Contracts

Contracts Outline

Contract

A legally enforceable agreement

What are the elements of a contract?

• Mutual Assent (offer and acceptance)

• Consideration

How is intent of the parties determined?

Objective standard based on outward objective facts as interpreted by a reasonable person. Subjective lack of intent is not sufficient to prevent the formation of a contract.

Offer

An objective manifestation of the offeror’s willingness to enter into an agreement that creates the power of acceptance in the offeree.

What are the elements of an offer?

• Intent

• Knowledge by the offeree (must know there is an offer).

  • Terms (the terms of the contract must be certain and definite).

• Essential Terms

• Language (words of promise, undertaking, or commitment; Distinguished from an invitations to deal)

What are the terms necessary for a on offer under the common law?

• Parties

• Subject matter

• Price

• Quantity

What is the term necessary for an offer under the UCC?

Quantity

How is a contract formed under the UCC?

• Both parties intend to contract

• There is a reasonably certain basis for giving a remedy.

What is the “gap” method under the UCC?

As long as the parties intend to create a contract, the UCC “fils the gap” if terms other than quantity, such as the time or place of delivery or even if the price of goods is missing.

Why do requirements or output contracts satisfy the UCC contract formation requirements without naming specific quantities?

Because the UCC implies good faith as a contract term.

If the duration term is not specified in the agreement how long will the contract last?

A reasonable period

What is the assumption if there is no duration in an employment contract?

That the employment is at-will. In an at-will employment relationship, either party can terminate the relationship at any time, without the termination being considered a breach of contract (unless the termination is against public policy).

If an employment contract provides for permanent employment why is this considered “at-will” employment?

Because the duration term is too vague.

When will an employment contract overcome the default rule that employment is at-will?

• By the express terms of the contract

• By rules published by the employer (i.e. employee handbook)

• By implication (by usage or conduct)

When the UCC fills the gap for missing terms, what is the default assumption for the term?

• Time = reasonable

• Place for delivery = the seller’s place of business

• Time of payment = when the buyer is to receive the goods

• Assortment of goods = reasonable choice of the buyer

• Price = reasonable

When are advertisements considered an offer?

When it is sufficiently specific and limiting as to who may accept the advertised promise.

How can offers be terminated?

• Lapse of time in offer

  • Termination date specified

  • Termination date not specified = at the end of a reasonable period (i.e. offer received by mail, acceptance is sent by midnight the day of receipt; if bargaining over the phone, reasonable time is by the end of the phone call unless otherwise agreed).

• Death or mental incapacity (unless there is an option)

• Destruction or illegality

• Revocation

• Rejection by the offeree

Revocation

The act of withdrawing an offer during contract negotiations.

What is the general revocation rule?

An offeror can revoke an offer at any time before acceptance. Revocation can be made in any reasonable manner by any reasonable means, and it is not effective until communicated. Revocation by mail is not effective until received. If the offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, the offer is automatically revoked.

In what circumstances is an offeror’s power to revoke limited?

• Option

• UCC firm-offer rule

• Promissory estoppel

• Partial performance

Option

An option is an independent promise to keep an offer open for a specified period. Generally there must be separate consideration for the option unless already a part of the contract. (i.e. Alice leases Bob a building for five years. The lease gives Bob an option to renew for another five years. No new consideration is needed)

UCC firm-offer rule

An offer to buy or sell or goods is irrevocable if:

• the offeror is a merchant

• there is an assurance that the offer is to remain open (if no period is stated, a reasonable time not to exceed 3 months).

• The assurance is contained in a signed writing from the offeror. (Offerors handwriting or letterhead may suffice for signature)

Oferee does NOT need to provide consideration to keep the offer open under the UCC firm offer rule, UNLESS the option is extended beyond 3 months, then consideration is needed.

Merchant

• A person who regularly deals in the type of goods involved in the transaction;

• A person who by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction; or

• Any businessperson when the transaction is of a commercial nature.

Promissory estoppel (Detrimental reliance)

When the offeree reasonably, forseeably, and detrimentally relies on the offeror’s promise before acceptance, the offer is irrevocable to the extent necessary to avoid injustice. Liability of the offeror can include, holding the offeror to the offer, reimbursement of the costs incurred by the offeree, or restitution of the benefits conferred.

