Contracts Flash Cards

Restatement (Second) of Contracts

a product of what is the classing theory of contracts

• first restatement contained a lot of bright-lined rules that led to unfairness

• movement from rules to standards with the 2nd restatement and reflects the legal realist movement

  • synthesis of the common law

Uniform Commercial Code

set of statutes that govern different areas of commercial law

goods

items where their value is bound up in their form or functionality (must be movable)

The U.C.C. is drafted by…

the american law association and the uniform law commission

• when they draft a statute it does not become law, but is sent to the state legislatures in hopes that they will adopt the law so that state common law can become more consistent

Contract

a promise for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty; a set of promises for which the law will enforce

objective theory of contract formation

someone must manifest an intent to be bound such that a reasonable person would believe that they did intend to be bound

subjective intent

• a person will be presumed to have subjective intent corresponding to their language and conduct

  • however if the other has special knowledge and knows that the other did not intend to be bound, then there is not mutual assent

    • if the offeror did not subjectively intend to enter into a contract but the other party think that you objectively did, too bad

Objective test

1. would a reasonable person believe that the other person’s manifestation indicate a desire to go forward with the deal? (objective)

2. does the offeree actually believe that the offeror intends to go forward with the deal?

With oral contracts…

they are generally as enforceable as written contracts except in real estate contracts, they must typically be in writing

Offer

something that creates in the offeree the power of acceptance

Power of Acceptance

you have the power to create the contract, the offeror does not get a further say

Advertisements are…

generally not considered offers because if more people accept than there are goods, then there are more contract than goods –> leads to a risk of multiple acceptances

• an advertisement is generally considered an invitation to negotiation (to make an offer)

  • BUT; if an advertiser assumes the risk of multiple acceptances, then the ad may constitute an offer

“first come, first serve”

overcomes the problem of multiple acceptances and may make an ad into offer

Reward advertisements…

generally considered offers as long as a reasonable person would think it was serious

• no multiple acceptances problem, treated as offers for a unilateral contract (required acceptance by performance)

Quotes for sales…

generally treated like advertisements (as an invitation to make an offer) because others can reasonably conclude that a price quote is being given to others

required specificity of an offer

an offer requires enough specificity to:

1. solve the multiple acceptance problem; and

2. give a reasonable objective standard for the court to justify enforcement

Lapse of Time

An offeree’s power of acceptance is terminated at the time specified in the offer, or if no time is specified, at the end of a reasonable time

What is considered a reasonable time in a lapse of time?

what is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made

reasonable time over the phone or face to face?

a reasonable time is assumed to end if the offer is conducted over the phone or face to face once the conversation has ended completely; UNLESS

• the offeree says let me think about it, this clearly extends the offer to a reasonable time

rejection of the offer

the offeree tells the offeror that they do not accept the offer

The offeree’s rejection of an offer terminates the offer; UNLESS

1) the offeror manifests that a rejection will not terminate the offer; or

2) the offeree manifests an intention to take the offer under futher advisement

A rejection is valid when…

received by the offeror

Rejection Exception

an option contract makes the offer non-rejectable

A counter-offer is…

an implied rejection

• rejects the original offeror’s offer and make the original offeree into the offeror of a new offer

Inquiring & Counter Offers

Inquiries are not considered counter offers, the offer is still alive

ex: I will give you 45k v would you take 45k?

