formation of contracts Flashcards
what is required for a contract to be binding?
- manifestation of mutual assent
- consideration
- lack of valid defenses
define offer
objective manifestation of a willingness by offeror to enter into agreement that creates power of acceptance in offeree
intent - a statement is an offer only if:
- person to whom it is communicated could reasonably interpret it as an offer
- expresses present intent of a person to be legally bound by a K
what is the knowledge requirement for an offer?
offeree must know of the offer in order to have the power to accept
what is the general requirement for the terms of an offer?
terms must be definite or the contract fails for indefiniteness
what are the required terms for offer under common law?
- essential terms (parties, subject matter, price, quantity) must be covered in K
- if the parties intended to create a K, the court may supply missing terms
what are the required terms for an offer under the UCC?
- only essential term is quantity
- UCC “fills the gap” if other terms are missing
- EXCEPTION: requirements or output Ks (UCC implies “good faith”)
what language is required for a valid offer?
offer must contain words of promise, undertaking, or commitment, and be targeted to a number of people who could actually accept
what kind of contract is it if a return promise is requested?
bilateral contract
what kind of contract is it if an act is requested?
unilateral contract
advertisements as an invitation to deal
advertisements are only an invitation to receive offers (but may qualify as an offer if sufficiently specific and limits who can accept or if associated with a stated aware)
termination of offers - lapse of time
offer terminates on a specified termination date or a reasonable period of time if none stated
termination of offers - death/mental incapacity general rule
offer terminates, even if offeree does not learn of the offeror’s death until after the oferee has sent what he believes is an acceptance
termination of offers - death/mental incapacity EXCEPTION
offers for option Ks do not terminate because consideration was paid to keep the offer open
termination of offers - destruction/illegality
destruction of offer or illegality of offer terminates the offer
termination of offers - revocation
offer can be revoked any time prior to acceptance (even if it states it will be open for specific amount of time)
when is the revocation of an offer effective?
not effective until communicated
when is a revocation sent by mail effective?
revocation sent by mail is not effective until received
what are the four limitations on revocation?
(1) option K
(2) UCC firm offer rule
(3) promissory estoppel
(4) partial performance
limitations on revocation - option K
an offeree must generally give consideration for an option K to be enforceable
limitations on revocation - UCC firm offer rule
offer irrevocable (for reasonable time but no more than three months) if offeror is a merchant (or any business person), and assurances (in authenticated writing) are made that offer will remain open
is consideration needed to keep offer open under the UCC firm offer rule?
no
limitations on revocation - promissory estoppel
if offeree reasonably and detrimentally relies on offer it may become irrevocable
limitations on revocation - partial performance generally
for all Ks, offeree must have knowledge of offer when performance begins
limitations on revocation - partial performance unilateral K
offeror cannot revoke once offeree has begun performance
limitations on revocation - partial performance bilateral K
commencement of performance operates as promise to render complete performance
revocations of general offers (to large number of people)
revocable only by notice given at least same level of publicity as offer (effective even if potential offeree acts in reliance on offer)
rejection by offeree
- offeree clearly conveys to offeror that he no longer intends to accept the offer
- rejection usually effective upon receipt
- counteroffer - acts as rejection of original offer and creates new offer
what is an acceptance?
an objective manifestation by the offeree to be bound by the terms of the offer
how is a bilateral K accepted?
an exchange of promises that render enforceable
how is a unilateral K accepted?
- promise to do something by one party in return for an act of the other party
- starting to perform is not enough, but it will make offer irrevocable for a reasonable period of time to complete performance
- offeree must be aware of offer before acting
means of acceptance - general rule
unless offeror specifies, offeree can accept in any reasonable manner/means
means of acceptance - silence
silence is not acceptance unless offeree has reason to believe offer could be accepted by silence or previous dealings make it reasonable to believe that offeree must notify offeror if he does not intent to accept
means of acceptance - shipment of goods
buyer’s request that goods be shipped is inviting acceptance either by seller’s promise to ship or by prompt shipment of goods
means of acceptance - shipment of goods: nonconforming goods shipped
both an acceptance and a breach, unless seller seasonably notifies buyer that goods are an accommodation (counteroffer); buyer may then accept or reject the nonconforming goods
mailbox rule - generally
applies only to acceptance; almost exclusively applies to bilateral K
mailbox rule - acceptance
effective when sent (not upon receipt), unless offer provides otherwise
mailbox rule - rejection following acceptance
acceptance will control even if offeror receives
rejection first (but if offeror detrimentally relies on rejection then offeree estopped
from enforcing K)
mailbox rule - acceptance following reject
mailbox rule does not apply; first one received
(i.e., in possession of offeror or her agent, or deposited in mailbox) will prevail; offeror
need not actually read the received communication
mailbox rule - revocation
effective upon receipt
mailbox rule - options and other irrevocable offers
mailbox rule does not apply; acceptance
must be received by offeror by a certain date or before offer expires
notice - unilateral K
Offeree not required to give notice after completing performance, unless:
- Offeror wouldn’t learn of performance with reasonable certainty and promptness; or
- Offer requires notice.
