Legal Environment of Business Quiz 2

Contract

A legally enforceable set of promises. Not all promises are contracts, such as gratuitous promises

Offer, Acceptance, Consideration, Capacity, Voluntary Consent, Lawful Objective

What are the six requirements for a contract to exist?

Contracts provide certainty and predictability in transactions involving the exchange of goods and services and help businesses plan

Why are contracts important in a market economy?

Common Law and Uniform Commercial Code (UCC)

Two main sources of contract law

Common Law

Judge-made law that can differ from state to state. It generally governs contracts involving real estate, services, and intellectual property

Uniform Commercial Code (UCC)

A statutory body of law governing commercial transactions; Article 2 covers contracts for the sale of goods

Contracts for the sale of goods

What does Article 2 of the UCC cover?

Tangible, movable personal property

What is a “good” under the UCC?

Look at the predominant element of the transaction. If services predominate, common law applies; if goods predominate, the UCC applies

How do you determine whether the UCC or common law applies to a mixed goods-and-services contract?

Merchant (under the UCC)

A person who regularly deals in the kind of goods being sold or has special knowledge of those goods

A duty of good faith and fair dealing

What duty does the UCC impose on parties?

CISG (United Nations Convention on Contracts for the International Sale of Goods)

Provides standard rules for international commercial sales of goods

Differences between the CISG and the UCC

CISG - International commercial sales of goods; merchants only; no writing requirement; no consideration needed to modify a contract

UCC - sales of goods; applies to merchants and non-merchants; writing generally required for sales over $500; no consideration needed to modify a contract

Valid Contract

A contract that meets all legal requirements and is enforceable in court

Unenforceable Contract

A contract that meets the basic elements of a contract but cannot be enforced because of another legal rule or conditions, such as the Statute of Frauds

Void Contract

An agreement that cannot be enforced, usually because it is illegal

Voidable Contract

A contract that one or both parties may cancel. It remains enforceable unless the party with the right to cancel does so

Express Contract - has terms directly stated by the parties

Implied Contract - shown through the parties’ actions rather than being expressly stated

Difference between an express contract and an implied contract?

Unilateral Contract - involves a promise in exchange for the other party’s performance

Bilateral Contract - involves both parties making promises

Difference between a unilateral and bilateral contract?

Executed Contract - has been fully performed

Executory Contract - has not been fully performed because at least one party still has a duty to perform

Difference between an executed and executory contract?

Quasi Contract

A legal fiction created by a court to avoid injustice and prevent unjust enrichment when a person has voluntarily received a benefit

Promissory Estoppel

A doctrine that can enforce a good-faith promise even when there is no valid contract in order to prevent injustice caused by detrimental reliance

Requirements for Promissory Estoppel

• A promise is made

• The promisor should have known the promisee would rely on the promise

• Promisee actually relied on the promise (significant reliance) in performing the act (or forbearance from performing)

• Injustice would result if the promise were not enforced

Intent, Definitiveness, Communication

Three main elements of an offer

Offer

A manifestation of a willingness to enter into a contract

Offeror

The person who makes the offer and shown an intent to enter into a contract

Offeree

The person to whom the offer is made and who has the ability to accept or reject the offer

Use objective intent - what a reasonable person would understand from the party’s words and actions - not the party’s private or subjective thoughts

How do courts determine whether a party intended to enter into a contract?

The offeror must show a present intent to contact (A joke, inquiry, or statement about future intent is generally not an offer)

What does intent mean when determining whether an offer exists?

The terms must be clear enough to:

• Determine each party’s obligations

• Show that the parties had a meeting of the minds

• Determine whether a party breached the contract

• Allow courts to provide an appropriate remedy

Why must an offer be definite?

Common law - generally requires more definite essential terms

UCC - is more flexible and allows some terms to remain open by using gap fillers, as long as the parties intended to contract

How do the common law and UCC differ regarding definitiveness?

UCC Gap Filler

A rule provided by the UCC that fills in a missing contract term, such as price, delivery, or other terms, based on good faith and commercial reasonableness

Quantity of Goods

What term must generally be identified in a UCC sale-of-goods contract?

It lasts until the stated deadline, unless it is terminated earlier

How long does an offer last if it includes a specific deadline?

It remains open for a reasonable period of time, based on the circumstances and prior dealings between the parties

What happens if an offer does not state how long it will remain open?

Lapse of Time, Revocation by Offeror, Rejection by Offeree, Operation of Law

Main ways an offer can be terminated

Revocation

When the offeror withdraws an offer before it has been accepted

General Rule for Revocation

An offeror may generally revoke an offer at any time before acceptance, even if the offeror previously promised to keep it open, unless an exception applies

UCC Firm Offer

A firm offer is an offer by a merchant, made in a signed writing, that assures the offer will remain open for a stated period, up to a maximum of three months

Option Contract

An agreement in which the offeree gives something of value in exchange for keeping the offer open for a specified period of time

Promissory estoppel may prevent revocation when the offeree significantly relies on the promise, and allowing revocation would cause injustice

How can promissory estoppel affect revocation?

