Contracts and Sales

What three elements does contract formation require?

Offer, acceptance, and adequate consideration

What is an offer?

An objective manifestation of the offeror's willingness to enter into a contract that creates a power of acceptance in the offeree

To be an offer a statement must be...

reasonably interpretable as a offer and express a present intent to be bound

Offer requirements

1) intent to contract—words of promise, undertaking, or commitment

2) knowledge of the offer by the offeree(s)

3) essential terms that are certain and definite

4) targeted to a number of people who could actually accept

Essential offer terms

Common law:

1. parties

2. subject matter

3. price

UCC: quantity

5 ways to terminate an offer

(1) death/mental incapacity

(2) destruction or illegality

(3) lapse of time

(4) rejection

(5) revocation (express or implied)

Death/mental incapacity

Terminates an offer prior to acceptance even if the offeree sends an acceptance before learning of the offeror's condition

Destruction or illegality

of the subject matter of an offer terminates the offer and prevents it from being accepted.

Lapse of time

Terminates an offer when the offer says it does or after a reasonable amount of time has passed

Rejection

An offer is terminated when the offeree clearly conveys an intent not to accept it or takes action absolutely inconsistent with a continuing ability to contract.

It is usually effective when it is received.

A counteroffer acts as one and creates a new offer.

Revocation

Terminates an offer if expressed or implied prior to acceptance, even if the offeror promised to keep it open for a specified time.

It is effective when communicated, and, if mailed, when received.

Types of irrevocable offers

UCC: (1) firm offer

Common law: (1) option contract; (2) partial performance; (3) promissory estoppel

Firm offer

Merchant gives written and signed assurance that offer will remain open for a reasonable period not to exceed 3 months (consideration not required)

Option contract

Offeror promises to keep offer open in exchange for consideration

partial performance

for unilateral contracts, if an offeror invites acceptance by performance and the offeree begins to perform, the offer is irrevocable until the offeree has had a reasonable time to complete performance

Promissory estoppel

Offeror could reasonably foresee reliance on offer, and offeree reasonably and detrimentally relies on it (consideration not required)

acceptance

• an objective manifestation by the offeree to be bound by the terms of the offer

• an offeree must know about the offer to have the power to accept it

What is the general rule for mailed acceptance within allotted response time?

effective when sent, not upon receipt, unless the offer provides otherwise (the mailbox rule)

acceptance by silence or actions/gestures alone

(1) Silence is not acceptance unless the offeree has reason to believe that it should be or previous dealings make it reasonable to believe that the offeree must give notice of an intent not to accept

(2) Actions and gestures alone can be an acceptance (e.g., sitting in the barber chair) and create an implied-in-fact contract

-move these to another card!-

(3) Asking a seller to ship goods invites acceptance by either promise to ship or by prompt shipment of the goods

(4) Shipping nonconforming goods is both an acceptance and a breach unless the seller "seasonably" notifies the buyer that the goods are an accommodation (which operates as a counteroffer). The buyer must then accept or reject the goods

When does the mailbox rule apply?

If an acceptance is sent before a rejection. The acceptance will control (it doesn't matter if rejection was received first) unless the offeror receives the rejection first and detrimentally relies on it

When does the mailbox rule not apply?

If a rejection is sent before an acceptance, the mailbox rule does NOT apply and whatever is received first is effective

The mailbox rule also does not apply with respect to offers and revocations. Offers and revocations are effective upon receipt. An acceptance sent before a revocation is received controls.

Bilateral contract

One in which a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render both promises enforceable. Can be accepted with a return promise or by starting performance (which operates a as promise to render complete performance)

Unilateral contract

One in which one party promises to do something in return for an act of the other party (e.g., monetary reward for finding Monster). Acceptance requires complete performance. Once a party begins to perform, the offer is irrevocable for a reasonable amount of time for the party to the finish performance (unless the offer states otherwise)

Does the offeree need to give notice after completing performance of a unilateral contract?

No, unless the offeree has reason to know that the offeror would not learn about the performance within a reasonable time or the offer requires notice.

What happens if notice is warranted but not given in a unilateral contract?

The offeror's duty to perform is discharged unless certain conditions are met.

What are the conditions under which an offeror's duty to perform under a unilateral contract is not discharged despite lack of notice?

1. The offeree exercised reasonable diligence to give notice.

2. The offeror learned about the performance within a reasonable time.

3. The offer specifically stated that notification was not required.

Does the offeree need to give notice of acceptance for a bilateral contract?