Unilateral contract

Contract in which one party promises to do something in return for an act of the other party (e.g. a monetary reward for finding a lost dog).

Bilateral contract

Contract in which a promise by one party is exchanged for a promise by the other.

How does revocation work for a unilateral contract?

Typically, the offeror cannot revoke the offer once the offeree has begun performance, unless the offeror has reserved the right to revoke. Once performance has begun, the offeree will have a reasonable time to complete performance but cannot be required to complete performance.

How does revocation work for a bilateral contract?

Commencement of performance operates as a promise to render complete performance and constitutes as an acceptance. If the contract is for the sale of goods, the offeror must receive notice of the performance within a reasonable time.

General offer

An offer made to a large number of people, generally through an advertisement.

How can a general offer be revoked?

By notice that is given at least the same level of publicity as the offer.

What happens when a offer is rejected by an offeree?

Rejection is effective upon receipt. An offeree cannot accept an offer once it has been terminated.

What is the effect of a counteroffer?

Rejection of the original offer and creates a new offer.

Exception: An option holder has the right to make counteroffers during the option period without terminating the original offer.

Acceptance

An objective manifestation by the offeree to be bound by the terms of the offer.

How does one accept an unilateral offer?

Complete performance. Acceptance can only occur if the offeree knows of the offer they are accepting (e.g.

What are the ways one can accept an offer in a bilateral contract?

The offeree can accept an offer by any reasonable manner or means, unless the offeror specifically requires the offeree to accept by a particular manner.

When is a means of acceptance reasonable?

• It has been used by the offeror

• It is used customarily in the industry

• It has been used in prior transactions between the parties.

Even if the acceptance is by unauthorized means, it may be effective if the offeror receives while the offer is still open.

When does silence constitute acceptance?

• The offeree has reason to believe that the offer could be accepted by silence and the offeree was silent with the intent to accept the offer by silence; OR

• It is reasonable to believe that the offeree must notify the offeror of their intent not to accept because of previous dealings or patterns of behavior.

How does an acceptance work with the shipment of goods?

If a buyer requests that the goods be shipped, then the buyer’s request will be construed as inviting the seller’s acceptance either by a promise to ship or by prompt shipment of conforming or nonconforming goods.

If the seller ships nonconforming goods it is both an acceptance of the offer and a breach of contract. If, however, the seller seasonably notifies the buyer that the nonconforming goods are tendered as an accommodation, then no acceptance has occurred and no contract is formed. The accommodation is deemed a counteroffer, and the buyer may accept or reject.

Mailbox rule

An acceptance that is mailed within the allotted response time is effective when sent (NOT upon receipt) unless the offer provides otherwise. The mailing must be properly addressed and include correct postage.

Under the mailbox rule what happens when the offeree sends an acceptance but later sends a rejection?

The acceptance will control even if the offeror receives the rejection first. If however, the offeror receives the rejection first and detrimentally relies on the rejection, the the offeree will be estopped from enforcing the contract.

Under the mailbox rule what happens when the offeree sends an rejection first and then later sends an acceptance?

The mailbox rule will not apply and whatever response the offeror receives first will control.

When does an offeree need to give notice of acceptance under a unilateral contract?

• The offeree has reason to know that the offeror would not learn of performance within a reasonable time; or

• the offer requires notice.

When is the offeree’s (exceptional) duty to notify the offeror discharged?

• When the offeree exercises reasonable diligence to notify the offeror of acceptance

• The offeror learns of performance within a reasonable time; or

• The offer specifies that notification of acceptance is not required.

Mirror-image rule (Common law)

The acceptance must mirror the terms of the offer (no different or additional terms).

Any change to the terms of the offer or the addition of another term not found in the offer acts as a rejection of the original offer and as a new counteroffer.

Acceptance under the UCC

Additional or different terms included in an acceptance do not automatically constitute a rejection of the original offer.

A confirmation that contains additional or different terms is treated as an acceptance unless the acceptance is expressly conditioned on assent to the additional or different terms, in which case the confirmation is a counteroffer.