The offer is terminated, and the rejection becomes effective when it is received by the offeror

What happens when an offeree rejects an offer?

Counteroffer

A response that attempts to change a material term of the original offer; it generally acts as a rejection of the original offer and creates a new offer

An offer may terminate because of:

• Death or insanity of either party

• Destruction of the subject matter

• Intervening Illegality

How can an offer be terminated by operation of law?

Generally, no. Advertisements, catalogs, price lists, and goods displayed in stores are usually invitations to negotiate, rather than offers

Are advertisements generally considered offers?

An advertisement may be an offer when it is highly specific, requires specific acts from the offeree, or contains words of limitation

When can an advertisement be considered an offer?

Rewards - generally offers for unilateral contracts

Auctions - generally invitations to make offers; an auction advertised “without reserve” can be treated as an offer

Bids - a subcontractor’s bid is generally an offer, but it may not be withdrawn when a general contractor has reasonably relied on it under promissory estoppel

How are rewards, auctions, and bids treated in contract law?

Acceptance

A manifestation of assent to the terms of an offer made by the offeree in a manner invited or required by the offer

Intent, Matching, Communication

Three elements necessary for a valid acceptance

The offeree must show a present intent to accept; Courts look at the offeree’s words and actions rather than subjective feelings

What does intent mean when determining whether an acceptance is valid?

Mirror Image Rule

Under common law, the acceptance must match the material/essential terms of the offer; If the offeree changes a material term, the response is generally a counteroffer

The response becomes a counteroffer, which both rejects/terminates the original offer and creates a new offer

What happens when an offeree changes a material term of an offer?

Under UCC 2-207, an acceptance can create a contract even if it contains different or additional terms, as long as there is a definite and seasonable expression of acceptance

(applies to sales of goods when form are exchanged)

How does UCC’s Battle of the Forms rule differ from the common law Mirror Image Rule

The different terms are “knocked out,” and UCC gap fillers are used if applicable

Under the Battle of the Forms rule, what happens to different terms?

Additional terms become part of the contract unless:

• The offer expressly limits acceptance to its own terms

• The additional terms materially alter the offer

• The offeror objects within a reasonable time

Under the UCC, when do additional terms become part of a contract between merchants?

For non-merchants, additional terms are generally treated as proposals for addition to the contract

How are additional terms treated when the parties are non-merchants?

Common Law - acceptance cannot materially vary from the offer; a material change creates a counteroffer

UCC - for sales of goods involving an exchange of forms, a contract can be formed even when the acceptance contains additional or different terms

What is the difference between common law and the UCC regarding acceptance terms?

Stipulated Means of Acceptance

A specific time, method, or place for communicating acceptance that is stated in the offer. If the offer stipulates a means, the offeree must fully comply with it for valid acceptance

The offeree may generally use an authorized or implied means of communication, including methods suggested by the offer, customary methods, prior dealings, or reasonable means recognized under the applicable rules

What happens if the offer does not specify how acceptance must be communicated?

Mailbox Rule

An acceptance sent through an authorized means of communication is generally effective when it is dispatched (sent) rather than when it is received

The acceptance is not effective until it is received by the offeror. An unauthorized means is generally an unreasonable method of communication, often one that is slower than the method used to make an offer

What happens when an unauthorized means of communication is used?

Stipulated - specifically required by the offer; offeree must comply

Authorized - suggested or reasonably implied; acceptance is generally effective when dispatched

Unauthorized - unreasonable method; acceptance if effective when received

Difference between a stipulated, authorized, and unauthorized means of acceptance

The offeree must perform the requested act (ex: completing the act requested in a reward offer)

How is a unilateral contract accepted?

The offeree may accept by making a promise to perform or by doing something that implies agreement

How is a bilateral contract accepted?

The original offeree or the offeree’s agent has the legal power to accept and create a contract

Who has the legal power to accept an offer?

The court at the parties’ objective intent to determine whether a contract exists

• It considers whether negotiations were concluded, whether the writing was intended to complete the contract or simply memorialize it, and whether the parties specifically intended not to be bound until a writing existed

What happens when the parties anticipate signing a written contract but the writing has not been completed?

The seller can accept by:

• Making a prompt promise to ship the goods (or)

• Making a prompt shipment of conforming or non-conforming goods

How can an offer to buy goods be accepted under the UCC by shipment?

If the seller notifies the buyer that the goods are being sent as an accommodation, the buyer can accept or reject them. If there is no notification, the shipment generally constitutes acceptance and breach of contract

What happens if a seller ships non-conforming goods?

Silence is generally not acceptance. The law usually requires an affirmative indication of assent

What is the general rule regarding silence as acceptance?

Silence may count when there are prior dealings, trade usage, or the offeree takes a benefit without objection

When can silence count as acceptance?

They are cyber-contracts in which users accept terms through actions such as clicking an “I agree” box or using software. Users must receive reasonable notice of the contract terms, which must be readily available

What are click-on and browse-wrap contracts?