Handout Contracts

Question 1

What is a Contract?

Answer 1

• A contract is just a legally enforceable blank
• look for an agreeement plus a special legal basis for enforcing the promise (e.g., bargained-for consideration)
• the law of contracts and sales spans two parallel universes

*UNiverse one - common law
- We are in this universe whenvere a contract deals with real estate or services

*Universe two - Article 2 of the UCC
- We are in this universe whenever a contracst deals with goods
- Note 1: The UCC governs all parties who enter into a goods contract, not just merchants
- Note 2: The law of contracts is often the same in both universes, with some key differences arising on the MBE

Question 2

Mixed Contracts

Answer 2

• What universe are you in if the contract has elements of both services and goods

Rule #1: The all or nothing rule. You cannot be in two universes at the same time, so ixed contracts must fall into one universe or the other
- Exception: dividslbe contracts - the agreement is divided into two mini-contracts

Rule #2: The predominant purpose rule. Does a good or a service play a bigger role?

Question 3

Formation in General

Answer 3

• Has an enforceable contract been formed?
• Four big topics within this question:
  1. Agreement (offer and acceptance)
  2. Consideration (and related theories for when you have to keep your promises)
  3. Defenses to formation (incapacity, duress, etc.)
  4. Statute of Frauds (enforceability)
  Note 3: If it helps, remember “All Contracts Don’t Stink.”

Question 4

Agreement

Answer 4

• A contract is typically created by agreement. This can be broken down into the offer and the acceptance:
  o Offer: “Will you go to the football game with me?”
  o Acceptance: “Sure”
  o Counteroffer: “How about we go skating instead?”

Question 5

Offer

Answer 5

• An offer is a manifestation of a willingness to enter into an agreement (by the offeror) that creates a power of acceptance (in the offeree).
  Note 4: Think of the offer as a caterpillar: Cute and fuzzy, but fragile.

o Offer and acceptance are governed by the objective test.
- The outward appearance of words and actions matters—not secret intentions.

o Key question—whether an offeror displays an objectively serious intent to be bound

Note 5: Watch out for situations involving humor or anger - the offeor may not be displaying a serious intent to be bound under the objetive test

Expression of opinion is not an offer

Question 6

Offer and Direction of Offer

Answer 6

o An offer must usually be directed to a specific offeree. In other words, you cannot accept an offer unless it is directed at you.
- Example 11: You hear that there are a lot of good deals to be had on Wall Street. So you walk down through the trading pit, saying “I accept. I accept. I accept.” Do you have any contracts with the stock traders? no.

 Limited exception—contest offers or reward offers that promise something to anyone who accomplishes a certain task
- Example 12: I’ve lost my pet cat, Monster, and I take out a newspaper advertisement promising $100 to anyone who finds my cat by this Friday. You see the ad, find Monster, and come by my house on Thursday to collect the reward. Do we have a contractual agreement? yes.

Question 7

Offer and Specificity

Answer 7

How specific must your offer be? Two slightly different rules for the two different universes:
 Common law—All essential terms must be covered in the agreement.
* This typically means the parties, subject, price, and quantity.
 UCC—The law is more willing to fill the gap and find a contract, even if the agreement leaves out some key terms.
* Under the UCC, the only essential term is the quantity.
* The price does not need to be stated.

Question 8

Offers and Requirement Contract

Answer 8

“I don’t know how many I need over the next year, but I promise to buy all of them from you.”
 The buyer is offering to buy 100% of whatever amount is needed from this individual seller.

Question 9

Offers and Output Contract

Answer 9

o Output contract: “I don’t know how many I will make over the next year, but I promise to sell all of them to you.”
 The seller is offering to sell 100% of whatever amount is produced to this individual buyer.
o Both output and requirements contracts are specific enough under the UCC, even though they don’t state an exact quantity term—they provide a formula for calculation.

