Formation: Offer, Acceptance, Consideration

Question 1

What are the types of contract as to formation?

Answer 1

(1) Express – formed by language, oral or written
(2) Implied in fact – formed by manifestations of assent through conduct
(3) Quasi-contract/implied in law – not actual contracts but are court constructions to avoid unjust enrichment by permitting a plaintiff to bring an action in restitution to recover under a contract otherwise unenforceable.

Question 2

What are the three categories of invalid contract?

Answer 2

(1) Void – unenforceable, without legal effect from the beginning
(2) Voidable – one or both parties may elect to avoid (e.g., by raising an incapacity defense)
(3) Unenforceable – The agreement is otherwise valid but unenforceable for reasons outside of contract formation (statute of frauds, statute of limitations)

Question 3

What are the three elements of an enforceable contract?

Answer 3

(1) Mutual assent (an offer and an acceptance)
(2) Consideration (either a bargained-for exchange or a substitute)
(3) No defenses to enforcement

Question 4

What is an offer?

Answer 4

A manifestation of intent to be bound (as judged by a reasonable person standard). It must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms.

This can mean that subjective intent can be overridden (an offer in jest will be treated as a real offer if it reasonably appeared to be one).

Question 5

What is required for a communication to be an offer?

Answer 5

(1) An expression of a promise, undertaking, or commitment (as indicated by language, surrounding circumstances, and prior relationship of the parties, as well as method of communication and industry custom)
(2) Certainty and definiteness in central terms
(3) Communicated to an offeree (offeree must have knowledge of the offer)

Question 6

When are advertisements offers?

Answer 6

General rule: an advertisement is not an offer but a solicitation or invitation for an offer

Exception: where the advertisement is specific as to quantity and means of acceptance (mink stole advertised 1st come, 1st serve for a dollar) or styled more as a reward offer. (key - nothing open to negotiation)

Exam: be careful of ads that look like offers but are really solicitations to deal.

Question 7

When is an offer definite and certain in its terms?

Answer 7

An offer is definite and certain when enough essential terms been provided so that a contract including them would be capable of being enforced. The court will not make the contract for the parties. Typically, the important terms include the offeree’s identity, subject matter of the contract, and price.

Question 8

What terms are required for real estate transactions?

Answer 8

Offers involving realty require identification of (1) the land and (2) the price terms

Question 9

What quantity terms are required in the UCC for a sale of goods?

Answer 9

The quantity must be certain or capable of being certain.

Question 10

What if there are terms missing or left open?

Answer 10

Missing terms do not prevent formation if it appears the parties intended to form a contract and there is a reasonably certain basis for providing a remedy. The majority rule and Article II allow courts to supply reasonable terms where consistent with the parties’ intent.

Question 11

What is the consequence of a missing price term generally?

Answer 11

The only time a missing price term prevents formation is a contract for real property. The failure to state a price term is usually non-fatal.

Question 12

What is the consequence of a missing time term for performance?

Answer 12

It will be implied that performance must occur within a reasonable time

Question 13

What terms are required/implied for employment or service contracts?

Answer 13

If duration is not specified, it will be construed as creating an at will contract

Services contracts require the nature of the work performed to be included in the offer

Question 14

What is the consequence of a vague material term?

Answer 14

If a material term is vague there is not an offer under either Art II or common law. The presumption of intent to supply reasonable terms only applies to missing terms.

Question 15

What are the methods by which an offer can be terminated?

Answer 15

(1) lapse of time
(2) revocation (by offeror)
(3) rejection (by offeree)
(4) operation of law

Question 16

When does an offer terminate by lapse of time?

Answer 16

After either a stated term or after a reasonable time has passed

What constitutes a reasonable amount of time is flexible and subject-dependent, but be wary where more than a month has gone by (time to raise the issue)

Question 17

When is an offer terminated by revocation?

Answer 17

An offeror’s retraction of the offer terminates the offer if communicated to the offeree before they accept. A revocation is effective when received by the offeree.