Revocation

when the offeror takes away their offer

• an offer can be revoked at any time before acceptance, even if the offeror has promised not to revoke

• an offer revocation is not effective until the offeree has received it

Exception: an option contract makes the offer irrevocable

An offer can be revoked by:

1. Direct communication of revocation; or

2. Indirect revocation (can be implied)

Direct Communication of Revocation

when the offeror communicates the revocation to the offeree

Indirect Revocation

when the offeree acquires reliable information that the offeror has taken definite action inconsistent with the intent to enter into the contract

• definite action has to be inconsistent from the standpoint of a reasonable person

• has to come from a reliable source and be sufficient information to get this message across

Death or Incapacity

death revokes an offer instantaneously regardless of whether the other party knows it

• being adjudicated as incompetent revokes an offer instantaneously

Death and Option Contracts

an option contract prevents death from revoking an offer – the contractual obligation passes to the decedent’s estate

Option contract restatement

is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time

option contract consideration approaches among the states

there is a split among the states

• some require consideration of $1 to count

  • some do not require that consideration be paid

Option Contract

a promise to not revoke an offer that is supported by consideration

• the offeree effectively buys (with a contract) the availability of the offer from the end of the option period (no revocation during this time)

• in option contract is also created upon the commencement of performance when an offer invites an offeree to accept by rendering performance (unilateral contract)

Nominal Consideration

not an amount low in relation to the value of the contract performance but an amount that is so low that it is symbolic in nature

Option contracts prevent termination of an offer by:

1. rejection (or counter offer)

2. Revocation; or

3. Death (or incapacity)

Changing your Mind in an option contract

you can reject the offer and then change your mind because you reserved a period of time to accept the offer

• you bought the block of time and so that contract is enforceable against the estate

Firm Offer

A merchant can make a firm offer (for goods) that cannot be revoked

1. offer by a merchant

2. to buy or sell goods

3. in a signed writing

4. which by its terms gives assurances that it will be held open,

   1. is not revokable for the time states

A merchant is:

a) a person who deals in goods of the kind involved; or

b) a person who holds themselves out as having knowledge or skill to the

• practices involved; or

• goods involved

General Rule of Acceptance

• Acceptance must be in a manner consistent with the offer

• the offeror can create, or suggest alternative exclusive methods of acceptance

  • if the offer does not specify a method of acceptance, the offeree can accept by any method reasonable under the circumstances

Acceptance is most commonly affected by:

• promise; or

  • commencement of performance

Bilateral Contract

promise exchanged for a promise

Unilateral contract

promise exchanged for complete performance

• formed a contract where a promise is offered in exchange for only complete performance

When do unilateral contracts arise?

when it is unambiguously clear from the language or the circumstances that the offeror does not want and will not accept a return promise as an acceptance

Purpose of the Mailbox Rule

purpose is to prevent surprise revocations

The Mailbox Rule

an acceptance is effective as soon as put out of the offeree’s possession (ie; when deposited with the postal service) without regard to whether it ever reaches the offeror

(but this does not count if the contract specifies that the acceptance is only effective upon reaching the offeror)

Notification and the Mailbox Rule

putting a letter in the mail is a notification of acceptance because you do not normally have to communicate it in such a way that it was received but if the medium of acceptance is not specified by the offeror, the offeree cannot pick a method of acceptance that is not reasonable under the circumstances

Does the mailbox rule apply to option contracts?

NO, because the risk of surprise revocation is not there

Policy reasons for the mailbox rule

the average offeror is going to want the other party to begin performing as soon as possible, therefore the sooner acceptance is valid, the sooner the offeree can start working

When does commencement of performance operate as an acceptance?

commencement operates as an acceptance at the moment of commencement (notification is not necessary to complete an acceptance by performance)

Adequate means of learning of performance

if the offeree has reason to believe that the offeror has no adequate means of learning of performance with reasonable promptness, then the offeree must exercise reasonable diligence in notifying the offeror of the commencement of performance within a reasonable time

If the offeree does not, the offeror cannot revoke (because the offer has ripened into a contract), but the offeror’s contractual obligation is discharged

Does an offeree’s silence operate as an acceptance?