Question 10

Offer and Power of Acceptance

Answer 10

A valid offer must convey the power of acceptance to the other side (i.e., the offeree can simply say “I accept” and know that he has concluded the deal).
Exam Tip 1: Here are two common fact patterns testing this concept:
invitations to deal —a preliminary communication that reserves a final right of approval with the speaker. It does not convey a power of acceptance to the other side.
Advertisement—usually understood as an invitation to deal (e.g., “Make me an offer for the advertised item; I’ll probably accept it.”). There are some exceptions:
- Reward advertisements (see Example 12, above)
- Advertisements that are very specific and leave nothing open to negotiation, including how acceptance can occur

Question 11

Terminating the Offer

Answer 11

• Look for one of six recurring fact patterns on the MBE (but also beware of irrevocable offers):
  1. The offeror revokes the offer by express communication to the offeree.
  2. The offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract. This is called a constructive revocation.
  3. The offeree rejects the offer
  4. The offeree makes a counter-offer
• Operates as a rejection plus a new offer
• Note 6: Be careful to distinguish a counteroffer from a mere counter-inquiry or indecision.
  5. The offeror dies
• Note 7: Death of one party after the contract has been formed does not usually terminate the contract; we’re talking here about offers.
  6. A reasonable amount of time passes
• Note 8: Remember that even if an offer is squashed, the offeror can always throw out a new offer with the exact same terms as before (“revival”).

Question 12

Irrevocable Offers (Caterpillar’s “Power Shield”)

Answer 12

• The offeror is normally free to revoke at any time prior to acceptance.
  Example 30: I offer to sell you my house for $1 million, and I promise not to revoke this offer for one week. Five minutes later, I say “Never mind. I revoke the offer.” Can you still accept? No.
• An “irrevocable offer” can arise in four ways.

Question 13

Irrevocable Offer and Option

Answer 13

• The offeror is normally free to revoke at any time prior to acceptance.
• An “irrevocable offer” can arise in four ways.

Option - yes

Question 14

Irrevocable Offer and Firm Offer

Answer 14

o A merchant in the UCC universe can make a firm offer to buy or sell goods (i.e., a binding, free option).
 Merchant—someone who regularly deals in the type of good at issue
* I.e., a business person, or a person holding himself out as having knowledge or skills particular to the goods
 For purposes of this rule, a merchant is any business person, when the transaction is commercial in nature.

o A firm offer must be written, signed by the offeror, and contain an explicit promise not to revoke.
o Time period—either: (i) as long as stated in the offer, or (ii) for a reasonable time period not to exceed 90 days

Editorial Note 1: According to UCC 2-205, the “reasonable time” is not to exceed three months.

Question 15

Irrevocable Offer - Unilateral Contract - Offeree has Started Performance

Answer 15

o A unilateral offer to contract cannot be revoked by the offeror if the offeree has started to perform.
 Unilateral contract—arises from a promise that requests acceptance by an action of the promisee
* Compare this with a request for a return promise, which is a “bilateral contract.”
Example 36: “I promise to pay you $1,000 if you promise to paint my house.” Unilateral or bilateral? bilateral.
Example 37: “I promise to pay you $1,000 if you take the action of painting my house.” Unilateral or bilateral? unilateral.

o Because a unilateral contract can be accepted only by performance, the law gives the promisee the right to finish.
Example 38: I promise $10,000 to the winner of a swim race to Alcatraz Island. The swimmers dive off the dock and are going strong toward the island. When they’re about halfway, I stand up on Fisherman’s Wharf with my bullhorn and yell “I REVOKE!” Can the winner of the race insist on the prize? yes, this is a unilateral offer with part performance.
Note 9: The offeree is not required to complete performance and can stop at any time.
Example 39: You are swimming in the Alcatraz race, but you get tired and swim to a boat. Can I sue you for breach of contract? No; there’s no agreement.

Question 16

Irrevocable Offers - Detrimental Reliance

Answer 16

o Arises when an offeree reasonably and detrimentally relies on the offer in some foreseeable manner
 Look especially for a general contractor/subcontractor context.
 This is a special variant of the reliance theory of contractual liability (sometimes called “promissory estoppel”).