Acceptance under the UCC when at least one party is a merchant

Additional or different terms are treated as a proposal in addition to the contract that must be separately accepted by the offeror to become a part of the contract.

Acceptance under the UCC when both parties are merchants

Additional term in the acceptance is automatically included in the contract unless:

• The terms materially alter the agreement;

• The offer expressly limits the terms; or

• The offeror objects to the new terms within a reasonable time.

When any of the exceptions are met, the term will not become part of the contract, and the offeror’s original terms control.

What does it mean for a term to materially alter a contract?

The term, without the other party’s express awareness, results in surprise or hardship.

Knock-out rule (UCC)

When there are different terms included in the acceptance of an offer, the different terms in the offer and acceptance nullify each other and are knocked out of the contract.

When gaps are created, the courts will use Article 2’s gap filling provision.

Consideration

A benefit bargained for and received by the promisor from a promisee.

When will a legal detriment constitute sufficient consideration?

The promise induces the detriment and the detriment induces the promise.

Examples:

• A return promise to do something;

• A return promise to refrain from doing something legally permitted;

• The actual performance of some act;

• Refraining from doing some act.

Why are generally gifts unenforceable?

Because it does not involve bargained for consideration.

When is a gift enforceable?

Under promissory estoppel if the promisor/donor knows that the promise will induce substantial reliance by the promisee and the failure to enforce the promise will cause substantial injustice.

Preexisting-duty rule

A promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform.

However, if the promisor gives something in addition to what is already owed, or varies the preexisting duty in some way, most courts will find that consideration exists.

Third party exception to the preexisting-duty rule

When a third party’s promise is exchanged for the promise to perform an act that the promisor is already contractually obligated to perform, the party’s promise to the third party is sufficient consideration.

Why is something given in the past not adequate consideration?

Because it could not have been bargained for, nor could it have been given in reliance upon a promise.

Exception: Material-benefit rule

Executory contract

A contract whose terms are to be performed by both parties at a later date or in an ongoing manner.

Modification of a contract (Common law)

Requires consideration unless:

• The parties rescind the existing contract by tearing it up or by some other outward sign and then enter into a new contract whereby one party must perform more than they were to perform under the original contract;

• One party agrees to compensate the other when unanticipated difficulties arise if the modification is fair and equitable considering those difficulties; or

• There are new obligations on both sides.

Can a written contract be modified orally?

Yes, even if the written contract contains a “no oral modification clause”, unless the modified contract falls within the Statute of Frauds.

Modification of contract (UCC)

No consideration is necessary, instead good-faith is required.

Good-faith

Honesty in fact and fair dealing in accordance with reasonable commercial standards. (applies to both merchants and non-merchants).

May a parry who is benefitted by a condition, orally waive the condition without new consideration?

Yes

Under an installment contract can waiver of a condition be revoked?

Yes, if the other party has reasonable notice that strict performance is required, unless it would be unjust because of a material change of position by the other party un reliance on the waiver.

Accord and satisfaction

The tender (accord) and acceptance (satisfaction) of an alternative performance that discharges a contractual obligation.

The alternative performance satisfies the other party’s existing duty.

Must there be consideration when a party agrees to accept a lesser amount in full satisfaction if its monetary claim?

Yes, there must be consideration or a consideration substitute for the party’s promise to accept the lesser amount.

Which contract can a party sue under if the other breaches an accord?

The party can sue either on the original contract OR under the accord agreement.

When is satisfaction discharged?

Upon performance, and the original contract is not discharged until satisfaction is complete

If a claim is unliquidated or otherwise subject to dispute how will the accord and satisfaction be discharged?

• The person against whom the claim is asserted in good faith tenders a negotiable instrument (i.e., check) accompanied by a conspicuous statement indicating that the instrument was tendered as full satisfaction of the claim (i.e., payment in full); and

• The claimant obtains payment of the instrument.

Contract must be in dispute.

If claimant is an organization, the discharge is not effective if the instrument is not tendered to a person, place, or office designated by the organization. If no such designation is made or if the claimant is not an organization, the discharge is not effective if the claimant returns the payment in 90 days.

Illusory promises

A promise that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. It is not legally binding.

Voidable and unenforceable promises

A promise that is voidable or unenforceable by a rule of law (e.g., infancy) can nevertheless constitute consideration.

