Contracts Midterm

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Contract

Contract

A promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty (Restatement (Second) of Contracts §1)

Option Contract

Holds an offer open for a specified period of time. Thus, makes an offer to enter a contract irrevocable by the offeror for a specified period of time. (Restatement (Second) of Contracts §25)

• Acceptance effective upon receipt

• POA not affected by counteroffers, rejection, or revocation.

• Consideration must be paid. But it can be nominal.

• 2 contracts: Option contract and Underlying contract

• Underlying contract forms when the optionee exercises the option.

• But optionee has no duty to exercise the option

Promise

a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. (Restatement (Second) of Contracts §2).

Illusory Promise

where a party appears to be bound by a promise, but in fact has not committed to performing any action or forbearance (Restatement (Second) of Contracts §77).

Freedom of Contract Policy

the belief that parties should be free to enter agreements without government intervention so long as the agreements do not violate a law.

Equity and Fairness Policy

recognizes situations in which the deal is so unfair that social justice demands that courts look at the substantive terms of the deal.

Contract Formation

The formation of a contract requires a bargain in which there is manifestation of mutual assent to the exchange and consideration. (Restatement (Second) of Contracts §17).

Objective Theory of Mutual Assent

a party’s manifestation of assent is judged by the objective reasonable interpretation of their outward expression of consent and not by their subjective intent. (Restatement (Second) of Contracts §202(3)(a)).

Offer

The manifestation of a present intent to enter a bargain that is stated in certain and definite terms and is communicated to an identified person or persons so that the offeree can reasonably understand that a contract would form if accepted.

Offeror

party making the offer - called the “master of the offer” and therefore sets the terms of the offer.

Offeree

the person to whom the offer is made - has the power of acceptance (POA) and therefore determines whether a contract forms.

Power of Acceptance (POA)

the right to form the contract merely by agreeing to every term of the proposed offer.

Preliminary Negotiations

when parties are discussing a potential contract, but no offer has been made R § 26.

Certainty

Even if there is a manifestation of intent to enter a bargain and is intended to be understood as an offer, it cannot be accepted as to form a contract unless the terms of the contract are certain and definite. R § 33.

Essential terms: price, time of performance, property being transferred / scope of work.

Advertisements and Price Quotes

Ads, flyers, catalogs, and price quotations are usually not offers but mere invitations to bargain. R § 26(b)(c)

Exceptions: satisfies elements of an offer, misleading ads, by statute, or rewards.

Family Contracts and Social Engagements

There is a rebuttable presumption that promises among family members are not enforceable unless there is clear and convincing evidence that they intended to enter a bargain.

Acceptance

A manifestation of assent to the terms of the offer in the manner invited or required by the offer. R § 50.

(1) manifestation of assent: can be verbal or by conduct but must be based on the objective outward expression.

(2) to terms of the offer: mirror image rule.

(3)manner invited or required: acceptance can be made by performance or by a return promise on what the offer requests (R § 32); if it is made by performance, the beginning of performance is acceptance (R § 62).

Rejection

When the offeree rejects the offer by either words or actions, the POA is terminated. R § 38

Counteroffer

When an offeree proposes new terms to the original offer and creates a new offer. Therefore, the roles are reversed and the offeree loses power of acceptance because he is now the offeror. R § 39.

Mere Inquiry

A consultation regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer. In this case, the offeree retains the POA.

Revocation

An offeror has the ability to revoke an offer before an acceptance has been made if the offeree receives notice of the revocation. R § 42 and 43.

Irrevocable offer

An offeror may not revoke an offer during the irrevocability period as the offeree retains POA during this period.

Lapse of Time

An offeree’s POA is terminated at the time specified in the offer, or if no time is specified, at a reasonable time. R § 41.

Face-to-face rule: the POA is terminated at the end of the conversation.

Death or Incapacity

An offeree’s POA is terminated when the offeree or offeror dies or is deprived of a legal capacity to enter into the proposed contract. R § 48.

Silence as Acceptance

The general rule is that silence is not acceptance unless it has been recognized as acceptance is previous dealings or when the offeror and offeree indicate that silence or inaction is acceptance. R § 69.

Mailbox Rule

Acceptance is effective upon dispatch. Williston on Contracts 6:32

Special issue: (1) when the rejection is mailed first, whichever communication arrives first is effective.

Exceptions: (1) option contract, (2) if the offeror states acceptance is not effective until receipt, (3) fed. govt. contracts.