Example 40: A builder who is bidding on a law school building project receives an offer from a subcontractor to supply all of the carpet for $20,000. Armed with this knowledge, the builder offers to renovate the building for $100,000. Before the law school accepts the bid, the subcontractor calls to revoke its carpet offer. Can the general contractor builder still accept the carpet offer from the subcontractor? Yes.

Question 17

Acceptance

Answer 17

• Acceptance—a manifestation of a willingness to enter into the agreement by the offeree
  1. Acceptance is governed by the objective test.
  o Starting place: “The offeror is master of the offer.”
  o The offeree must accept the offer according to the rules of the offer.
  Example 41: I offer to sell you my Jeep for $50 and state that in order to accept this offer, you must spring into a handstand, walk across the room to me on your hands, and sign this piece of paper. You look at me funny, just stand there, and say “I accept.” Is there a contract? No.

o Unilateral versus bilateral offers—The offeror decides which type of offer to make, and the offeree must play by those rules.
Example 42: “I promise to pay you $1,000 if, and only when, you paint my house.” You say, “I accept.” Is there a contract? No, you haven’t done what I said you must do to accept.
Example 43: Bob sends a letter to Sue, reading “please ship me 500 windshield wiper blades next week for $5 each.” Sue mails back a letter saying, “I accept.” Unilateral or bilateral offer? Unclear without more information. Is there a contract? Yes, under the modern approach.
Note 10: Under the modern approach, if there is an ambiguity about whether the offer is unilateral or bilateral, acceptance can be by either performance or a return promise.
Example 44: Bob sends a letter to Sue, reading “please ship me 500 windshield wiper blades by next week for $5 each.” Sue ships 500 wiper blades the next day. Is there a contract? Yes.
Note 11: TRICK What if the seller tries to accept by shipping the wrong goods? The UCC treats this as acceptance plus breach.
Example 45: Bob sends a letter to Sue, reading “please ship me 500 Bosch windshield wiper blades by next week for $5 each.” Sue ships 500 Sloshed wiper blades the next day. Is there a contract? ________, but also a breach.

Question 18

Otther Acceptance Rules

Answer 18

1. The offer must be specifically directed to the person trying to accept it.
2. Even with an open-to-all offer, you must know about that offer in order to accept it.
   Example 46: I’ve lost my pet cat, Monster, and I take out a newspaper advertisement promising $100 to anyone who finds my cat by this Friday. You never see the ad, but you find Monster roaming near my house and return the cat to me. Later, you learn about the reward offer and come by to collect. Do we have a contractual agreement? No_.
3. You must communicate your acceptance to the other party in order for it to become effective.
   Example 47: You offer to buy my contracts textbook for $50. I say “I’ll think about it.” That night, while I’m alone brushing my teeth, I say to myself “that’s a good offer… I should really accept that offer… in fact, I do accept that offer right now… I accept!” The next morning, you call me up and revoke the offer. Is there a contract? No.
   o The requirement of communicating an acceptance can raise some timing issues. This is the subject of the mailbox rule.

Question 19

Mailbox Rule

Answer 19

o General rationale—to determine when an acceptance has been legally communicated when there is some delay between sending and receiving

o The Rule—An acceptance sent by mail is effective when the letter is sent.

o Does not apply:
1) If the offeree sends something else back first (e.g., rejection, counteroffer);
2) To other types of communications (e.g., revocations, rejections);
3) To option contracts; or
4) It is unclear whether this applies to other media (e.g., fax, e-mail).
Example 48: I send you an offer. You mail back your acceptance. I call you before I receive your letter and revoke. Is there a contract? Yes.
Example 49: I send you an offer. You mail back your acceptance. The letter gets lost and never shows up. Is there a contract? Yes.
Example 50: I send you an offer. You mail back your acceptance. You change your mind and call me up before I receive your letter to reject the offer. Is there a contract? yes, unless I detrimentally relied on the rejection.
Example 51: I send you an offer. You mail back a rejection. You change your mind and mail back an acceptance a few hours later. Both letters arrive at my house on the same day. Is there a contract? Maybe. It depends on which letter I open first.

