevocable once performance has begun for a reasonable time to allow the offeree to complete performance. (offeree is not required to complete performance)
Preparations to Perform - Substantial preparations to perform do not make the offer irrevocable but may constitute detrimental reliance if such preparation was foreseeable.
Beginning Performance in Offers Indifferent As to Acceptance
If the offer is ambiguous as to the method permitted for acceptance, it can be accepted through any reasonable means.
If performance is a reasonable means, the start of performance constitutes acceptance (revocation becomes impossible because the contract was validly formed)
Acceptance
An acceptance is a manifestation of assent to the terms of the offer that is communicated to the offeror in the manner invited.
For any acceptance to be valid, the offeree must have knowledge of the offer. Additionally, acceptance of a bilateral contract generally requires the acceptance to be communicated to the offeror.
Who May Accept an Offer
Generally, only the person whom an offer is addressed has the power of acceptance, and an offeree’s power of acceptance cannot be assigned.
HOWEVER, if there is an option contract, the right to accept is transferable
UCC Acceptance
1) Unless unambiguously indicated by the language or circumstances, an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances
UCC Prompt or Current Shipment
An order or other offer for the prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but such shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation.
UCC Beginning Performance Acceptance
Where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
Silence as to Acceptance
Silence is generally not an acceptance. However, a court may find acceptance by silence if due to prior dealings or trade practices it would be commercially reasonable for the offeror to consider the silence acceptance.
RECEIPT OF SERVICES - If the recipient of services knows or should have known that the services were being rendered with the expectation of compensation and, by a word, could have prevented the mistake, the recipient may be held to have accepted the offer if they failed to speak.
Mirror Image Rule
Under Common law, for an acceptance to be valid it must be an acceptance of each and every term of the offer. If there are different or additional terms, it is treated as a counteroffer.
Acceptance of a True Unilateral Contract
A true unilateral contract is not accepted until performance is completed.
Generally, the offeree is not required to give the offeror notice that he has begun the requested performance, but is required to notify the offeror within a reasonable time after performance has been completed.
However, no notice is required if:
1) the offeror waived notice; or
2) the offeree’s performance would normally come to the offeror’s attention within a reasonable time
2-207(1)
A definite and seasonable expression of acceptance or a written confirmation sent within a reasonable time operates as an acceptance even though it states terms that are additional to or different than those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms.
2-207(2)
The additional terms are to be construed as proposals for the addition to the contract. Between merchants, such terms become part of the contract unless:
1) the offer expressly limited acceptance to the terms of the offer;
2) they materially altered it; or
3) notification of objection to them has already been given or is given within a reasonable time.
2-207(3)
Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case, the terms of the contract consists of those terms on which the writings agree, together with any supplementary terms under the UCC.
Mailbox Rule
Acceptance by mail or similar means is effective at the moment of dispatch, provided that the mail is properly addressed and stamped, unless one of the following exceptions apply:
– The offer stipulates the acceptance is not effective until received
– An option contract is involved
– The offeree sends a rejection and then sends an acceptance (whichever arrives first is effective)
– The offeree sends an acceptance and then a rejection, in which case the acceptance is effective unless the rejection arrives first and the offeror detrimentally relies on it.
Acceptance by Unauthorized Means (Mailbox Rule)
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.
Auction Contract
Under the UCC, a sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner. 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.
Consideration
The two elements that constitute consideration are (1) a bargained for exchange between the parties (2) of something of legal value.
GA - The existence of a seal raises a prima facie presumption of consideration, which is rebuttable
Act or Forbearance as Consideration
An act or forbearance by the promisee is sufficient to constitute consideration if it benefits the promisor (the benefit does not need to be economic)
It is irrelevant whether the promisee would have acted or forbeared anyway
Past or Moral Consideration
A promise given in exchange for something already done does not satisfy the bargain requirement - past consideration is not consideration
However, where a past obligation is unenforceable because of a technical defense (SOL), that obligation will be enforced if a new promise is made in writing or is partially performed.
Adequacy of Consideration
Courts do not inquire into the adequacy of consideration or fairness unless something is entirely devoid of value
Preexisting Duty Rule
The preexisting duty rule holds that performing or promising to perform an existing legal duty is insufficient consideration
Exceptions:
1) new or different consideration is promised
2) the promise is to ratify a voidable obligation
3) the preexisting duty is owed to a third person rather than the promisor
4) there is an honest dispute as to the duty
5) there are unforeseen circumstances sufficient to discharge a party, or under the modern view - if the modification is fair and equitable in view of circumstance not anticipated when the contract was made
NOTE - under the UCC, a good faith agreement modifying a contract needs no consideration
Modification of Common Law Contracts
Under common law, a contract cannot be modified unless the modification is supported by new consideration (preexisting duty rule)
However, the modern view permits modification without consideration if (1) the modification is due to circumstances unanticipated by the parties when the contract was made and (2) it is fair and equitable.
Discharge of Debts
A debt can be discharged through an accord and satisfaction. Generally, an accord must be supported by new consideration.
However, even if the consideration is of a lesser value than originally bargained for, it is sufficient if they new consideration is of a different type or if the claim is to be paid to a third party.
A debtor’s offer to make a partial payment on an existing debt will suffice for an accord and satisfaction if there is some bona fide dispute as to the underlying claim or if there is some alteration (even slight) in the debtor’s consideration.
Forbearance to Sue
A promise to refrain from suing on a claim constitutes consideration if the claim is valid or the claimant believes in good faith the claim is valid
Promissory Estoppel
Promissory Estoppel can act as a substitute for consideration. Promissory estoppel requires
1) a promise
2) reasonable foreseeable reliance on the promise by the promisee
3) actual reliance or inducement of action or forbearance by the promisee
4) injustice can only by avoided by enforcement of the promise