notice - unilateral K: notice required but not provided—offeror’s duty is discharged, unless:
- Offeree exercises reasonable diligence to give notice;
- Offeror learns of performance within reasonable time; or
- Offer indicates notice of acceptance is not required.
notice - bilateral K
offeree must give notice of acceptance
- Mailbox rule—acceptance valid when sent (even though offeror hasn’t received it)
- UCC—if acceptance is made by beginning performance, notice is required within a
reasonable time; failure to give notice results in offer’s lapse
additional or different terms - common law mirror-image rule
acceptance must mirror the terms of the offer, so any change or addition to the terms acts as a rejection and a new counteroffer; conditional acceptance terminates the offer and acts as new offer from original offeree
additional or different terms - UCC (no mirror-image rule) in general
acceptance containing additional or different terms generally treated as acceptance
additional or different terms - UCC (no mirror-image rule): one or both parties are NOT merchants
definite and seasonable expression of
acceptance sent within a reasonable time is usually acceptance of original offer, and
new/different terms are treated as proposed additions to the K that must be separately
accepted by offeror
additional terms - UCC (no mirror-image rule): both parties are merchants (battle of the forms)
Additional terms—automatically included in the K, unless:
- Term materially alters original K (i.e., would result in surprise or hardship);
- Offer expressly limits acceptance to terms of the offer; or
- Offeror objects to new terms within a reasonable time after notice of new
terms is received.
- If one of these exceptions is met, original terms of offer control
additional or different terms - UCC (no mirror-image rule): one or both parties are NOT merchants EXCEPTION
an acceptance expressly conditioned on assent to new/different terms is
treated as a counteroffer
different terms - UCC (no mirror-image rule): both parties are merchants (battle of the forms)
(“knock-out” rule)—different terms in offer/acceptance nullify each other, and court uses Article 2’s gap-filling provisions to patch holes in K
additional or different terms - UCC (no mirror-image rule): acceptance based on conduct
if offer and purported acceptance differ too much to create a contract but the parties begin to perform anyway, then UCC allows for a
contract to be recognized with the following terms:
- Any terms actually agreed upon in the parties’ writings, and
- Any supplementary terms filled in by the UCC
consideration - bargain and exchange in general
must be a bargained-for legal detriment to the promisee
consideration - legal detriment and bargained-for exchange
- To constitute sufficient consideration, must be bargained-for in exchange for the promise, promise must induce the detriment, and detriment must induce the promise
- Consideration can be return promise to do or refrain from doing something, or performance of or refraining from doing some act
consideration - distinguishing gift from valid consideration
Test to distinguish gift from valid consideration is whether offeree could reasonably
believe intent of offeror was to induce the action (if YES, then there is consideration
and promise is enforceable)
consideration - gifts: promissory estoppel
Promissory estoppel—if promisor/donor knows that promise to make a gift will
induce substantial reliance by promisee and failure to enforce it would cause
substantial injustice, promise is enforceable
adequacy of consideration - subjective value
benefit to promisor need not have economic value; if promisor wants it, giving of it will constitute adequate consideration
adequacy of consideration - preexisting duty rule (common law)
does not qualify as consideration unless promisor gives something in addition
to what is owed, or varies preexisting duty in some way
adequacy of consideration - preexisting duty rule EXCEPTION for third parties
party’s promise to a third party to perform an act the party is contractually obligated to perform for another is sufficient consideration
adequacy of consideration - past consideration
modern trend towards enforcing past promises under the material benefit rule
adequacy of consideration - executory contract
exchange of promises is adequate consideration
adequacy of consideration - modification (common law)
must be supported by consideration, and agreements to modify K are enforceable if:
- Rescission of existing K and entering into of new K
- Unanticipated difficulties arise and modification is fair and equitable, or
- New obligations arise on both sides
adequacy of consideration - modification (UCC)
- Requires only good faith
- No consideration is necessary
accord and satisfaction - accord
one party agrees to accept a different performance from the other party to
satisfy the other party’s existing duty
accord and satisfaction - satisfaction
performance of the accord agreement will discharge both the original
K and the accord K
accord and satisfaction - discharge of original K
Original K not discharged until satisfaction is complete
accord and satisfaction - unliquidated or disputed claim
An unliquidated or disputed claim may be discharged by negotiable instrument
(e.g., a check with the note “Payment in full”)
illusory promise
not legally binding because it is vague or promisor can choose whether or not to honor it
can voidable/unenforceable promises still constitute consideration?
yes
Requirements (buyer agrees to buy all that he requires) and output (seller agrees to
sell all that she manufactures) Ks
- There is consideration because promisor suffers legal detriment
- Quantities may not be unreasonably disproportionate to estimates
legal claim settlement
a promise not to assert (or a release of) a claim or defense is not consideration, unless the claim or defense is doubtful or the party promising not to assert (or releasing) the claim believes in good faith that it is valid
promises binding without consideration - pay a debt barred by statute of limitations (SoL)
new promise to pay debt after SoL
has run is enforceable without new consideration
promises binding without consideration - perform voidable duty
new promise to perform voidable duty is enforceable if it doesn’t suffer from an infirmity rendering it voidable
promises binding without consideration - material benefit rule
when a party performs an unrequested service for another party, the modern trend permits the performing party to enforce the promise of payment for material benefits received to extent necessary to prevent injustice (unless donative intent)
promises binding without consideration - promissory estoppel
(consideration “substitute”)—a promise is binding if:
* Promisor should reasonably expect it to induce action on the part of the promisee or a
third person
* Promise does induce such action, and
* Injustice only avoided by enforcement of promise
enforceability - in general
a defense to formation or a defense to enforcement may render K void,
voidable, or unenforceable
enforceability - void Ks
entire contract is null, as if no K existed
enforceability - voidable Ks
operates as valid K until/unless one party takes steps to avoid it
enforceability - unenforceable Ks
valid K that cannot be enforced if one party refuses to carry out its terms
what are the defenses to formation?
(1) mistake
(2) misunderstanding
(3) misrepresentation
(4) undue influence
(5) duress
(6) capacity to K
defenses to formation in general
no “meeting of minds” due to mistake or misunderstanding, misrepresentation or fraud, undue influence or duress, or lack of capacity
what is mutual mistake?
both parties are mistaken as to essential element
K is generally voidable by party adversely affected for mutual mistake if:
-mistake existed when K was formed
-mistake relates to basic assumption of K
-mistake has material impact on transaction, and
-adversely affected party did not assume the risk of mistake
can either party avoid K if reformation is available to cure mutual mistake?
no
what is a unilateral mistake?
One party is mistaken as to essential element of K, but either party can enforce K
on its terms
unilateral mistake - mistaken party can void K if he didn’t bear risk of mistake and either:
- Mistake would make enforcement of K unconscionable, or
- Non-mistaken party caused the mistake, had duty to disclose or failed to disclose mistake, or knew or should have known the other party was mistaken
what is required to rescind a K for unilateral mistake?
must be absence of serious prejudice to other party to rescind K
reformation (mutual mistake)
Court can reform writing except to extent that rights of third parties who relied on K
would be unfairly affected
misunderstanding - in general
both parties believe they are agreeing to same material terms, but they in fact agree to different terms
misunderstanding - neither party knows or has reason to know
no K if material term involved
misunderstanding - one party knows or has reason to know
K formed based upon meaning of
material term as understood by unknowing party
misunderstanding - both parties know terms ambiguous at time of K formation
no K unless both parties intended same meaning
misunderstanding - waiver
one party can choose to enforce K according to other party’s understanding
misunderstanding - subjective determination of misunderstanding
each party’s knowledge or reason to know of the misunderstanding governs (i.e., not what a reasonable person would know)
misrepresentation - in general
an untrue assertion of fact (i.e., present event or past circumstance)
fraudulent misrepresentation
requires proof that:
- The misrepresentation is fraudulent:
-Knowing or reckless false assertion of fact
-With intent to mislead
- The misrepresentation induced assent to the K, and
- Justifiable reliance on the misrepresentation by the adversely affected party
nondisclosure
conduct to conceal a fact or nondisclosure of a known fact is tantamount to an assertion that the fact does not exist
effect - fraud in the factum (execution)
fraudulent misrepresentation prevents party from knowing character/essential term of transaction, so no K is formed and apparent K
is void unless reasonable diligence would have revealed K’s true terms
effect - fraud in the inducement
fraudulent misrepresentation is used to induce another to enter into a K; K voidable by adversely affected party if she justifiably relied on the
misrepresentation
nonfraudulent misrepresentation (innocent/negligent)
renders K voidable by adversely affected party who justifiably relied on material misrepresentation and was induced to assent to K because of it
misrepresentation - effect of party’s fault
a party’s fault in not knowing or discovering facts before entering into the K does not prevent the party’s reliance on the misrepresentation from being justified (unless it constitutes a failure to act in good faith)
cure of misrepresentation
K not voidable if facts cured before deceived party has avoided the K
avoidance/reformation for misrepresentation
when content/legal effect of K is misrepresented, deceived party can avoid K or reform it to express what was represented
undue influence - in general
unfair persuasion of a party to assent to a K
undue influence - unfair persuasion
- Relationship between dominant party and dependent party due to lack of expertise
or experience, or diminished mental capacity - Persuasion of one party seriously impairs the free and competent judgment of other
party
undue influence - confidential relationship
dominant party has burden of proving K was fair (may be held to higher standard of disclosure)
undue influence - third party undue influence
victim may void K unless nonvictim party to K gave value or materially relied on K in good faith and without knowledge of undue influence
undue influence - damages
restitution available
duress - in general
improper threat that deprives party of meaningful choice
duress - improper threat
- Threats of criminal or civil action (made in bad faith), or
- Threats to breach K in violation of good faith and fair dealing
duress - deprivation of meaningful choice
person has no reasonable alternative such that threat induced his assent
duress - effect on K
K is void when duress is through physical compulsion and voidable in other instances
capacity to K - infancy (under 18)
voidable by infant but not by adult (except for reasonable value of necessaries)
capacity to K - mental illness
K is void for one who is adjudicated mentally incompetent, but only voidable if there has been no adjudication
capacity to K - guardianship
K is void for individuals under guardianship (except for reasonable value of necessaries)
capacity to K - intoxication
K is voidable by intoxicated party if she was unable to understand nature/consequences of K and other party knew of intoxication
what are the defenses to K enforcement?
(1) illegality
(2) unconscionability
(3) public policy
defenses to enforcement - illegality
- K is unenforceable if consideration/performance under K is illegal
- K is void if it contemplates illegal conduct
- duty to perform is discharged if K becomes illegal after formation
- if one party is justifiably ignorant of facts making K illegal or lacks illegal purpose he can recover (assuming guilt of other party)
defenses to enforcement - illegality EXCEPTIONS (5)
(1) ignorance of illegality
(2) lack of illegal purpose
(3) divisible Ks
(4) licensing violation
(5) restitution
defenses to enforcement - illegality exception: ignorance of illegality
a promisee may recover if the promisee is justifiably ignorant of the facts making K illegal and the promisor had knowledge of the illegality; if both parties are excusably ignorant, the promisee may have a claim in restitution
defenses to enforcement - illegality exception: lack of illegal purpose
a part who has substantially performed may recover if:
- K does not involve illegal consideration/performance—the party is unaware of the other party’s illegal purpose
- the party knows of the other party’s illegal use—unless the party furthered the illegal use or the use involves grave social harm
defenses to enforcement - illegality exception: divisible Ks
if K can easily be divided into legal and illegal parts, a party may recover on the legal part(s)
defenses to enforcement - illegality exception: licensing violation
depends on the purpose of the licensing requirement:
- regulatory purpose—the party who fails to comply cannot enforce the K
- raise revenue—the party who fails to comply can enforce the K
defenses to enforcement - illegality exception: restitution
- not in pari delicto—when parties are not equally at fault, the less guilty party may recover under restitution
- withdrawal—a party who withdraws from an illegal K before the improper purpose has been achieved may recover under restitution when the party has not engaged in serious misconduct
defenses to enforcement - unconscionability
K is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would agree to it (e.g., hidden, complex boilerplate language, adhesion Ks)
defenses to enforcement - public policy
K may be unenforceable if it violates significant public policy
implied-in-fact Ks
conduct, not words, indicates assent or agreement
quasi-Ks
a plaintiff confers benefit on a defendant and the plaintiff has reasonable expectation of compensation and court implies K to prevent unjust enrichment
quasi-Ks requirements (3)
- Plaintiff conferred measurable benefit on defendant,
- Plaintiff acted without gratuitous intent, and
- Unfair to let defendant retain benefit
warranties in sale of goods Ks - express warranty
Any promise, affirmation, description, or sample that is part of the basis of the bargain, unless it is merely the seller’s opinion
warranties in sale of goods Ks - express warranty disclaimers
disclaimers that unreasonably negate or limit express warranties are inoperative
warranties in sale of goods Ks - implied warranty of merchantability
- implied whenever seller is a merchant (i.e., seller dealing in goods of the kind sold)
- goods must be fit for their ordinary purpose
warranties in sale of goods Ks - implied warranty of fitness for a particular purpose
- implied whenever seller has reason to know (from any source) buyer has particular use
for goods and buyer is relying on seller’s skill to select the goods
warranties in sale of goods Ks - disclaimer of implied warranty of fitness for a particular purpose
disclaimer may use general language but must be in writing and conspicuous
warranties in sale of goods Ks - disclaimer implied warranty of merchantability
oral or written disclaimer using the term
“merchantability”; writing much be conspicuous
warranties in sale of goods Ks - disclaimer of all implied warranties
language makes plain that there is no implied warranty (e.g., sold “as is); buyer’s inspection of goods; excluded/modified by course of dealing,
course of performance, or trade usage