Question 20

Acceptance without Communication (By Silence)

Answer 20

o There are some exceptions to the requirement that you must communicate an acceptance to the offeror.

o Look for one of the following:
 Unilateral reward offers or contests (e.g., my lost cat Monster)
 Unilateral offer in which the parties are geographically close (such that the offeror will see that performance has occurred)
 A past history of silence serving as acceptance (such that the offeree should reasonably notify the offeror if she does not accept)
 The offer says that acceptance must come by silence, and the offeree intends to accept the offer by silence.

Example 52: I’ve lost my pet cat, Monster, and I take out a newspaper advertisement promising $100 to anyone who finds my cat by this Friday. You see the ad, find Monster, and come by my house on Thursday to collect the reward. Can you get the money even though you never communicated your acceptance to me? Yes.
Example 53: Mickey buys her weekly keg of beer by calling up Pabst on Monday and leaving a message requesting delivery on Friday. One Monday, she leaves her message as usual, but Pabst does not deliver the keg that Friday. Distraught, Mickey asks if she has a contract for this keg. Does she? Likely yes.
Example 54: I offer to sell you my Jeep for $500,000, saying “you may accept this offer by remaining silent for five seconds.” You stare at me but don’t say a word. After five seconds pass, do we have a contract? No, unless you intend to accept.

Question 21

Implied-in-Fact Contracts

Answer 21

o You can communicate an acceptance without writing or speaking.
o This communication by gestures or actions is called an “implied-in-fact” contract.

Example 55: I walk into Cheapcuts, a popular haircut franchise where the service offerings and prices are posted above the cash register. The energetic receptionist offers to put my name in, and I sit down to wait. A short time later, someone comes forward and calls my name. I follow, and she cuts my hair. When I walk toward the exit, the receptionist tells me that I owe them $15. Must I pay—even though I never said a single word? Yes - implied in fact contract

Question 22

Common Law Counteroffers

Answer 22

• The common law universe uses the mirror-image rule.
  o The terms in the acceptance must match the terms of the offer exactly—or it is not an acceptance, but a counteroffer.
• A conditional acceptance is another form of counteroffer.
  o Look for: “if,” “only if,” “on the condition that,” “but,” etc.
  Example 56: I offer to mow your lawn on Saturday for $50. You say, “OK, if you come over on Sunday.” Do we have a contract? No.

Question 23

UCC 2-207 Counteroffers

Answer 23

• The UCC universe is more forgiving for acceptances that do not match the terms of the offer exactly.
  o The UCC replaces the mirror-image rule with § 2-207.
• In some cases, a purported acceptance that does not match the terms of the offer exactly can still count as a legal acceptance.
  o But, do not assume that all terms in the purported acceptance will govern the contract.
  Note 12: It does not matter whether the parties are merchants for this part of § 2-207.
  Example 57: I run a business on the side: Geis’s Chainsaws. You send me a purchase order requesting a chainsaw for $400. On the back of this form is an indemnification provision saying “seller agrees to indemnify buyer in the event of a lawsuit related to the chainsaw.”
  I send back a confirming memo that is exactly the same as the purchase order, except for a provision on the back saying “buyer agrees to indemnify seller in the event of a lawsuit.”
  Editorial Note 2: Prof. Geis misspoke with regard to the seller’s confirming memo. The seller’s memo has the opposite indemnity provision of the buyer’s provision.
  The most likely outcome—we do not ever notice the difference, because nobody ever gets hurt. But it is possible that a dispute arises and one of us tries to back out of the deal. Is there a contract and, if so, which indemnity term, if any, controls?

Question 24

UCC Acceptance

Answer 24

Text of § 2-207(1): “A definite and seasonable expression of acceptance [or a written confirmation] which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms.”