Yes. Remember mailbox rule (acceptance effective when sent) and UCC rule that if acceptance is made by starting performance, then notice must be given within a reasonable time or the offer will lapse.

Effect of additional or different terms in reply to offer (common law)

Mirror image rule: offer is rejected and reply is treated as a counteroffer

What is the effect of additional or different terms in reply to an offer under the UCC when at least one party is a nonmerchant?

If at least one party is a not a merchant, the offer is accepted (unless the reply expressly required assent to additional/different terms) and additional/different terms are treated as proposed additions to the contract.

What is the effect of additional or different terms in reply to an offer under the UCC when all parties are merchants?

• The offer is accepted (unless the reply expressly required assent to new/revised terms)

• The additional terms become part of the contract (unless offer requires express assent to new terms, the new terms materially alter the contract, or the offeror objects within a reasonable time)

• Contradicting terms cancel each other out under the knockout rule and the court patches the holes in the contract.

What is consideration?

Bargained for exchange. Exists when there is a legal detriment to the promisee that is bargained for by the promisor

What forms can consideration take?

• 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

What is the general rule with respect to adequacy of consideration?

A party generally cannot challenge a K on the grounds that consideration is inadequate. Consideration need not have economic value and even a promise that is voidable or unenforceable by rule of law can qualify as consideration.

In what circumstances may consideration be inadequate?

(1) settlement of a legal claim, (2) preexisting duty rule (common law), (3) past consideration, (4) illusory promise

Settlement of legal claim

A promise not to assert or release a claim or defense that proves invalid does not qualify as consideration unless the claim or defense was doubtful (due to uncertain facts or law) or the promising party believed in good faith that the claim or defense was valid.

Preexisting duty rule

Common Law: a promise to preform a preexisting legal duty is not consideration. However, courts often find consideration if the promisor gave something in addition to what was already owed or varied the preexisting duty rule in some way.

Past consideration

Historically viewed as inadequate, but the modern trend is to enforce certain promises involving past consideration under the material benefit rule

Illusory promise

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

Do requirements contracts generally have consideration?

There is consideration under a requirements contract because the promisor suffers a legal detriment: the buyer agrees to buy all that the buyer will require of a product from the seller

Do outputs contracts generally have consideration?

There is consideration under an outputs contract because the promisor suffers a legal detriment: the seller agrees to sell all that the seller manufactures of a product to the buyer.

When do requirement and outputs contracts fail for lack of consideration?

If quantities are not bought or sold in good faith or are unreasonably disproportionate to any estimated amounts

What is required for K modification under the common law?

Generally, new consideration unless: (1) the existing K is rescinded and a new K is made; (2) there are unanticipated difficulties and modification is fair and equitable; (3) there are new obligations on both sides

What is required for K modification under the UCC?

Good faith! Good faith requires honesty in fact and fair dealing in accordance with reasonable commercial standards and applies to both merchants and nonmerchants

"Accord"

An agreement by which a contracting party agrees to accept different performance from another party to satisfy that other party's existing duty

"Satisfaction"

Performance of an accord, which discharges the OG contract and the accord contract. The OG contract is not discharged until the satisfaction is complete

What kinds of promises are binding without consideration?

(1) a promise to to pay a debt barred by the statute of limitations; (2) a promise to perform of a voidable duty (provided that the new promise is not voidable for similar reasons; (3) a promise to pay for material benefits received when a party performs an unrequested service (e.g., emergency services) but only to the extent necessary to prevent injustice; (4) promissory estoppel/detrimental reliance

Promissory estoppel doctrine

A consideration substitute. A promise is binding without consideration if: (1) the promisor should reasonably expect it to induce action by the promisee (or a third party), (2) the promise does induce action, AND (3) the only way to avoid injustice is to enforce the promise.

Void

the entire transaction is regarded and a nullity as if no K existed

voidable

a valid K exists unless and until one party takes affirmative steps to avoid it

Unenforceable

A valid K that cannot be enforced against a party who refuses to perform

Mutual mistake

made when both parties are wrong about an essential element of the contract

Unilateral mistake

made when only one party is wrong about an essential element of the contract

What happens when there is a mistaken contract

Either party can attempt to enforce a mistaken contract on its terms, but the contract may be voidable if certain conditions are met

When is a K with a unilateral mistake voidable and by whom?