Question 18

What are the two types of revocation?

Answer 18

(1) Direct – communicated to offeree

(2) Indirect – offeror indicates revocation by conduct and offeree is aware of the conduct

Question 19

What are the four instances where an offer may not be revoked?

Answer 19

(1) option contract
(2) UCC merchant’s firm offer
(3) detrimental reliance
(4) beginning performance on a unilateral contract

Question 20

What are option contracts?

Answer 20

The offeree gives consideration for a promise by the offeror not to revoke an outstanding offer for either a specified period of time or a reasonable period. Must have consideration to be irrevocable.

Question 21

What is a merchant’s firm offer?

Answer 21

If a merchant offers to buy or sell goods in a signed writing containing assurances that the offer will be held open, it is irrevocable regardless of absence of consideration for a period of time not to exceed three months.

If a merchant offers for more than 3 months, they are bound only to three months unless supported by consideration.

Question 22

What is detrimental reliance?

Answer 22

When an offeror can reasonably foresee that the offeree would detrimentally rely on the offer and the offeree does detrimentally rely, the offer is held open as an irrevocable option contract for a reasonable length of time. A common scenario for this is general contractors soliciting bids, which would-be subcontractors can reasonably foresee them using in making their own bids.

Question 23

What is the rule of beginning performance on a unilateral contract?

Answer 23

An offer for a unilateral contract becomes irrevocable once performance has begun. The offeree must be given a reasonable amount of time to complete the performance. The contract does not form until performance is complete, meaning that though the offer must stay open, the offeree is not bound to complete their performance.

Preparations to perform are not enough to make the offer irrevocable, the offeree must have embarked on performance. However, if there have been substantial preparations, this may constitute detrimental reliance.

Question 24

What is rejection and what forms does it take?

Answer 24

Termination by the offeree. An express rejection is a statement by the offeree that they do not intend to accept the offer. Can also be by counteroffer, conditional acceptance, and additional terms.

Question 25

How does a counteroffer operate as a rejection?

Answer 25

As a general rule, a counteroffer (same subject matter different terms) by offeree is a rejection and a new offer. A conditional acceptance (“I’ll accept, as long as it also includes X.”) is also a rejection and a new offer.

“Mere inquiry” or “mere bargaining” is not a counteroffer (“would you consider lowering the price?”)

Question 26

Once rejected, can the offeree revive the offer?

Answer 26

No! The offeror may restate it, though.

Question 27

When is rejection effective?

Answer 27

When received.

Question 28

What is the common law mirror image rule?

Answer 28

Under common law, the acceptance must mirror the terms of the contract, adding additional terms is a rejection/counteroffer. The mirror image rule does not apply under the UCC.

Question 29

What terminates an offer by operation of law?

Answer 29

Death of either party terminates a revocable offer. ***This is not the same thing as whether or not death terminates a contract or an irrevocable offer.

Destruction of the subject matter terminates the power of acceptance

If the proposed subject matter becomes illegal, the offer terminates

Question 30

Who may accept an offer?

Answer 30

Generally, only the party to whom the offer is directed. If directed at a member of a class, anyone in that class. If directed to the public, anyone at all. An offeree must know of an offer to accept

Question 31

Can the power of acceptance be assigned?

Answer 31

General rule: No

Exception: Option contracts, because the power to accept is in itself a contract right

Question 32

When is a unilateral offer accepted?

Answer 32

Generally not until performance completed, though once performance begins the offer is irrevocable for a reasonable amount of time to allow performance to be completed.

Question 33

What is the effect of beginning performance in a bilateral contract?

Answer 33

Acceptance and an implied promise to finish performance.

Question 34

What are the requirements for acceptances of a bilateral contract offer?

Answer 34

(1) The acceptance must be communicated, absent express waiver in the offer.
(2) Acceptance is generally allowed in any reasonable manner but offeror is the master of offer and may require a particular act.
(3) Acceptance must be unequivocal.