Example 58: You send a purchase order requesting acceptance by this Friday. I send back my confirming memo two weeks later. Is there a contract? No, because the purported acceptance is not timely.
Example 59: You send a purchase order. I send back a timely confirming memo saying “Thanks, but I no longer sell chainsaws; however, I have a hand saw which you can have on the same terms.” Is there a contract? No, because this is not a definite acceptance of the original offer.
Example 60: You send a purchase order. I send back a timely confirming memo saying “OK, on the condition that you agree to indemnify me against a lawsuit for harm arising from the chainsaw.” Do we have a contract? No.
Example 61: Same facts as Example 60, but my acceptance letter has a bunch of terms on the back, all of which match yours, except for a clause that says “Buyer agrees to indemnify seller against a lawsuit for harm arising from the chainsaw.” Do we have a contract? Yes, under § 2-207(1).

Question 25

UCC - The Additional Term

Answer 25

o The new term in the acceptance may control under § 2-207(2), but only if all of the following are true:
1) Both parties are merchants;
2) The new term does not materially alter the deal;
3) The initial offer did not expressly limit acceptance to its terms; and
4) The offeror does not reject within a reasonable time to the new term.

o It is very difficult for the new terms in the acceptance to govern the contract.
Example 62: Same facts as Example 61. Is my indemnity term part of the contract? No.
Example 63: Does the answer change if the buyer is Lowe’s? Probably not, if the indemnification is not material.

Question 26

The Knock-Out Rule (Different Terms)

Answer 26

o Arises when the acceptance has a different term from the initial offer (as opposed to just an additional term)
o Minority—When the different term does not govern under § 2-207(2), the initial offer controls the terms.
o Majority—“Knock out” both of the different terms; neither term will govern and the general gap-filling provisions of the UCC will apply.

Question 27

Acceptance Based on Conduct

Answer 27

o Parties might fail to make a contract but still act as though there is an agreement (e.g., exchange goods for money).
o Under UCC § 2-207(3), only the terms that both writings agree on become part of the contract, with all other terms supplied by the UCC default rules.

Question 28

UCC 2-207 - Confirming Memo

Answer 28

• Arises when the parties have a contract (usually by verbal agreement) and one party sends a confirming memo with additional terms
• Section 2-207(1): [A definite and seasonable expression of acceptance or] a written confirmation which is sent within a reasonable time operates as an acceptance [even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms.]
  Exam Tip 2: If you see this fact pattern (early agreement + written confirmation with new terms), work through the same steps as above for § 2-207(2). But recognize that the new terms will very rarely come in.

Question 29

Bargained For Consideration

Answer 29

o Consideration—a deal in which the parties exchange promises involving a legal detriment or benefit
Exam Tip 3: The bar examiners like to test situations in which bargained-for consideration is missing. Ask the following questions:
1. Who is making the promise that needs to be supported by law? (That person is the promisor; the other party is the promisee.)
2. Is there a benefit to the promisor or a detriment to the promisee? (You just need one, not both.)
3. Was this bargained for? (In other words, did the parties think that they were making a deal when they exchanged promises?)
Example 64: I promise to pay you $1,000 if you do not watch the next season of The Bachelor. You do not watch the show, but I refuse to pay you the money. Who is the promisor? Professor Geis. Who is the promisee? You.
Did I benefit from the exchange of promises? Not in a legal sense. Did you incur a legal detriment, even though not watching the show is good for you? No. Is there bargained-for consideration? Yes.

 Not doing something that you are legally entitled to do is a legal detriment.

o Gift promises and conditional gifts do not count as bargained-for consideration.
Example 65: Every year for Christmas, Mickey gives me a tacky tie, and I give her an ugly sweater. Can she sue me this year if I refuse to give her a present? No, we are exchanging gifts, not bargaining.
Example 66: I promise to give you my Jeep if you come to my house to pick it up. Is there bargained-for consideration? No. I am not bargaining for you to come. This is a conditional gift.