• voidable by mistaken party who did not bear the risk of the mistake

• if enforcement would be unconscionable or the other party caused or knew of the mistake

When is a K with a mutual mistake voidable and by whom?

Voidable by the adversely affected party who did not bear the risk of the mistake if reformation is unavailable.

What is reformation?

When a mutual mistake is made, a party may request the court to reform a written contract if the parties agreed to put a prior agreement into writing, and, as a result of the mistake, there is a difference between the prior agreement and the written. This remedy is not available to the extent it would unfairly affect the rights of third parties who relied on the K.

Misunderstanding

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

How is a misunderstanding evaluated?

Governed by a subjective test. If no party knows about the misunderstanding there is no contract (because no mutual assent); if one party knows there is a contract formed based on the unknowing party's understanding of the material terms; if both parties know there is no contract unless the parties intended the same meaning. One party may waive the misunderstanding and choose to enforce the contract according to the other party's understanding.

Misrepresentation

an untrue assertion of fact about a present event or past circumstances

affirmative conduct to conceal a fact or nondisclosure of a known fact = an assertion that the fact does not exist

How to prove fraudulent misrepresentation?

show that: (1) the misrepresentation was fraudulent (made knowingly or recklessly with intent to mislead); (2) the adversely affected party justifiably relied on the misrepresentation; (3) the misrepresentation induced assent to the K.

Fraud in the fact

prevented party from knowing the contract's character/essential terms; VOID

Fraud in the inducement

A type of fraud that occurs when one party is tricked into entering a contract or agreement based on false statements or misrepresentations made by the other party.

VOIDABLE

What is a non-fraudulent misrepresentation and how to prove?

• an innocent or negligent misrepresentation that renders a contract VOIDABLE by the adversely affected party

• the adversely affected party must show that: (1) the misrepresentation was material; (2) the party justifiably relied on the misrepresentation; and (3) the party was induced to enter into the K because of it

Effect of a party's fault in the misrepresentation analysis

Unless it amounts to bad faith, a party's fault in not knowing or discovering facts before entering into a K does not make that party's reliance unjustified

what is the effect of cure of misrepresentation on misrepresentation analysis?

the contract is not voidable if the misrepresentation is cured before the deceived party has avoided the contract

Avoidance or reformation for misrepresentation

when the content or legal effects of a contract are misrepresented, the deceived party can avoid the contract or ask the court to reform it to express what was represented

Undue influence

the unfair persuasion of party to enter into a contract. can happen when there is a relationship in which one party is dominant and the other is dependent because of a lack of expertise or experience or because of a party's diminished mental capacity. the victim may void the contract and recover restitution damages

What is the effect of a confidential relationship between contracting parties?

when a confidential relationship between contracting parties is established, the dominant party has the burden of proving that the K is fair and that party may be held to a higher standard of disclosure

What is the effect of a nonparty to a K who causes undue influence?

the victim may void the contract unless the non-victim party gave value or materially relied on the on the K in good faith and without the knowledge of the undue influence

Duress

an improper threat that deprives a party from meaningful choice. VOID when duress is through physical compulsion and VOIDABLE in other instances

Improper threat

Includes threats of criminal prosecution, threats of civil action (when made in bad faith), and threats to breach a K in violation of the duty of good faith and fair dealing

Deprived of meaningful choice

A party is deprived of meaningful choice when there is no reasonable alternative such that the threat induces the person's consent

Capacity

parties must have this in order to be able to contract

What are grounds for incapacity?

1. infancy - voidable by the infant except for the reasonable value of necessities

2. mental illness (adjudicated = void; not adjudicated = voidable)

3. guardianship - void, except that a person under guardianship may be liable for the reasonable value of necessities

4. intoxication - voidable by the intoxicated party if the party was unable to understand the nature/consequences of the contract and the other party should have known about the intoxication

What are three defenses to enforcement of an otherwise valid contract?

