Formation of Contracts Flashcards
What is a contract? (Q)
A contract is a mutual exchange between two parties that is a legally enforceable agreement.
When does a bilateral contract occur? (Q)
A bilateral contract results when the parties mutually exchange promises. Acceptance by promise.
When does a unilateral contract occur? (Q)
There is no return promise. Acceptance of the initial promise is done by performance.
What is consideration? (Q)
Consideration is something of value given (e.g., money, a return promise, or forbearance) by a promisee to a promisor. Consideration can constitute either a benefit to the promisor or a detriment to the promisee. To have sufficient consideration to form a contract, the parties must both (1) bargain for and (2) exchange something.
Can the parties to a contract determine for themselves whether consideration is adequate? (Q)
Yes. The parties to a contract normally decide for themselves whether consideration is adequate. Any exchange of value is generally sufficient for adequate consideration. The values that are exchanged do not have to be equivalent. Courts do not usually second-guess the parties’ determination of the relative value of the detriments exchanged, but they may do so if the purported consideration is so trivial in value that it could not possibly have induced the promisor’s promise. (Hardesty)
What is the bargain definition of consideration? (Q)
A performance or return promise is bargained for if it is sought by the promisor in exchange for the promise and is given by the promisee in exchange for that promise.
What is the benefit/detriment approach to consideration? (Q)
The return promise or performance must be bargained for, but it must also result in a benefit to the promisor and/or a detriment to the promisee.
What is a gratuitous (gift) promise? (Q)
A gratuitous promise is a promise to do or refrain from doing something, made without the expectation of or actual compensation. A gratuitous promise is not enforceable as a contract because it is not supported by consideration. A contract requires an exchange of value between the parties. If a party receives nothing of value, there is no consideration and thus no contract. The exchange of values can be very unequal and even nominal, but each party must receive something.
What is an illusory promise? (Q)
An illusory promise looks like or sounds like a promise but in fact promises nothing. If a promise depends on the happening of a future event, or if the promisor reserves a choice for alternative performance, the promise is illusory. Unlike true promises, illusory promises do not bind the promisor.
This means an illusory promise cannot provide the consideration necessary to create a binding agreement.
Can a party give valid consideration by promising the other party to render performance to a third person who is not a party to the contract? (Q)
Yes. As long as the performance would constitute valid consideration if rendered to the other contracting party, a promise to render that performance to a third person who is a non-party is also valid consideration.
A promisee furnishes consideration by incurring a legal detriment (here, the promise to render performance to the third party) in exchange for the consideration to be received from the promisor. Therefore, if the promise to render performance to a third party is bargained for in the contract, it is valid consideration.
Can an existing duty serve as consideration for a new agreement between the same parties?
No. An existing duty cannot serve as consideration for a new agreement between the same parties. Under the preexisting duty rule, a promisee cannot form a contract by promising or performing a legal duty already owed to the promisor, because the promisee does not suffer a legal detriment.
Can past consideration support a contract?
No. Past consideration cannot support a contract if the offeror’s promise is made in recognition of a benefit already conferred by the offeree. Any asserted moral obligation to fulfill a promise made in response to the past consideration is not legally enforceable.
Is an exclusive agreement to sell goods on behalf of another, in which a seller is not bound to actually sell any goods, supported by sufficient consideration?
Yes. If one party to a contract grants the second party the exclusive right to sell the first party’s goods, common law and the UCC imply a promise by the second party to use best efforts to sell the goods. This implied obligation to use best efforts constitutes sufficient consideration to create a valid and enforceable contract, even if the contract does not obligate the seller to sell a certain quantity of goods. (Wood, Judge Cardozo)
Under common law, is new consideration required for a modification of a contract?
Yes. Under common law, the parties must both give new consideration to validate the modification of a contract.
Parties can circumvent the new consideration requirement by first terminating the original contract and then entering into a new contract on exactly the same terms as the old one, except for the modifying amendment. When the parties first agree to terminate the existing contract, they both give consideration by surrendering their rights under the existing contract. The parties’ preexisting duties are extinguished, and the parties can then enter into the replacement contract, in which they both give consideration by exchanging detriments that are the same as those in the earlier contract, with the addition of the modification.
What is the rationale for the common-law rule requiring new consideration to validate the modification of an existing contract?
The rationale for the common-law rule that the modification of an existing contract requires new consideration is the preexisting duty rule—i.e., that a party does not incur a legal detriment by promising or performing a legal duty that is already owed to the other party. An existing contract already obliges the parties to perform what they promised. If the contract is modified to add to the obligations of one of the parties, the other party’s preexisting obligation under the contract will not support the modification. Rather, consideration doctrine requires that the other party must also undertake a new obligation to provide consideration to support the modification.
Is a modification to an existing contract supported by sufficient consideration if both parties alter their duties?
Yes. A modification to an existing contract is enforceable and supported by sufficient consideration if both parties alter their duties, such as by agreeing to accelerate performance. Each party’s alteration of duties provides sufficient consideration for the other’s.
Under the unanticipated difficulties rule, what must a party prove to validate a contract modification without consideration?
Under the unanticipated difficulties rule, a party seeking to validate a contract modification without consideration must prove that (1) a change in circumstances that was not anticipated by the parties at the time of contracting and that made the performance of the party seeking the modification more difficult (2) renders the modification fair and equitable.
The unanticipated difficulties rule is an exception to the usual rule that a modification to a contract must be supported by new consideration. The rationale for this exception is that the modification is motivated by the unanticipated difficulties rather than by unfair pressure or coercion. (Angel)
Does a modification of a contract for the sale of goods require consideration in order to be valid?
No. A modification of a contract for the sale of goods does not require consideration in order to be valid. In a sale of goods, the UCC expressly abolishes the common law rule that requires consideration to make a contract modification binding. Under the UCC, the consideration requirement is replaced by a test of good faith, which would not be satisfied if a party extorted the modification without a legitimate commercial reason. The UCC defines good faith to require both subjective honesty and the observance of reasonable commercial standards of fair dealing.
What remedy will a court provide for a promissory estoppel claim?
The remedy for promissory estoppel will be limited to the promisee’s actual loss based on the extent of the promisee’s extent of reliance. The remedy for promissory estoppel is not based on the terms of any promise.
A member of a church promised the pastor that she would donate $10,000 to the church the following January. The pastor recorded the promised amount as prospective income in its budget. The church member failed to donate the money.
Can the church invoke promissory estoppel to enforce the promise?
No. The church cannot invoke promissory estoppel to enforce the promise. Promissory estoppel may permit enforcement of a promise that is not otherwise enforceable under contract law if:
the promisor expects or should reasonably expect the promise to induce performance,
the promisee justifiably relies on the promise, and
the promisee suffers a substantial detriment.
Promissory estoppel relief is premised on detrimental reliance—i.e., justifiable reliance by the promisee that causes it economic cost or loss.
To enforce a promise under the doctrine of promissory estoppel, must a promisee prove that the promisor made the promise with the intent of inducing the promisee to act in reliance on the promise?
No. To enforce a promise under the doctrine of promissory estoppel, a promisee does not need to prove that the promisor made the promise with the actual, subjective intent to induce the promisee to act on the promise. Courts instead use an objective standard, i.e., whether the promisor reasonably should have expected to induce the specific action or forbearance.
The promisor’s objective expectation is closely linked to the promisee’s justifiable reliance. Both tests evaluate the link between the promise and reliance, seen from the different perspectives of the reasonable promisor and the reasonable promisee.
Is promissory estoppel relief available to a promisee who would have taken the same action allegedly induced by reliance on a promise even if the promise had not been made?
No. Promissory estoppel relief is not available to a promisee who would have taken the same action allegedly induced by reliance on a promise even if the promise had not been made.
To succeed in a promissory estoppel claim, a promisee must show that the promise induced the action. If the promisee would have taken the same action even if the promisor had not made the promise (e.g., because the promisee had made the decision to take the action before the promise was made, or because the promisee would have had no choice but to take the action), then the promisee cannot claim that he or she acted in reliance on the promise.
What are the elements of S 90 Promise Reasonably Including Action or Forbearance for Promissory Estoppel?
Promise
Reasonably expected to induce reliance
Reliance
Injustice can be avoided only by enforcement
Remedy can be limited as justice requires.
A man told his sister that he would give her a gift certificate for a certain hotel as a birthday present. On the strength of this promise, the sister booked a non-refundable two-night stay at the hotel for the weekend after her birthday. The cost of the two nights’ accommodation was $450. The man never gave his sister the promised gift certificate, and the sister had to pay the $450 for the hotel herself. The man’s promise was clearly gratuitous.
Does the doctrine of promissory estoppel provide a basis to enforce the man’s promise?
Yes. Promissory estoppel provides a basis to enforce the promise. The doctrine of promissory estoppel may permit enforcement of a promise that is not otherwise enforceable under contract law if:
the promisor expects or should reasonably expect the promise to induce performance,
the promisee justifiably relies on the promise, and
the promisee suffers a substantial detriment.
Promissory estoppel relief is premised on detrimental reliance—i.e., justifiable reliance by the promisee that causes it economic cost or loss.
What remedy will a court provide for a promissory estoppel claim?
The remedy for promissory estoppel will be limited to the promisee’s actual loss based on the extent of the promisee’s extent of reliance. The remedy for promissory estoppel is not based on the terms of any promise.
What is the difference between a contract implied in fact and a contract implied in law?
A contract implied in fact is an actual contract in which the parties’ intent to enter the contract is manifested by conduct rather than by express agreement. By contrast, a contract implied in law (also called a quasi contract) describes the cause of action for unjust enrichment, which is not based on contract at all. The basis of unjust enrichment is that the defendant was enriched at the plaintiff’s expense, and it would be inequitable to allow the defendant to enjoy that benefit without compensating the plaintiff.
The reference to contract in the terms “quasi contract” and “contract implied in law” is historical and fictional. The cause of action was created by early common law courts, when forms of action were very rigid, so that unjust enrichment claims could be addressed in the form of action for contract.
What are the elements of a claim for unjust enrichment?
To recover on an unjust enrichment claim, a claimant must show: (1) a benefit was conferred on the beneficiary, and (2) justice requires the beneficiary to compensate the claimant for that benefit.
What five elements must a plaintiff prove to succeed in a claim for promissory estoppel?
To succeed in a claim for promissory estoppel, the plaintiff (i.e., the promisee) must prove:
the promisor made a promise to the promisee,
the promisor had a reasonable expectation that the promisee would act or forbear from acting in reliance on the promise,
the promisee did in fact act or forbear from acting in justifiable reliance on the promise,
the promisee suffered economic loss as a result of that reliance, and
the enforcement of the promise is necessary to avoid injustice.
Is an exclusive agreement to sell goods on behalf of another, in which a seller is not bound to actually sell any goods, supported by sufficient consideration?
Yes. If one party to a contract grants the second party the exclusive right to sell the first party’s goods, common law and the UCC imply a promise by the second party to use best efforts to sell the goods. This implied obligation to use best efforts constitutes sufficient consideration to create a valid and enforceable contract, even if the contract does not obligate the seller to sell a certain quantity of goods.
If a particular performance would constitute consideration, does a promise to render that performance in the future also qualify as consideration?
Yes. If a performance would constitute consideration, a promise to render that performance in the future is also consideration. A party’s legal detriment—i.e., relinquishment of a legal right—is the same whether the party renders performance at the time that the contract is concluded (creating a unilateral contract) or commits itself to rendering that performance in the future (creating a bilateral contract.) For consideration purposes, there is no distinction between incurring the legal detriment of performing a contractual obligation and the detriment of promising to perform it in the future.
Does an exchange of promises constitute sufficient consideration to create an enforceable contract?
Yes. An exchange of promises generally constitutes sufficient consideration to create an enforceable bilateral contract. The promisor is the person who makes the promise, and the promisee is the person to whom the promise is made. In a bilateral contract, each party is both a promisor and a promisee.
Is an enforceable contract created if a promise of very large value is exchanged for an item of very small value?
Yes. An enforceable contract is created if a promise of very large value is exchanged for an item of very small value. The adequacy of consideration is a determination usually left to the parties. As long as the parties manifest the intent to exchange the stated values, a court will accept the parties’ judgment on the adequacy of the exchange—even if the exchanged values appear lopsided.
At common law, is a contract created if an offeree accepts an offer but also adds an additional term not in the offer?
No. At common law, a contract is not created if an offeree accepts an offer but also adds an additional term not in the offer. A response to an offer does not qualify as an acceptance unless it manifests the intention to enter the transaction on the terms proposed by the offer—and only on those terms. The response must therefore be exactly in accord with the offer and may not vary or add to the terms proposed in the offer.
The strictest application of this principle—the mirror-image rule—admits of absolutely no variation in the response. Many courts have moved away from this rigid approach and treat a response to an offer as an acceptance if it clearly manifests intent to accept and contains only minor, non-material variations from the offer.
What is an acceptance?
An acceptance is the showing or manifestation of assent to an offer’s terms by an intended offeree with knowledge of the offer. An acceptance may consist of a promise or performance by the offeree, depending upon the terms of the offer.
If the offer stipulates the method of acceptance, then acceptance must conform to the terms of the offer for the acceptance to be valid. Otherwise, any reasonable method of acceptance will be valid, including either acceptance by promise (forming a bilateral contract) or acceptance through performance (forming a unilateral contract).
Is an invitation to negotiate a valid offer?
No. A party may indicate a desire to enter into a contract through an invitation to negotiate, such as an invitation to bid, a negotiation of terms, a price quotation, or a proposal of terms. Generally, such an invitation is not considered a binding offer, because the invitation lacks any manifestation of the offeror’s willingness to conclude a final bargain.
Under the objective test of intent, is evidence of a party’s subjective understanding and intention relevant and admissible to determine the party’s manifested intent?
Yes. Although not controlling, evidence of what a party subjectively understood and intended in manifesting intent is relevant and admissible under the objective test of intent.
The objective test of intent requires that a party’s intent be determined not by evidence of actual subjective intent, but by a reasonable interpretation of manifested intent based on the party’s words and conduct in context. Evidence of a party’s subjective intent could, however, be useful and informative in the interpretation of the manifestation of intent if (1) the manifestation is ambiguous and (2) the evidence of subjective intent does not contradict the manifested intent.
Must the parties display real or apparent intent to be legally bound in order for a contract to form?
No. The parties need not display real or apparent intent to be legally bound in order for a contract to form. What matters is that the parties manifest the intent to enter into a bargain, exchange, or similar arrangement under specific terms.
The manifestation of intent not to be legally bound, however, may prevent a contract from forming.
In a case of mutual misunderstanding as to the nature of an apparent offer, what test do courts use to determine whether the communication could reasonably be construed as an offer?
Courts use the objective test of assent to determine whether a communication could reasonably be construed as an offer in cases of mutual misunderstanding (e.g., if an apparent offeror intends a communication in jest, but the person to whom it is addressed believes it to be a serious offer). This test calls for an evaluation of what a reasonable person in the position of the recipient would have understood the communication to mean. It does not consider the subjective intent of the person who made the communication or the subjective understanding of the person to whom it was made.
Under what circumstances can an advertisement constitute a valid offer?
An advertisement is not considered a valid offer unless the language makes an express promise to adhere to specific terms. Although many advertisements are properly interpreted as mere solicitations for offers, an advertisement can qualify as an offer to the public if it:
states the material terms of the contract;
is clear, definite, and explicit;
leaves nothing open to be negotiated; and
is reasonably understood to invite acceptance by members of the public.
In particular, mere puffery (i.e., describing a product or service in flattering language meant to attract potential buyers) is not a valid offer.
What four elements must be present for a contract to form?
The four basic elements that are required to form a contract are:
offer,
acceptance,
intent, and
consideration.
The parties to a contract must mutually assent to the formation and understand that they are entering into a contract together.
What is an offer?
An offer is some showing or manifestation of willingness to enter into a bargain that is made by an offeror and justifies acceptance by an offeree. An offer is the first step in contract formation.
To form a contract, an offer must be reasonably certain, communicated to the offeree, and must not have terminated prior to acceptance.
How certain must an offer’s terms be to constitute a valid offer?