Question 35

How may an Art II offer to buy goods for current and prompt shipment be accepted?

Answer 35

By a promise to ship or by shipment of conforming or nonconforming goods

Question 36

What is the effect of a shipment of nonconforming goods?

Answer 36

A shipment of nonconforming goods is simultaneous acceptance and breach unless the seller seasonably notifies buyer that the nonconforming goods are offered as an accommodation. If offered as an accommodation, the buyer can reject or accept the non conforming goods.

Question 37

When is an acceptance effective?

Answer 37

General rule: Acceptances are effective when mailed (mailbox rule)

Exceptions:

(1) The offer stipulates that acceptance ineffective until received.
(2) The mailbox rule does not apply to irrevocable offers like option contracts. Acceptance will be effective on receipt.
(3) The offeree sent a rejection before they sent the acceptance.
(4) The offeree sent the acceptance by an unauthorized means.

Question 38

What is the effect of an offeree sending both an acceptance and a rejection?

Answer 38

If the offeree sends a rejection and then sends an acceptance, the mailbox rule does not apply and whichever is received first is effective.

If an offeree sends an acceptance and then a rejection, the mailbox rule usually applies (acceptance will be effective). If the offeror receives the rejection first and changes position in reliance, the offeree will be estopped from enforcing the contract.

Question 39

What is the effect of acceptance by improper means?

Answer 39

If an offeree accepts by an improper means (e.g., offer specifies by phone and they send by email), then the acceptance is not effective on dispatch, but by receipt.

Question 40

What is consideration?

Answer 40

A bargained-for exchange of legal detriment/benefit. The promise must induce the detriment and the detriment must induce the promise. An act of forbearance by the promisee may be sufficient consideration if it benefits the promisor. Benefits need not be economic. Adequacy of consideration is not a relevant inquiry as to validity.

Question 41

Can past or moral consideration be sufficient?

Answer 41

Generally: no
Exceptions:
(1) if a past obligation is unenforceable because of a technical defense like statute of limitations, then if there is a new promise in writing or partial performance, it will be enforceable;
(2) if benefit to promisor performed by promisee in response to promisor’s request or emergency, a subsequent promise to pay will be enforceable

Question 42

What is the role of adequacy of consideration?

Answer 42

Adequacy or fairness are not relevant inquiries (“peppercorn” can be consideration), but token consideration or sham consideration may be insufficient. A possibility of value that never materializes doesn’t make it inadequate.

Question 43

When is there a legal detriment to the promisor?

Answer 43

If the promisee does something they are not legally obligated to do or refrains from something they have a legal right to do. Does not matter if they were or weren’t going to do it anyway.

Question 44

What is the pre-existing duty rule?

Answer 44

Under common law, a pre-existing legal duty cannot constitute consideration, meaning that a contract modification is unenforceable absent new consideration under common law. Under the UCC, a contract modification is enforceable if done in good faith.

Question 45

What are the exceptions to the pre-existing duty rule?

Answer 45

A promise to ratify a voidable obligation (e.g., promise to ratify a minor’s contract after reaching majority)
A pre-existing duty owed to a third person rather than a promisor
Honest dispute as to duty
Unforeseen circumstances (unanticipated at the time of formation) make the modification fair and equitable
Good faith modification under the UCC

Question 46

How is the pre-existing duty rule applied to debt contracts?

Answer 46

Payment of a smaller sum than due on an existing debt is generally insufficient consideration for a promise from a creditor to discharge debt, courts try to find workarounds. Look for possible new or different consideration in the form of earlier than required payment or payment in stock rather than cash.

Question 47

Is forbearance to sue consideration?

Answer 47

Yes, if the claim is valid or if the claimant believed in good faith that it was valid.

Question 48

What is the requirement of mutuality?

Answer 48

Consideration must exist on both sides of the contract. If only one party is bound to perform, then the promise is illusory and will not be enforced. Courts will supply implied promises to infer mutuality in some instances.

Question 49

What is promissory estoppel?