Yes but only in certain cases:

a) where an offeree takes the benefit of offered services with reasonable opportunity to reject them and the reason to know that they were offered with the expectation of compensation

b) where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer

c) Because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept

Mirror Image Rule

an acceptance has to mirror the offer precisely and cannot change the offer in a material or immaterial way

• historic rule that is used when there is not an inquiry, changes the terms in one way, or adds a condition, it does not matter how immaterial it is

  • Does not distinguish between material and immaterial terms

Shift in Mirror Image Rule

some states are moving away from the strict mirror image rule and are becoming flexible to allow acceptances but differ only on immaterial terms

Material change

a big deal; any reflection and the other party possibly wants to get out of the deal

immaterial change

a trifling deal

U.C.C. Def of Contract

the agreement of the parties is augmented by the U.C.C.’s gap filling provisions

U.C.C. Def of Agreement

the bargain of parties, in fact based on their language or inferred from the surrounding circumstances, including course of performance, course of dealing, or usage of trade

U.C.C. Def of Sale

the transfer of ownership from the seller to the buyer for a price

U.C.C. Def of Term

means a portion of an agreement that relates to a particular matter (this DOES NOT mean gap-fillers)

U.C.C. gapfillers

the normal answer a lay person would think, rules that kick in to provide a reasonably certain basis for a remedy

• course of dealing and usage of trade ARE NOT gap fillers

U.C.C. definition of Merchant

A merchant is:

a) a person who deals in goods of the king involved; or

b) a person who holds themselves out as having knowledge or skill particular to the

• practices involved; or

• goods involved

• (this includes someone who the public would assume to understand the basic practices of contracting (universities))

Contract Salad

start with the agreement (terms the parties have assented to their language and other terms created by inferences from facts) and then throw in the gap fillers; then yank out the unenforceable terms

• the terms that are up for negotiation and are in BOTH offers go into the new contract and whatever is not shown in both offers are kicked out of the contract and the gap-fillers will fill in the rest

U.C.C. § 2-105(1) definition of goods

good are all things including specifically manufactured things that are movable at the time of contract for sale

• assets other than real estate whose value is based on their form and performance

U.C.C. § 1-303

provides definition for course of performance, a course of dealing, usage of trade (these are considered terms of the agreement)

Hierarchy of § 1-303

• express terms prevail over courses and usage of trade

• course of dealing trumps usage of trade because it is closer to the parties and more representative of their history

U.C.C. § 2-204 Formation in General

• a contract for the same of goods may be made in any manner sufficient to show agreement, including conduct by both parties that recognizes the existence of such a contract

  • It is hard to identify an offer and acceptance in every situation so an agreement is sufficient to constitute a contract for sale be found even though the moment of its making is undetermined

U.C.C. § 2-305: open price term

1. the parties, if they so intend can conclude a contract for sale even though the price is not settled. In such case, the price is a reasonable price at the time of delivery if:

   a) nothing is said as to the price; or

   b) the price is left to be agreed by the parties and they fail to agree; or

   c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third party or agency, and it is not so set or recorded

U.C.C. § 2-307: delivery in single lot or several lots

unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tended, but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned, may be demanded for each lot

U.C.C. § 2-308: absence of specified place for delivery

the place for delivery is the seller’s place of business or, if he has none, his residence

BUT if you have dealt with the seller before on several occasions and the seller has always put them on a truck and delivered them to you –> this is a course of dealing, which is part of the agreement between the parties because it comes from the definition of agreement

U.C.C. § 2-309: absence of specific time provisions; notice of termination

1. the time for shipment or delivery or any other action shall be a reasonable time

2. where the contract provides for successive performances but is indefinite in duration, it is valid for a reasonable time

   1. termination of a contract by one party requires that reasonable notification be received by the other party

U.C.C. § 2-310: open time for payment or running credit; authority to ship under reservation

a) a payment is due at the time and place which the buyer is to receive the goods even though the place of shipment is the place of delivery; and

b) if the seller sends the goods, he may ship them under reservation, but the buyer may inspect the goods after their arrival before payment is due; and

c) if delivery is authorized and made by documents of title, then payment is due at the time and place at which the buyer is to receive the documents regardless of where the goods are to be received; and

d) where the seller ships the goods on credit, the credit period runs from the time of shipment

