Barbri - Contracts and Sales

Contract Question Steps

1. What law applies? (Common Law or UCC)

2. Was a contract formed? (offer, acceptance, consideration)

3. Is the contract enforceable? (Defenses)

4. What does the contract mean?

5. Whether performance is excused

6. Whether the contract was breached?

7. What are the remedies?

8. Are there third-party beneficiaries?

Contract Formula

K = MA (O+A) + C - D

Contract = Mutual Assent (Offer and Acceptance) + Consideration - Absence of Defenses

Main Sources of Law

1. Common law

2. Article 2 of the Uniform Commercial Code (UCC)

Contract Definition

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

- A legally enforceable agreement

Express Contract

Formed by oral or written language

Implied Contract

Formed by conduct

Quasi-Contract

Not a contract

Another name for a restitution remedy to avoid unjust enrichment

- Courts permit a plaintiff to bring an action in restitution to recover the amount of the benefit conferred on the defendant

Bilateral Contract

The exchange of mutual promises

Offer can be accepted in any reasonable way

unless expressly indicated otherwise, assume any contract is bilateral

Unilateral Contract

Promise for performance

- The offeror-promisor promises to pay upon completion of the requested act by the promisee

- Requires full performance

Occurs in two situations:

1. The offeror clearly (unambiguously) indicates that completion of performance is the only manner of acceptance, and

2. There is an offer to the public, such as a reward offer

Unilateral Offer Magic Words

1. "My offer can be accepted only by...."

2. Reward offer

Void v. Voidable Contracts

Void contracts can never be enforced, but an aggrieved party may elect to enforce a voidable contract

Controlling Law: UCC

1. The sale of goods

2. Transactions between merchants

Goods Under UCC

Anything movable when identified to the contract

- Tangible personal property

Controlling Law: Common Law

Contracts for services; anything not under UCC

- E.g., construction contracts, employment contracts, land sale contracts, and other real estate contracts

Merchant Under UCC

1. One who regularly deals in goods of the kind sold, or

2. Holds themselves out as having special knowledge or skills as to practices or goods involved

For Article 2 provisions dealing with general business practices, almost anyone in business can be deemed a merchant

Special Definition for Certain Transactions

Some Article 2 provisions are narrower and require a person to be a merchant with respect to goods of the kind involved in the transaction

All sales of goods governed by:

UCC Article 2

Contracts Involving Goods and Nongoods

If a sale involves both goods and services, the law governing the dominant part of the transaction applies

When payment is divided between goods and services, each is governed by their respective laws

Good Faith and Fair Dealing

Good faith applies to every UCC contract

Good faith and fair dealing applies to common law contracts

Good faith = honesty in fact, and the observance of reasonable commercial standards

Elements of an Enforceable Contract

1. Offer

2. Acceptance

3. Consideration

4. (No defenses)

Offer

An offer is a manifestation of an intention to be bound

For a communication to be an offer, 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

How does an offer create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms?

Look for:

1. Promise / undertaking / commitment to enter into the contract

2. Certainty and definiteness in the essential terms

3. Communication of the above to the offeree

Promise, Undertaking, or Commitment

There must be objective intent to enter into a contract

- Reasonable person standard

Consider language, surrounding circumstances, prior practice and parties' relationship, and methods of communications

an invitation to negotiate is nottt an offer

Offer - Use of Broad Communications Media

The broader the communicating media, the more likely it is that the courts will view the communication as merely the solicitation of an offer

Offer - Advertisements

usually NOT considered an offer. Advertisements, catalogs, circular letters, and the like containing price quotations are usually construed as mere invitations for offers

Exception:

1. Promise

2. Certain and definite, and

3. The offeree clearly identified

Offer - Bids

Bids in construction are offers

Offer - Definite and Certain Terms

Offers usually must include:

1. Offeree's name

2. Offer's subject matter

3. Price

Definite and Certain Terms - Land Sale Offers

Land sale offers must include:

1. Price

2. Description of land

No price = no definite terms

Definite and Certain Terms - Sale of Goods must include:

Offers for the sale of goods must include:

- Quantity term

UCC gaps fillers can fill in missing price term

"Requirements" and "Output" Contracts

Requirements Contract = Buyer promises to buy from seller all goods buyer requires

Output Contract = Seller promise to sell to buyer all goods seller produces

There cannot be a tender of or demand for a quantity unreasonably disproportionate to:

1. Any stated estimate, or

2. Any normal or otherwise comparable prior output or requirements

Offer - Employment and Other Services

If the duration of the employment is not specified, the offer, if accepted, is construed as creating a contract terminable at the will of either party

For other services, the nature of the work performed must be included in offer

Offer - missing terms

The fact that one or more terms are left open does not prevent the formation of a contract IF it appears that the parties intended to make a contract and there is a reasonably certain basis for giving a remedy

The court can supply reasonable terms:

- if time is not specified, it should be within a reasonable time

- (except real property), price is reasonable price at the time of delivery

Offer - Vague Terms

If material terms are vague/ambiguous/to be agreed upon at a future date, there is no offer (like terms to be agreed on later that are material)

Termination of Offer

An offer cannot be accepted after it was terminated

1. Lapse of time

2. Revocation

3. Rejection

4. Death (by operation of law)

Termination of Offer - Lapse of Time

Offer terminated if not accepted within deadline or reasonable time

- reasonable time is determined by all the circumstances at time of offer and attempted acceptance

Termination of Offer - Rejections

An offer terminates when an offeree rejects it

Can take the form of:

- Express Rejections

- Counteroffers

- Conditional acceptances

- An additional term thrown into a common law offer

Rejection - when is it effective?

Effective when received, no matter when recipient actually reads it

Received means when it is delivered to the authorized location

Express Rejection

Statement by the offeree that they do not intend to accept

Counteroffer

An offer made by the offeree to the offeror that contains terms different from the original offer

- Operates as both a rejection and new offer

- Mere bargaining/inquiries is not a rejection

Exam Tip

- Watch for punctuation at end of offeree's response

- Period = Counteroffer

- Question mark = Bargaining

Mere inquiries

Won't terminate the offer when it's consistent with the idea that the offeree is still keeping the original proposal under consideration

Test: whether a reasonable person would believe that the original offer had been rejected

Conditional Acceptances

When an acceptance is made expressly conditional on the acceptance of new terms, it is a rejection of the offer

- Rejection + New offer

Performance cannot create acceptance. if goods shipped/accepted, its based on the original terms

Rejection of option contract

Usually ineffective! A rejection OR counter offer does not terminate the option.

The only way it becomes effective is if the offeror detrimentally relies on the rejection

Termination of Offer - Revocation

A retraction of an offer by the offeror

- Direct revocation

- Indirect revocation

Direct Revocation

Offeror directly communicates the revocation

(if offered via publication, an express revocation would be by using comparable means)

Indirect Revocation

Offer revoked indirectly if:

1. Offeree receives correct information,

2. From a reliable source,

3. Of offeror's acts indicating revocation

Offeree must know about it!

Timing of Revocation

Revocations are effective upon receipt (or when published)

Revocation Exceptions

1. Option contracts

2. Merchant's firm offer under UCC

3. Detrimental reliance

4. Part performance

Revocation Exceptions - Option Contract

Offeree gives consideration for offeror to not revoke offer for period of time

Revocation Exceptions - Merchant's Firm Offer Under UCC

1. Merchant promises (anybody operating any business)

2. Offers to buy or sell goods in signed writing (anything that looks authenticated will work)

3. The writing gives assurances that it will be held open

4. Makes it irrevocable, even without consideration, for the stated or, if no time is stated, a reasonable time

No period may exceed 3 months

Revocation Exceptions - Detrimental Reliance

When offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so, the offer will be held irrevocable as an option contract for a reasonable length of time

- Must be foreseeable!

Revocation Exceptions - Part Performance (Unilateral Contract Offer)

Start of performance of unilateral contract offer = Irrevocable for reasonable time necessary to complete performance

Substantial preparations to perform do not make the offer irrevocable, but may constitute detrimental reliance sufficient to make the offeror's promise binding to the extent of the detrimental reliance.

Termination of offer by operation of law

1. Death

2. Insanity

3. Destruction of the proposed contract's subject matter

4. Supervening illegality

Termination of Offer - Death

Death before acceptance = Terminates a revocable offer

Death after acceptance = Obligation goes to estate of the deceased person

Acceptance

A manifestation of assent to the terms of an offer

- Language of offer controls acceptance

Acceptance - who may accept?

usually only the person to whom an offer is addressed, or a member of a class

Option contracts - the right to accept is transferable

Offeree must know of the offer in order to accept it

Acceptance of Offer for Bilateral Contracts

Can be accepted by:

1. Promise to perform, or

2. Beginning of performance

Acceptance must be communicated to the offeror. An offer can be accepted by any reasonable manner by any medium reasonable under the circumstances