(1) illegality (2) unconscionability (3) public policy

Illegality as a defense to formation

If the consideration or performance under a contract is illegal, then the contract is unenforceable. If a contract contemplates illegal conduct when it is formed, then it is void. If it becomes illegal after it is formed, then the duty to perform is discharged, subject to several exceptions

ignorance of illegality

• a promisee who was justifiability ignorant of the facts making the contract illegal can recover from the promisor if the promisor knew about the illegality

• if both parties were excusably ignorant, the promisee may have a claim in restitution

lack of illegal purpose

if the contract does not involve illegal consideration or the performance of an illegal act and a party has substantially performed, then that party can recover if the party did not: (1) know about the other party's illegal purpose and (2) act to further the other party's illegal purpose (despite knowing about it) and grave social harm is not involved

Divisible contracts

if it is easy to separate a K into legal and illegal parts, recovery may be available on the legal parts

available of restitution for illegal contracts

when the parties were not equally at fault, then the less guilty party may be entitled to restitution. a party who did not engage in serious misconduct and withdrew from an illegal contract before the improper purposes was achieved may be entitled to restitution

Unconscionability as a defense to formation

a contract is unconscionable when it is so unfair to one party that no reasonable person would agree to it (eg.g. boilerplate language that is hidden or complex contracts of adhesion)

Public policy as a defense to formation

even if a K is not illegal or unconscionable, it may be unenforceable if it violates a significant public policy (e.g., restrictions on marriage, contract to commit a tort)

express contract

formed when a person assents to an offer orally or in writing

implied-in-fact contract

when a person's assent to an offer is inferred solely from the person's conduct

quasi-contract/implied-in-law contract

• a plaintiff conferred a benefit on a defendant with a reasonable expectation of compensation and

• the court implies a contract to prevent unjust enrichment

When is restitutionary recovery available on a quasi-contract?

(1) the plaintiff conferred a measurable benefit on the defendant

(2) the plaintiff acted without gratuitous intent AND

(3) allowing the defendant to keep the benefit would be unfair

Express warranty

any affirmation, promise, description, or sample given by a seller regarding goods that is part of the basis of the bargain, unless it is merely the seller's opinion. disclaimer clauses that grossly conflict with express warranties are ignored

Types of implied warranties under the UCC

(1) merchantability and (2) fitness for a particular purpose,

Warranty of merchantability

warrants that goods are reasonably fit for their ordinary purpose and pass without objection in the trade under the contract description; implied if the seller is a merchant

How to disclaim warranty of merchantability?

May be disclaimed orally or in a conspicuous writing with the term "merchantability"

Warranty of fitness for a particular purpose

warrants that goods are fit for a particular purpose; implied if a seller has reason to know that buyer is relying on seller's skill or judgment to select goods

How to disclaim warranty of fitness for a particular purpose?

General language in conspicuous writing

How may parties disclaim implied warranties under the UCC ?

(1) a clear statement that there is no implied warranty

(2) buyer's inspection of the goods

(3) course of dealing or performance

(4) trade usage

Defense of Impracticability

replaces the common law doctrine of impossibility and is available if: (1) performance becomes illegal after the contract is made; (2) the subject matter of the contract is destroyed; (3) the preforming party in a personal services contract dies or becomes incapacitated; or (4) the performance becomes impracticable (really hard)

What must a party asserting impracticability defense show?

(1) an unforeseeable event happened; (2) a basic assumption of the contract was that the event would not happen; and (3) the party seeking discharge was not at fault

partial impracticability

Temporary impracticability only suspends duty; discharged if performance is materially more burdensome after impracticability ends

If seller is able to deliver some of the goods, they must be apportioned among all of the buyers with whom the seller has contracted

Any buyer may refuse to accept and may cancel K

Frustration of purpose

applies when an unexpected event destroys one party's purpose for making the K

the event need not be completely unforeseeable, but frustration must be severe enough to fall outside the assumed risks of the K

frustrated party can cancel the K without paying damages

release

a writing that discharges another party from an existing duty

for common law Ks, the release must be supported by consideration

for goods Ks under the UCC, a written waiver or renunciation that is signed and delivered by the aggrieved party is effective without consideration

mutual rescission

rescission = cancelling a K and placing the parties as close as possible to their pre-contract positions

if it occurs by mutual agreement, the surrender of rights under the original K of each party is consideration for the recission

Ks w/ third party beneficiaries cannot be rescinded by mutual agreement if the beneficiaries' rights have already vested

destruction or injury to identified goods

when goods identified at the time the K is made are destroyed through no fault of either party and before the risk of loss passes to the buyer, the K is avoided; there is no need to perform and no breach;

even if the goods are only damaged, the K is avoided unless the buyer chooses to take the goods at a reduced price without any other claim against the seller

if the risk of loss has passed to the buyer, the contract is not avoided and seller may demand performance