Misunderstanding

mutual misunderstanding happens when the parties attached materially different meanings to their manifestations

• even though the parties used the same words, the parties think those words mean different things

Misunderstanding prevents contract formation when:

• the parties don’t know the meaning attached by the other

  • the parties both know or had reason to know the meaning attached by the other

A contract is formed with the meaning attached by one party if…

one party knew what the other party meant and that one of the parties did not have actual knowledge of what the other party meant but should have had reason to know (perfect ignorance)

State of mind is a …

state of mind is a fact, and the fact finder can find that the seller had actual knowledge, and if the finding of fact was incorrect, we do not do anything as long as there is credible evidence that is introduced that would support that argument

Restatement (Second) of Contracts § 20

Effect of Misunderstanding

Ambiguity

language that is reasonably susceptible to more than one interpretation

latent ambiguity

a hidden ambiguity that you would not notice until you hear the rest of the story

• ex: two boats named peerless

Patent Ambiguity

a document’s language is unclear or has multiple possible meanings

Indefiniteness

material term that cannot be resolved to missing term, no contract has been formed, and parties are still negotiating under common law

A contract will fail for indefiniteness if the terms are too vague or ambiguous for a court to:

• determine the existence of a breach; and

• fashion a remedy to enforce

  • if there is not a reasonably certain basis for giving an appropriate remedy at all then there is no contract

U.C.C. § 2-204(3)

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

• Agreement to agree is one of the ways that a term can be left open but a contract for sale does not fail for indefiniteness 

  • If the parties have manifested assent to enter into a contract then an agreement to agree is fine 

Common Law Approach Agreements to Agree

the general common law approach when there is was an agreement to agree –> we put in a price for the renewal time (we agreed to agree in the future)

Common Law 2 step approach on agreements to agree

1)   If the parties had thought about it at the time of assenting to the contract, would

                        they have instructed the court to fill the gap for them?

2)   Can the court fill the gap?

• Only if there is an objective way to do so (Varney issue).

consideration

something that has been given in exchange for a promise

nominal consideration

an amount that seems low in relation to the return consideration is nominal if a court found it played no part in the inducement

What is the key to consideration?

mutual inducement

• must examine the mental states of both parties

  • each side will make an argument that the other/they did not have the same full or mutual inducement at all

to constitute consideration…

a performance or a return promise must be bargained for

Bargained for

if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise-

forbearance of claims test

did the forbearing party honestly and reasonably believe that they had a claim?

• would have to actually believe it and a reasonable person would think it is a credible claim

Inadequate consideration

something that is more than nominal but is a mismatch in what is considered and what is promised

Pre-existing duty rule

predicated on the idea that there was a modification, but performing what the law already requires you to do is NOT consideration –> modification of an existing contract generally requires new consideration

Henning Way to get around pre-exisiting duty

2 parties, neither of whom have fully performed (executory contract) could both agree to forgive each other of their remaining duties, the parties can enter into a new contract on new terms

• many courts will accept nominal consideration to support the modification of a contract in good faith cases

Application by analogy

the court will say that this transaction is not covered by the UCC but it is analogous and makes sense so we will take the UCC and make it the new common law

executory contract

a contract where each party still has obligations left to fulfill

Restatement exception to pre-existing duty rule

§ 89

a promise modifying a duty under a contract not fully performed on either side is binding

a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

b) to the extend provided by statute; or

c) to the extend that justice requires enforcement in view of material change of position in reliance on that promise

• if the RSK was around at the time of great depression case, this would have worked

UCC Modification of Contracts

§ 2-209

modification of contracts do not need consideration to be binding BUT there is a good faith requirement

Promise made in gratitude

there is generally no moral obligation to perform a promise made in gratitude for a past benefit that was given gratuitously; if someone received a benefit and out of moral obligation promises to do something, this is NOT the product of consideration

Officious intermeddler

you will not recover restitution because they did the act and then asked for compensation