Question 30

Adequacy of consideratio (nominal consideration)

Answer 30

 A pretense of consideration is insufficient.
Example 67: I promise to sell you my Jeep for $1. Is there bargained-for consideration? No, $1 is inadequate.
 A difference in economic value between the items exchanged is not grounds for finding inadequate consideration.
 As long as there is enough value, even subjective value to the person receiving it, consideration will be adequate.

Question 31

Illusory promise

Answer 31

Example 68: You promise to buy my Jeep for $5,000 on December 1, “if you feel like it.” Is there bargained-for consideration? No.
 A promisor must clearly commit to the deal or there is no consideration (i.e., there must be a way for the promisor to breach).

 Look for situations where one side is not really committing to the deal under the objective test. Examples:
* “I would like to buy your car when I have more money.”
* “When the economy gets better, I will pay $5,000 for your car.”

 Satisfaction contracts are not illusory; they are real contracts with consideration.
Example 69: I promise to pay Mickey $500 if she paints a portrait of my family that meets my satisfaction. She says OK. Is there bargained-for consideration? Yes.

 Output and requirements contracts are not illusory promises.
* There is a way for a party to breach:
o By requiring the product and purchasing from others; or
o By making the product and selling to others.

Question 32

Past consideration is not consideration

Answer 32

Example 70: You are trying to win a race to Alcatraz, when the sharks start to circle. I swing my boat over to pick you up. Grateful, you promise to pay me $500 for the rescue. Is there bargained-for consideration? No

Question 33

Promising not to sue

Answer 33

 Settling a legal claim can be sufficient consideration, but only if:
a) The plaintiff has a good faith belief in the validity of the claim; or
b) There is reason to doubt the validity of the claim due to uncertain law.

Question 34

Common Law Contract Modification

Answer 34

• Contract modification might require new consideration to be valid (the pre-existing duty rule)
  1. Common Law
  o Follows the preexisting duty rule—a promise to do something that you are already legally obligated to do is not consideration.
  Example 71: You rent an apartment from Slumlord for one year; the rent is $2,000 per month. Later that year, you start running short on cash, and you both agree to modify the rent to $1,500 per month. Can Slumlord sue you at the end of that month for the extra $500? Yes, at common law. (There is no bargained-for consideration for the modification of the contract.)

Question 35

Exceptions to Common Law Contract Modification

Answer 35

o Exceptions:
1) A change in performance;
2) A third party promising to pay; or
3) Unforeseen difficulties that would excuse performance.
Example 72: Same facts as Example 71, except you agree to re-rent the apartment for another year when the rent is lowered to $1,500 per month. Can Slumlord sue you at the end of that month for the extra $500? No.
Example 73: Same facts as Example 71, except Slumlord’s sister (Slumlady) agrees to cover $500 of your monthly rent if you stay in the apartment. Is there bargained-for consideration? Yes.
o Promising partial payment for release from a debt obligation—ask whether the debt is currently due and undisputed. If so, the modification is not binding.
Example 74: Mickey owes me $50,000, due today. I promise to release her from this debt if she can pay me at least $1,000. If she does, can I sue her for the other $49,000? Yes, because the modification is not valid.
Example 75: Same facts as Example 74, except that the debt is not due until next year. If Mickey accepts the deal and pays me the $1,000 today, can I sue her next year for the other $49,000? No, because the debt is not currently due.

Question 36

UCC Modification

Answer 36

o The UCC universe does not follow the preexisting duty rule.
o Ask whether the modification is made in good faith. If so, it is binding even without new consideration.
Example 76: Mickey contracts with Pabst to buy her weekly keg of beer for $75. Later in the week, Pabst calls back to say that there is a worker shortage that week, and it can’t get her the beer unless she pays $100 (so Pabst can outsource delivery to FedEx). Mickey says, “OK, charge what you must; I need my beer.” Is the price modification binding? Yes.
Example 77: Same facts as Example 76, but Pabst knows that Mickey will do anything for her beer. On Friday morning, Pabst calls to say, “you better pay us $1,000 or we won’t deliver your keg this afternoon.” Mickey says, “OK, charge what you must.” Is the price modification binding? No.