Requirements contract

A contract under which a buyer agrees to buy all that the buyer will require of a product from the other.

Output contract

A contract under which a seller agrees to sell all that the seller manufactures of a product to the buyer.

Does offering to settle a legal claim constitute consideration?

Not if it is is in invalid claim. But a promise to not assert a claim can constitute consideration if the claim or defense is doubtful because of uncertainty of facts or law. Can also be consideration if the party promising not to assert or releasing the claim believes in good faith that ir may be fairly determined to be valid.

What types of promises are binding without consideration?

• Promise to pay a debt barred by the statute of limitations or bankruptcy

• Promise to perform a voidable duty

• Promise to pay benefits received (Material-Benefit Rule)

• Promissory Estoppel

Requirements for a new promise to pay a debt barred by the statute of limitation or bankruptcy.

A new promise to pay a debt after the statute of limitations has run in enforceable without any new consideration. When the promise is an express promise, most states require that the new promise be in writing and signed by the debtor. A new promise is implied when:

• the obligor voluntarily transfers something of value (money, negotiable note) to the obligee as interest on, part payment of, collateral security for the prior debt;

• the obligor voluntarily acknowledges to the obligee the present existence of the prior indebtedness; OR

• States to the obligee that the statute of limitations will not be pleaded as a defense.

For bankruptcy, a new promise to pay is enforceable without new consideration. There must be an express promise to pay rather than a mere acknowledgement or partial payment of the discharged debt, the new promise need not be in writing.

Because the new promise, not the prior debt obligation, is enforceable, the amount to which the obligee is entitled may be less than the prior debt obligation.

Material-Benefit Rule

When a party performs an unrequested service for another party that constitutes a material benefit, the modern trend permits the performing party enforce a promise of payment made by the other party after the service is rendered.

NOT enforced when the performing party rendered the services without the expectation of compensation (ie, gift). The promise is not enforced only by the extent necessary to prevent injustice.

Promissory estoppel

Enforces a promise that is not supported by consideration.

Promise binding if:

• The promisor should reasonably expect it to induce action or forbearance on the part of the promisee or a third person

• The promise does induce such action or forbearance; AND

• Injustice can be avoided only by enforcing the promise.

Generally results in reliance damages rather than expectation damages.

Promissory Estoppel exception for charitable subscriptions

A charitable subscription (written promise) is enforceable under the doctrine of promissory estoppel without proof that the charity relied on the promise.

Construction contracts and promissory estoppel

An agreement not to revoke a sub-bid can be enforceable under a theory of promissory estoppel. Because the sub-bid is only an outstanding offer, the general contractor is NOT bound to accept it upon becoming the successful bidder for the general contractor. A general contractor can enter into a subcontract with another subcontractor for a lower price.

Void Contract

The entire transaction is regarded as a nullity, as if no contract existed.

Voidable Contract

The contract is valid unless and until one party takes affirmative steps to avoid it.

Unenforceable Contract

A valid contract that cannot be enforced if one of the parties refuses to carry out its terms.

Defenses to Contract Formation

• Mistake

• Misunderstanding

• Misrepresentation, nondisclosure, or fraud

• Undue Influence

• Duress

• Lack of capacity to contract

Mistake

A belief that is not in accord with the facts as to a basic assumption on which the contract was made that materially affects performance.

Mistake must be regarding an existing fact and not regarding a future event.

Mutual mistake

Both parties are mistaken as to an essential element of the contract. The contract may be voidable if:

• A mistake of fact existed when the contract was formed

• The mistake relates to a basic assumption of the contract

• The mistake has a material impact on the transaction; and

• The adversely affected party did not assume the risk of the mistake.

When reformation of the contract is available to cure a mistake, neither party can avoid the contract.

Conscious Ignorance

A party may bear the risk of a mistake when:

• The party is aware at the time of the contract of having only limited knowledge of the facts to which the mistake relates; and

• The party accepts such limited knowledge as sufficient.

Mistaken party’s negligence

When the mistake is attributable to a party’s failure to know or discover facts before entering into the contract, the party may nonetheless assert the defense of mistake unless the party failed to act in good faith in accordance with the reasonable standards of fair dealing.