Answer 49

Consideration is not necessary where it is in the interests of justice to enforce the contract. This occurs when:

(1) the promisor should reasonably expect to induce action or forbearance
(2) such action or forbearance is in fact induced

(damages may be limited to that which justice requires)

Question 50

When is a price quotation an offer?

Answer 50

Generally: they are not
Unless: possibly if in response to an inquiry containing a quantity term

Question 51

Are promises to choose among alternative courses enforceable?

Answer 51

No, they are illusory unless every alternative involves legal detriment to the promisor

Question 52

What is a bilateral contract offer?

Answer 52

an offer open as to the method of acceptance (may be accepted in any reasonable. Modern law presumes a contract is bilateral unless clear expression to the contrary.

Question 53

What is a unilateral contract offer?

Answer 53

A contract that can only be accepted by performance (magic words: “offer…only by.” Come in the form of expressly framed acceptance by performance requirements or as reward-style offers to the general public.

Question 54

In a UCC-governed auction, when is a sale complete?

Answer 54

A sale is complete when the auctioneer announces by the fall of the hammer or other customary manner. Auctioneer has discretion when bid is made while hammer falling. Bidders may retract bids until auctioneer announces sale.

Question 55

What is the difference between an auction with reserve and an auction without reserve?

Answer 55

An auction sale with reserve means the auctioneer may withdraw the goods at any time before announcing sale (default unless expressly put up without reserve). Without reserve is once bids are called for a lot or item cannot be withdrawn unless no bid is made.

Question 56

What is the restatement and Art II positions on whether contracts are generally bilateral or unilateral?

Answer 56

The Restatement and Art II view all offers as indifferent offers unless specifically indicated otherwise by conduct or language

Question 57

Under the modern approach, in which circumstances may a contract be unilateral?

Answer 57

(1) clear indication by offer or that completion of performance is the only manner of acceptance
(2) where there is an offer to the public (e.g., reward) clearly contemplating acceptance by performance

Question 58

When is an offeree sufficiently identified in the contract?

Answer 58

When the offeree or class to which the offeree is belongs is sufficiently identified to justify the inference that the offer or intended to create a power of acceptance

Question 59

What are requirements and output contracts?

Answer 59

Requirements — buyer promises to buy from a certain seller all of the goods the buyer requires and seller agrees to sell them that amount

Output — seller promises to sell the buyer all of the goods they produce and the buyer agrees to buy

Question 60

Why are requirements and output contracts still definite enough as to quantity?

Answer 60

Because the quantity can be made certain by reference to objective extrinsic facts

Question 61

What are the limitations on the scope of requirements/output contracts?

Answer 61

No tender or demand for quantity unreasonably disproportionate to either a stated estimate or, absent an estimate, any normal or comparable prior outputs or requirements

Question 62

What gap-filler does the UCC provide for a missing price term?

Answer 62

The price will be a reasonable price at the time of delivery where parties say nothing as to price or fail to set it after agreeing to.

Question 63

Under the UCC, can a contract be formed even if it is agreed that one party will fix the price in the future

Answer 63

Yes, but the price-fixing party must act in good faith. If she does not, the other party may either cancel the contract or fix a reasonable price themselves.

Question 64

How can vague offer terms be cured?

Answer 64

Part performance can supply clarification or the contract itself may supply the definite terms

Question 65

When does an offer become definite where the offeree is given a choice of alternative performances?

Answer 65

When the offeree communicates her choice

Question 66

What is the effect of an offer stating some term will be agreed on later?

Answer 66

If the term is material, then the offer is too uncertain and the court will not supply a reasonable term because the parties have provided otherwise (unless it is a price term)

Question 67

How do requirements and output contracts have the necessary mutuality?

Answer 67

A contract to buy “all that I will require” or sell “all that I manufacture” is not illusory because the promisor has parted with the legal right to buy or sell requirements or output to someone else. This is distinct from a contract to buy “all the goods I may wish to order from you” because that does not require the promisor to do anything.