Consideration

A detriment to the promisee or benefit to the promisor that is bargained for. R § 71.

There has to be a bargained of exchange in which:

(1) The promise induces the detriment (promisee’s motive).

(2) The detriment induces the promise (promisor’s motive).

The exchange must have a legal value which is determined by either:

(1) A detriment to the promisee (waiver of a legal right to take action or forbearance)

(2) A benefit to the promisor (a gain that the party is not legally entitled to receive, can be an economic gain or service or property).

Adequacy of Consideration

A contract will not be rescinded simply because there is an unequal exchange between the parties.

Freedom of contracts policy

Gross inadequacy

When the exchange is grossly unequal it poses a red flag for the courts to examine the deal for a possible defense to formation.

Nominal consideration

Where something of great value is exchanged for something of almost no value, it is considered a mere formality or pretense of a bargain.

Gratuitous promise

A promise to make a gift.

Conditional gift

The promisor intends to make a gift and the promisee must perform an action (or forbearance) to receive the gift.

• Not enforceable bc the detriment doesn’t induce the promise. The promisor has no motive besides making the gift.

• The condition/event can be something within the promisee’s control or something outside of either party’s control.

Past consideration

The promisor makes an offer based on past performance and therefore it is not bargained for.

• Not enforceable because the detriment didn’t induce the promise (promisor has no motive besides making a gift because the service/favor was already rendered).

Moral Obligation

A promise that is made out of love, respect, or a desire to do justice.

• Not enforceable bc it is based on a subjective standard and people have diff. views on morality.

Preexisting Legal Duty

A promise to do something a party is already legally obligated to do does not constitute consideration for a promise unless the party takes on a new duty. R § 73.

One-sided modification

One party may make new or additional promises to perform, but the other party has the same duties as they did before under the original agreement.

• Not enforceable because there are no reciprocal promises (no quid pro quo “promise for a promise.”)

Additional or Different Type of Consideration

Will make a modified contract enforceable because both parties take on a new duty to perform or change the type or timing of consideration.

Settlement of an Honest Dispute

Will make a modified contract because both parties waive their legal right to sue.

Modification and Changed Circumstances

A contract modifying a duty to perform under a contract not fully performed on either side is binding if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made. R § 89.

UCC Article 2

An agreement modifying a contract only needs good faith to be binding, no consideration needed.

Promissory Estoppel

A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or third party and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. R § 90.

• Promisee relied on the promise by taking action or forbearance.

• It was foreseeable to the promisor that the promisee would take action or forbearance.

• Injustice results if the promise is not enforced.

• Case: Kirksey v. Kirksey

Expectation Interest

Gives the P full value of the promise (what the party would expect if there was a contractual right with consideration).

Compensates based on what was promised.

Reliance interest

Compensates the P only for the amount that they are out of pocket (only to the extent that their economic position has deteriorated).

Compensates based on the degree P suffered by relying on the promise.

Unjust Enrichment

A person who is unjustly enriched at the expense of another is subject to liability in restitution.

Restitution

Doctrine that provides a party with a recovery even when no contract exists.

Promissory Restitution

a promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. R § 86

• based on past consideration.

• focuses on benefit conferred to the promisor.

• promisee must have expected some kind of benefit, otherwise will not be compensated.

• case: Webb v. McGowin

Bilateral Contract

Contract forms when the parties exchange promises, before either party actually performs under the terms of the contract.

Unilateral Contract

Contract only forms after one party performs under the terms of the contract.

Conditional contract

Both parties agree to enter a contract if some event or condition occurs.

Part Performance of a Unilateral Contract

Where an offer invites an offeree to accept by rendering performance, an option contract is created when the offeree begins performance.

Contract Formation

The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration. R § 17.

Specific Performance

Equitable remedy only when monetary damages would be inadequate to meet P’s needs

Mutual Rescission/Release

Contract is rescinded when both parties’ duties are executory.

Step 1: the parties could mutually agree to terminate the contract or release one another from their obligations.

Step 2: the parties are then free to enter a new contract with different terms if they wish to do so.

Accord and Satisfaction

A special type of settlement agreeement in which the accord is a new agreement and the satisfaction is the actual performance of the accord.

Novation

An agreement in which the parties agree to replace an existing obligor with a new obligor. Therefore, the duties of the original obligor are discharged.

Requires a previous valid obligation and agreement by all parties to change the obligation.

Account Stated (AS)

Arises between parties involved in a prior transaction, and one of the parties (the debtor) owes money from the prior transaction to the other party (the creditor).