A valid offer must set forth reasonably certain terms. Reasonably certain terms are terms from which a reasonable person would conclude that (1) an offer has been made and (2) understand that communication of acceptance is all that is necessary to form a binding contract.
Typically, this means that the offer must identify the parties, describe the subject of the agreement, and if applicable, include a price term (which may be an objective standard from which the price can be derived, such as fair market value). Certain additional terms may be required depending on the subject matter of the contract. For example, an offer to buy or sell goods must include a quantity term under the Uniform Commercial Code (UCC).
A company sent a letter to a vendor. The letter detailed the company’s intent to purchase materials and closed with: “Your acceptance of this offer will become effective upon the approval of this transaction by our board of directors.”
Did the letter from the company to the vendor qualify as a valid offer?
No. The letter was not a valid offer because the vendor’s acceptance alone would not form a binding contract. An offer is the manifestation of an offeror’s willingness to enter into a contract, justifying acceptance by an offeree. A valid offer contains reasonably certain terms from which a reasonable person would (1) conclude that an offer has been made and (2) understand that communication of acceptance is all that is needed to form a binding contract. A communication reserving the right to have the final say on contract creation cannot be an offer, even if it manifests a desire to enter into a contract on stated terms.
Here, the letter stated that acceptance of the offer would not be effective until approved by the board. A reasonable person would not conclude that communicating acceptance was all that was needed to form a binding contract, because the company reserved the final say on contract creation for itself. Thus, there was not a valid offer.
A movie theater advertised in the Sunday newspaper that on Wednesday night, all seats in the theater would be on sale for $5. The advertisement contained no words of limitation or qualification. A customer showed up at the theater on Wednesday night, asked for four tickets, and tendered a $20 bill in payment. The box office employee refused to sell the four tickets for $20, stating that the theater had decided to cancel the promotion and that the price of a ticket was the usual $15.
Did the theater’s advertisement constitute an offer?
Yes. The advertisement was an offer. An advertisement is not considered a valid offer unless the language makes an express promise to adhere to specific terms. Although many advertisements are properly interpreted as mere solicitations for offers, an advertisement can qualify as an offer to the public if it:
states the material terms of the contract;
is clear, definite, and explicit;
leaves nothing open to be negotiated; and
is reasonably understood to invite acceptance by members of the public.
Here, the advertisement stated the ticket sale price and the sale time without any limitation or qualification; it was clear, definite, and explicit; it left nothing open for negotiation; and it was reasonably understood to invite the public to participate in the sale. The advertisement thus constituted an offer, which the customer accepted by paying the stated price of $20 for four tickets.
A farmer was considering selling a farm and knew that a man was interested in buying it. The farmer composed an email to the man, offering to sell the farm to the man for a stated price. Before sending the email, the farmer had second thoughts and decided not to sell. The farmer intended to delete the email but, without realizing it, hit the “send” button instead of the “delete” button and accidentally sent the email to the man. The farmer did not discover this mistake until the next day, when the man replied to the farmer and accepted the offer.
Was the farmer’s email an offer to sell the farm?
Yes. The email was an offer. An offer is the manifestation of an offeror’s willingness to enter into a contract that justifies acceptance from an offeree. Such a manifestation of willingness will bind the offeror even if he did not subjectively intend to make an offer. A valid offer contains reasonably certain terms from which a reasonable person would (1) conclude an offer has been made and (2) understand that communication of acceptance is all that is needed to form a binding contract.
Here, though the farmer did not subjectively intend to make an offer, the email was a binding manifestation of willingness to enter into a contract. The farmer knew the man wanted the farm, and the email offered to sell him the farm for a stated price. A reasonable person would conclude that a genuine offer was made, and that a contract would be formed if the man accepted. Thus, the email was an offer.
Under what circumstances can a joke or an offer made in jest constitute a valid offer?
A joke or offer made in jest can be a valid offer, but only if the offeree neither knows nor has reason to know that the offer is a joke. In other words, the offeree must not realize that the offer is made in jest, and must believe that it has been made seriously. If both parties to a transaction manifest an intent that the transaction should not be taken seriously—i.e., if both parties know that they are joking—there is no valid offer.