Acceptance made by unauthorized means or improperly transmitted by authorized means may still be effective if it is actually received by offeror while offer exists

Offers to Buy Goods for Current or Prompt Shipment - UCC

Construed as inviting acceptance either by a promise to ship or by current or prompt shipment of conforming or nonconforming goods

Acceptance of Offer for Unilateral Contracts

Finish performance

- Once offeree starts performance of a unilateral contract offer, the offer becomes irrevocable

Notice for Acceptance and completion of unilateral contracts

Acceptance: notice not required

Completion: required to notify within a reasonable time after performance

- Exception if (1) offeror waived notice or (2) the offeree's performance would normally come to the offeror's attention within a reasonable time

Acceptance Under UCC - Shipment of Nonconforming Goods

The shipment of nonconforming goods is an acceptance as well as a breach, unless the seller seasonably notifies the buyer of an accommodation

- An accommodation is a counteroffer

- Buyer may reject accommodation

Accommodation

Essentially a counteroffer

Not acceptance or breach

the accommodation shipment rule only applies when shipment is used as a form of acceptance

Silence as Acceptance

Generally, silence is not acceptance

Exception: 1. Custom where silence acceptance was reasonable, or 2. recipient knew/shouldve known that services were being rendered and could have prevented the mistake by a word, will prob be held liable

Mirror image rule - Common Law

Acceptance must mirror offer terms

- Any different or additional terms in the acceptance make the response a rejection and counteroffer

Battle of the Forms - Acceptance

Offeree's additional or different terms is an acceptance unless expressly made conditional on the assent of the additional terms

Battle of the Forms - Contracts Involving Nonmerchants

If any party to the contract is not a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do not become part of the contract unless the offeror expressly agrees.

Battle of the Forms - Contracts Between Merchants

If both parties to the contract are merchants, additional terms in the acceptance will be included in the contract unless:

1. They materially alter the original terms of the offer;

2. The offer expressly limits acceptance to the terms of the offer; OR

3. The offeror has already objected to the particular terms or objects within a reasonable time after notice of them is received

Different terms may or may not be knocked out

Material Alteration

A term that is likely to cause hardship or surprise to offeror

- Exam Tip: It is not a material change to throw in a term that is customary in the industry

Moment of Mutual Assent Uncertain

UCC considers binding even though the moment of the contracts making is uncertain

Mailbox Rule

Acceptance by mail or similar means is effective when dispatched

- Rejections and revocations must be received

Mailbox Rule Exceptions

1. The offer stipulates that acceptance is not effective until received

2. An option contract is involved (acceptance only effective upon receipt)

3. The offeree sends rejection and then sends an acceptance (whichever arrives first)

4. Sends an acceptance and then rejection, mailbox rule applies unless offeror received rejection first and detrimentally relies on it

Consideration

1. bargained-for exchange, and

2. legal value of benefit to the promisor or detriment to the promisee

Consideration - Bargained-for Exchange

Promise must induce the detriment and the detriment induce the promise

- There is no bargain involved for a gift

Consideration - Act or Forbearance

A promise to act or forbear is sufficient consideration if it benefits the promisor

Past or Moral consideration

A promise given in exchange for something already done does not satisfy the bargain requirement

Adequacy of Consideration

Irrelevant, a mere peppercorn is sufficient

If something is devoid of value or if sham consideration is used, it is insufficient

Consideration - Legal Benefit

A forbearance or performance of an act that the promisor was not legally entitled to demand of expect

Consideration - Legal Detriment

The promisee does something they are not legally obligated to or refrains from doing something they have a legal right to do

Consideration - Preexisting Legal Duty (Common Law)

Need new consideration to modify common law contract

There is consideration if:

1. New or different consideration is promised

2. The promise is to ratify a voidable obligation

3. The preexisting duty is owed to third person

4. There is an honest dispute as to the duty

5. The modifications fair and equitable in view of circumstances not anticipated when the contract was made

Consideration - Modifying UCC Contracts

No consideration needed to modify sale of goods contracts

- Only good faith is required

Consideration - Discharge of Debts

Need new consideration

- An alternative method of payment is usually sufficient

A debtor's offer to make a partial payment on an existing debt will suffice for an accord and satisfaction if there is some "bona fide dispute" as to the underlying claim or there is otherwise some alteration, even if slight, in the debtor's consideration.