Question 68

Are conditional promises enforceable?

Answer 68

Yes, even if the contingency is remote, unless the condition is entirely within the promisor’s control (an example of an invalid promise of this kind might be a promise to do something “only if I decide to do X”

Question 69

Are promises conditioned on satisfaction illusory?

Answer 69

No, because they are constrained by the promisor’s good faith or by the reasonable person standard.

Question 70

Does the reservation of a right to cancel or withdraw make a promise illusory?

Answer 70

It may if it is unqualified, but consideration will be valid if the right is in any way restricted (e.g., a time limit). Article II implies a requirement of reasonable notice.

Question 71

Are voidable promises objectionable on mutuality grounds?

Answer 71

No

Question 72

When is a gratuitous suretyship promise enforceable?

Answer 72

Where the surety makes the promise before or at the same time as the creditor performs or promises to perform, the creditor’s performance or promise will be consideration for the surety’s promise.

Where the surety makes the promise after the creditor has performed or made an absolute promise to perform, there is no consideration (pre-existing legal duty rule) and it is unenforceable. A promise after the creditor has performed/promised will be enforceable if there is additional consideration or where obtaining a surety was a condition precedent to the creditor’s performance and the creditor performed in reliance on the surety’s promise.

Question 73

Is a promise to choose among several alternative means of performance illusory?

Answer 73

Yes, unless (1) every alternative involves some legal detriment to the promisor, (2) the power to choose rests with the promisee or a third party and at least one alternative involves legal detriment, or (3) the promisor selects an alternative involving legal detriment (cures illusory promise).

Question 74

When is a revocation effective?

Answer 74

A revocation is effective when received by the offeree. It need not be read to be effective.

Question 75

How may an offer made by publication be revoked?

Answer 75

An offer made by publication may be revoked by publication of comparable means (equivalent to receipt).

Question 76

What is the effect of additional or different terms supplied by the offeree in sales of goods where at least one party to the contract is not a merchant?

Answer 76

The additional or different terms do not establish a rejection but do not come in. The terms of the offer govern the contract formed. The mirror image rule from common law does not apply.

Question 77

What is the effect of additional or different terms supplied by the offeree in sales of goods where both parties are merchants?

Answer 77

Under the “battle of the forms” UCC provision,

(1) Additional terms by the offer will be included unless
(a) they materially alter the original terms,
(b) the offer expressly limits acceptance to the terms of the offer, or
(c) the offeror objects to the terms within a reasonable time or has already objected to them
(2) different terms are either treated identically to additional terms, or knock one another out and are replaced by gap-fillers, depending on the jurisdiction. A difference between the offer and acceptance as to price, quantity or quality will indicate that there has been no meeting of the minds and thus no contract.

Question 78

When is an additional term considered material for purposes of battle of the forms analysis?

Answer 78

An additional term is material when it is likely to cause hardship or surprise or when they change the party’s risk or the remedies available to them. (This is a question of fact.) Disclaimers of warranties will always be material, but generally speaking, terms customary in the industry will not be considered material.

Question 79

Is a merchant’s confirmatory memo containing additional or different terms subject to battle of the forms provisions?

Answer 79

Yes

Question 80

Does an offeree in a unilateral offer have to give the offeror notice that they have begun performance?

Answer 80

Offerees do not have to give notice that they have begun performance.

Question 81

Does an offeree in a unilateral offer have to give the offeror notice that they have completed performance?

Answer 81

Offerees do have to give notice to the offeror within a reasonable time that they have completed performance, unless notice was waived or the performance would normally come to the offeror’s attention in a reasonable period of time. Absence of such notice does not prevent formation, but discharges offeror’s duties (it constitutes a failure to perform a condition subsequent).

Question 82

When is silence construed as an acceptance of a bilateral contract offer?

Answer 82

Silence is not generally acceptance, but custom can create a duty to speak. A silent receipt of benefits (especially where the parties have previous dealings) often constitutes acceptance.