The mistaken party’s negligence regarding the mistake is not sufficient to prevent the mistaken party from avoiding the contract.

Unilateral Mistake

When only one of the parties is mistaken to an essential element of the contract when the contract was formed, either party can generally enforce the contract on its terms.

The mistaken party can void the contract if:

• The mistake would make enforcement of the contract unconscionable; or

• The nonmistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken.

For a unilateral mistake to form the basis for recession, there must be an absence of serious prejudice to the other party.

Reformation for mistake

When a writing fails to express the agreement because of a mistake of both parties the court may, at a party’s request, reform the writing to express the agreement, except for the extent that rights of third parties who have relied on the document will be unfairly affected.

Reformation of a writing for mistake is available if:

• There was a prior agreement (written or oral) between the parties;

• The parties agreed to put that prior agreement in writing; and

• As a result of a mistake, the prior agreement and the writing differ.

Misunderstanding

Occurs when both parties believe that they are agreeing to the same material terms but they in fact agree to different terms.

• Neither party knows or should know of the misunderstanding: NO CONTRACT

• One party knows or should know of the misunderstanding: There is a contract formed based on the meaning of the term as understood by the unknowing party

• Both parties know or should know of the misunderstanding: NO CONTRACT

• Waiver: One party may waive the misunderstanding and enforce the contract according to the other party’s understanding.

Misunderstanding is determined by each party’s subjective knowledge, not an objective reasonable person standard.

Misrepresentation

An untrue assertion of fact. To constitute a fact, the assertion must be about a present event or circumstance.

Fraudulent misrepresentation

Requires proof of the following:

• The misrepresentation is fraudulent;

  • a false assertion of fact made knowingly or recklessly without knowledge of its truth; and

  • with the intent to mislead the other party;

• The misrepresentation induced assent to the contract; and

• The adversely affected party justifiably relied on the misrepresentation.

Nondisclosure

Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist.

Mere nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that:

• Disclosure is necessary to prevent a previous assertion from being a misrepresentation, fraudulent, or material;

• Disclosure would correct a mistake of the other party as to a basic assumption and the failure to disclose would constitute lack of goof faith and fair dealing;

• Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or

• The other party is entitled to know the fact because of a confidential or fiduciary relationship.

Fraud in Factum

Fraud in the execution. Occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction.

NO contract is formed and the apparent contract is void unless reasonable diligence would have revealed the true terms of the contract.

Fraud in the inducement

Occurs when a fraudulent misrepresentation is used to induce another to enter into a contract.

Contract is voidable by the adversely affected party if they justifiably relied on the misrepresentation in entering into the agreement.

Non-fraudulent misrepresentation

An innocent or negligent misrepresentation can still render a contract voidable by the adversely affected party if:

• The misrepresentation is material (info that would cause a reasonable person to agree that the person making the misrepresentation knows would cause the adversely affected party to agree)

• The misrepresentation induced assent to the contract; and

• The adversely affected party justifiably relied on the misrepresentation.

Undue influence

The unfair persuasion of a party to assent to a contract. Typically occurs in relationships between a dominant party and a dependent party (trustee-beneficiary, lawyer-client, doctor-patient, financial adviser-client, and in some cases, parent-child).

Ask whether the party was able to exercise free and competent judgement or whether the persuasion of the other party has seriously impaired that judgement. Relevant factors include the fairness of the bargain, the availability of independent advice, and a party’s susceptibility to being persuaded.

When a fiduciary relationship between contract parties is established, the burden of proving that the contract is fair is placed on the dominant party.

Restitution damages may be available.

Third-party undue influence

When a person who is not a party to the contract causes undue influence, the victim may void the contract unless the non-victim party to the contract gave value or materially relied on the contract while acting in good-faith and without reason to know of the undue influence.

Duress

An improper threat that deprives a party of meaningful choice.

Improper threats: Threats of a crime, tort, criminal prosecution, or the threat of pursuing a civil action in bad faith.

Threatening to breach a contract is improper if doing so would violate the duty of good-faith and fair dealing.

Deprivation of meaningful choice = when the person does not have.a reasonable alternative to succumbing to the threat