Consideration - Illusory Promises

If only one party is bound to perform, the promise is illusory and will not be enforced

Illusory promise - right to choose alternative courses

A promise to choose one of several alternative means of performance is illusory unless every alternative involves legal detriment to the promisor

The promise will not be found illusory if:

(1) at least one alternative involves legal detriment and the power to choose rests with the promisee or a third party, or

(2) a valuable alternative (that is, one involving legal detriment) is actually selected.

Promissory Estoppel or Detrimental Reliance

A promise is enforceable without consideration to prevent injustice if:

1. The promisor should reasonably expect to induce action or forbearance, and

2. Such action or forbearance is in fact induced

Bar Exam Tip: Promissory estoppel is only the right answer if there is no consideration

Damages for promissory estoppel

Some jurisdictions will award expectation damages

2nd Restatement provides that the remedy "may be limited as justice requires," so they might just award reliance

Requirement that No Defenses Exist

A valid contract supported by consideration may still be unenforceable because of:

1. A defect in capacity,

2. A defense to the formation of the contract, or

3. A defense to enforcement of certain terms exists

Defense: Legal incapacity

Defendants without capacity can disaffirm contract

- They don't have to, but they can

Those who lack capacity:

- Minors (under 18)

- Intoxicated people (even voluntary intoxicated people if the other party knew and took gross advantage of you)

- Mentally incompetent individuals

Lack of Capacity - Minors

K still binding on the adult

Minors (under 18) can choose to disaffirm K as a whole any time before the age of majority, and must return anything received under the K that still remains

- Generally, all that matters is the age at the time the agreement was made (e.g., it does not matter if minor said they were of age)

Lack of Capacity - Minors: Implied Affirmation

Retaining benefits after gaining capacity = Implied affirmation

- E.g., minor signs contract when 17, and keeps benefits under the contract without complaining when he turns 18

Lack of Capacity - Minors: Exceptions

States have created a few statutory exceptions for:

1. Student loans

2. Insurance contracts, and

3. Agreements not to reveal an employer's proprietary information

Lack of Capacity - Minors: Necessaries

Necessaries - Items necessary for subsistence, health, or education

A minor may disaffirm a contract for necessaries but will be liable in restitution for the reasonable value of benefits received

Lack of Capacity - Mental Incapacity

When a person's mental capacity is so deficient that they are incapable of understanding the nature/significance of a contract

K is voidable - person may affirm or disaffirm when lucid but may not contract after guardian has been appointed

Lack of Capacity - Intoxication

K is voidable if the other party had reason to know about the intoxication

Duress and Undue Influence

Duress - when a party's assent is procured by an improper threat

K is voidable and can be rescinded as long as there is not affirmation

Duress - Economic Duress

Usually taking advantage of another person's economic needs is NOT duress

Withholding something someone wants/needs will constitute duress if:

1. The party threatens to commit a wrongful act that would seriously threaten the other contracting party's property or finances; and

2. There are no adequate means to prevent the loss

Undue Influence

Elements:

1. Undue susceptibility to pressure by one party, and

2. Excessive pressure by the other party

Concerns arise when the dominant party is in a confidential/caregiver relationship

Absence of Mutual Assent - Misunderstanding of Ambiguous Language

If a contract includes a term with two possible meanings, the result depends on the parties' awareness of the ambiguity (subjective intent is taken into account):

1. Neither aware - No K unless both intended the same meaning

2. Both aware - No K unless both intended the same meaning, or

3. One party aware - Binding K based on what the innocent party reasonably believed to be the meaning of the ambiguous words

Absence of Mutual Assent - Mutual Mistake as to Existing Facts

If both parties are mistaken about existing facts, the K may be voidable by the adversely affected party if the mistake:

1. Concerns a basic assumption on which the contract is made,

2. Has a material effect on the agreed-upon exchange, AND

3. The party seeking avoidance did not assume the risk of the mistake

Exam Tip: Can't just be a bad bargain (i.e., though the bat was worth $100,000, but it was only worth $50,000)

Mutual mistake - one party bore risk

Not a defense if the party asserting the mistake as a defense bore the risk that the assumption was made

Happens when one party is in a position to better know the risks than the other party, or consciously aware of their ignorance

Absence of Mutual Assent - Unilateral Mistake as to Existing Facts

K valid unless the non-mistaken party knew or had reason to know of the mistake, then K voidable

- No relief unless obvious mistake

Same elements of mutual mistake

Absence of Mutual Assent - Mistake by the Intermediary (Transmission)

When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake