Formation of Contracts

Question 1

When is there adequate consideration?

Answer 1

• Something of substance

- Look to subjective value

Question 2

What is the pre-existing duty rule?

Answer 2

Common Law: Not consideration.

Exceptions

• When a third party’s promise is exchanged for promise to perform act that promisor already obligated to do.
• Something new is offered.

Question 3

What is past consideration?

Answer 3

Common Law: Not consideration.

Modern Trend (2nd Restatement) - Allowed under material benefit rule.

Question 4

When is there valid consideration?

Answer 4

Bargained for exchange

• Majority: legal detriment to promisee
• Minority: Detriment or benefit.

Return promise to do something, refrain from doing something, actual performance, or refraining from performance.

Question 5

Is a settlement of a legal claim valid consideration?

Answer 5

No.

Unless: claim is doubtful or believes in good faith it is valid.

Question 6

When can an offer be terminated?

Answer 6

• Lapse in Time (if no date: reasonable time)
• Death/Mental Incapacity
• Destroyed/Illegal
• Rejection by offeree.
• Revocation by offeror

Note: A terminated offer can be revived by the offeror.

Question 7

What are requirements and output contracts?

Answer 7

Both are valid consideration.

Requirements: “I will buy all you make”.

Outputs: “I will sell you all I make”.

Note: Cannot be disproportionate to prior agreements.

Question 8

What is an illusory promise?

Answer 8

Too vague. “if I feel like it”.

Not consideration.

Question 9

Is a gift valid consideration?

Answer 9

Generally, no. But if bargained for consideration, then yes.

I.e. gifts B $100 to quit smoking.

Question 10

What are the three defenses to formation?

Answer 10

1. Undue influence (unfair bargaining power)
2. Duress.
   - Void if physical. Voidable if other.
   - Threat of criminal prosecution is improper.
   - Threat of civil action is ok.
3. Capacity
   - Infancy: Voidable by minor. Exception: necessities.

• Mental illness: If adjudicated, then void. If not, then
  voidable.
  -Understand transaction or act in reasonable
  manner and knows this (other party)
• Intoxication: voidable if unable to understand.

Question 11

What are the UCC special rules for auction sales?

Answer 11

• Each lot is a separate sale.
• Fall of the hammer = completion.
• Reserve auction: auctioneer may withdraw goods before completion of sale. This is presumed.
• No-Reserve auction: once begun, no withdrawal unless no bids.
• When seller bids, buyer may avoid sale or take last good-faith bid.
  -Exceptions for forced sale and a seller may bid if
  he gives notice.

Question 12

What is the effect of UCC 2-207(3)

Answer 12

Acceptance based on conduct

• No physical contract.
• Whatever is agreed to in writing are now terms of
  contract and UCC fills in the rest.

Question 13

What is the effect of additional or different terms in an acceptance?

Answer 13

Common Law

• Mirror Image Rule
  
  • Any difference = counteroffer.
  • Suggestions, clarifications, inquiries are ok.

UCC
- 2-207(1)
- Only one merchant.
- Still an acceptance, new terms must be agreed to
separately.
- “Definitive and seasonable” or written confirmation
within reasonable time.

• 2-207(2)
  - Both merchants
  - Acceptance and additional terms are ok unless
  they materially alter, acceptance conditional on
  terms, or offeror objects.
  - Different terms = knockout rule.

Question 14

Can silence act as an acceptance?

Answer 14

Yes. But only if;

• Prior dealings
• Reason to believe offer can be accepted by silence.

Question 15

What is the difference between a bilateral and a unilateral offer?

Answer 15

Unilateral: promise to do something in return for an act of other party.
- Requires complete performance.

Bilateral: Promise for a promise.

Question 16

When is an offer revocable?

Answer 16

Option: consideration needed.

UCC Firm Offer

• Merchant is offeror
• Assurances to remain open
• Assurance is in a signed writing.
• No longer than 3 months.
• No consideration needed.

Question 17

What are the different warranties in sale of goods contracts?

Answer 17

Express
- Exception: opinion

Implied Warranty of Merchantability

• Merchant
• Fit for ordinary purpose

Implied Warranty for fitness for Particular Purpose

• Particular use
• Relies on skill of seller

Note: All can be waived if conspicuous

Question 18

What is an implied-in-fact contract and a quasi-contract?

Answer 18

Implied-In-Fact
- Implied by conduct. Person must intend conduct but also know conduct causes offeror to know it is assent.

Implied-In-Law

• Measurable benefit
• Without gratuitous intent
• Unfair to keep because opportunity to decline or reasonable excuse for not giving opportunity.

Question 19

What is required for a valid offer?

Answer 19

Intent: Reasonably interpret and present intent

Knowledge by offeree

Terms

• common law: essential elements (parties, subject matter, price, quantity).
• UCC quantity only.

Duration Terms
- If none, reasonable time.

Power of Acceptance in Offerree

Note: Invitations to deal are not offers. Exception for reward offers or if they are specific.

Question 20

What are the three defenses to formation?

Answer 20

1. Mistake

a. Mutual
- Voidable by adversely affected party if; (1) mistake of fact at time formed; (2) basic assumption; (3) material impact; and (4) adversely affected party did not assume risk of mistake.

b. Unilateral
- Void if (mutual mistake elements) and unconscionable or non-mistaken party caused mistake, duty to disclosure, or knew of mistake.

2. Misunderstanding
   - Neither party knows: no contract
   - One party knows: meaning by other party
   - Both parties know: no contract.
3. Misrepresentation
   - Fraudulent when knowingly false, intent to mislead, inducement, or reliance. If not fraudulent, still voidable if material, induced assent, and reliance.
   - Non-disclosure - necessary to prevent misrepresentation, correct basic assumption or mistake, entitled to know due to relationship
   - Fraud in the factum; essential terms - void
   - Fraud in the inducement: voidable.

Question 21

When are there promises that are binding without consideration?

Answer 21

Promise to pay a debt after statute of limitations has run out = ok.

Material Benefit Rule
- Unrequested service, expectation of compensation.

Promissory Estoppel

• Reasonably expect promise to induce
• Does induce; and
• Avoid injustice
• Exception: for construction contracts, general contractor not bound to sub-bid.

Question 22

When does the common law or UCC govern?

Answer 22

Common Law: Services

UCC: Goods

Note: Predominant Purpose Test

Question 23

What is the common law and UCC rules for divisible or installment contracts?

Answer 23

Common Law
- Recovery limited to portion preformed. Obligations can be separated to agreed equivalents.

UCC

• Multiple shipments, each must be separately accepted and paid.
• Non-conforming segments: buyer can reject only if it substantially impairs value and cannot be cured. May cancel if non-conformity impairs value of entire contract.

Question 24

When is there an accord and satisfaction?

Answer 24

Accord: A party to a contract agrees to accept a different performance

Satisfaction: Discharges both old and new contract. If breach, can sue under either.

Question 25

Can a contract be modified?

Answer 25

Yes.

Common Law
- Must have consideration. But agreements to modify may still be enforced if; (1) recession by destruction; (2) unanticipated difficulties and agree to compensate; (3) new obligations on both sides.

UCC

• No consideration needed.
• Good-faith required.

Question 26

What is the difference between a void, voidable, and unenforceable contract?

Answer 26

Void: never existed.

Voidable: Can be voided, discretionary.

Unenforceable: Valid, but not enforceable.

Question 27

What are the defenses to enforcement?

Answer 27

Illegality
- Exceptions: ignorance (one party knows and other does not). And lack f illegal purpose.

Unconscionably

Public Policy

Question 28

When is a revocation of an offer, sent by mail, effective?

Answer 28

Upon receipt

Question 29

Under the mailbox rule, when is acceptance effective?

Answer 29

An acceptance that is mailed properly (i.e., correct postage and address) within the allotted response time is effective when sent as opposed to on receipt, unless the offer provides otherwise.