Contracts 2: Contract Formation
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What is a CONTRACT?
a legally enforceable agreement
Exam tip: look FIRST for an agreement THEN see if it's legally enforceable
What is the difference between an EXPRESS contract and an IMPLIED-IN-FACT contract?
- Express Contract: created by the parties' WORDS (oral or written)
- Implied-in-Fact Contract: created by the parties' CONDUCT
- Same rules apply to both types
What is RESTITUTION?
Also known as a QUASI-CONTRACT, restitution is a equitable remedy that protects against UNJUST ENRICHMENT whenever contract law yields an unfair rest.
Restitution is the remedy of LAST RESORT.
What damages can be recovered through restitution/quasi-contract?
reasonable value of the benefit conferred (not the contract price)
What is the difference between a BILATERAL and a UNILATERAL contract?
- Bilateral: offer can be accepted in any REASONABLE way (flexible)
- Unilateral: offer can be accepted only be PERFORMING (inflexible)
What are the TWO fact patterns in which a UNILATERAL contract is found?
- Offer STATES that it can be accepted only by performing
- Reward, contest, or a price
How do you determine whether there is AGREEMENT (three-step process)?
1. Was there an OFFER?
2. Was the offer TERMINATED?
3. Was there ACCEPTANCE?
What is the definition of an OFFER?
a manisfestation of an intention to be bound
Are ADVERTISEMENTS offers?
EXCEPTION: where the ad specifies a QUANTITY term
What will a court do if there is an OPEN PRICE TERM?
Read in a "REASONABLE" price
EXCEPTION: contract for sale of real property
Are REQUIREMENT contracts permissible? Any restrictions?
They are okay under ARTICLE 2 desite the uncertain quantity.
However, the buyer, even in GOOD FAITH, CANNOT take the seller by surprise; the request cannot be out of line with its prior demands.
What are the FOUR ways in which an offer can be TERMINATED?
- Death (before acceptance)
When does an offer LAPSE?
after a STATED TERM or a REASONABLE TIME has passed
Who must REVOKE an offer for it to be terminated?
What is the difference between a DIRECT revocation and an INDIRECT revocation?
- DIRECT: the offeror indicates DIRECTLY to the offeree that he has changed his mind about the deal
- INDIRECT: the offeror engages in CONDUCT that indicates he's changed his mind AND the offeree is AWARE of the conduct
What are the FOUR exceptions in which an offer CANNOT be revoked?
- OPTION: a promise to keep the offer open that is PAID for
- FORESEEABLE RELIANCE: must happen before accepting (rare - usually subcontractor/contractor)
- STARTING PERFORMANCE IN UNILATERAL CONTRACT: mere preparation is not enough
- FIRM OFFER (Art. 2): in a SOG, a MERCHANT promises in a SIGNED writing to keep an offer OPEN
True or False?
A letterhead constitutes "signature" for the purposes of establishing a firm offer.
Is there a time limit under an OPTION? under a FIRM OFFER?
- OPTION: no time limit
- FIRM OFFER: 3 month maximum
When is a revocation effective?
only when it is RECEIVED
Do the following result in a REJECTION of an offer?
- CONDITIONAL ACCEPTANCE
- ACCEPTANCE VARYING OFFER
- Counteroffer: YES
- Bargainng: NO
- Conditional Acceptance: YES (rejection + counteroffer)
- Acceptance Vayring Offer: Common Law (YES); Art. 2 (NO)
What is the MIRROR IMAGE RULE?
the rule that requires the acceptance to "mirror" the offer to be valid
In a Art. 2 SOG, offeree sends offeror an acceptance varying offer. His new terms included ONLY IF...
- Both parties are MERCHANTS;
- Term is not a MATERIAL CHANGE; AND
- There is NO objection within a REASONABLE time
An offeree submits an acceptance varying offer with a change that is customary in the industry. Material change?
Is an offeror permitted to keep out a MINOR, IMMATERIAL change in an acceptance varying offer?
Yes, by objecting within a reasonable time
Does the DEATH of a party BEFORE acceptance terminate an offer?
Only REVOCABLE offers.
An IRREVOCABLE offer (such as an option) is not terminated by death.
What controls in determining whether an offer has been ACCEPTED?
The language of the OFFER.
If there is "only by" in the offer, the acceptance must abide by those terms in order to accept.
Can you ACCEPT an offer by STARTING PERFORMANCE?
- Bilateral Contract: Yes. Starting performance IS acceptance and carries an IMPLIED promise to FINISH the job.
- Unilateral Contract: No. Only COMPLETION of performance is acceptance.
If the offeree STARTS PERFORMANCE in a unilateral contract, can the offeror revoke his offer?
- MBE--NO. The offeror cannot revoke, but the offeree has no duty to finish.
- NY--YES. The offeror can revoke until the offeree has completed performance.
What is IMPROPER PERFORMANCE?
- Common law: simultaneous acceptance AND breach
- Art. 2 SOG: simultaneous acceptance AND breach UNLESS seller is sending the goods as an accommodation to buyer (then it becomes a COUNTEROFFER)
Does the offeree's SILENCE constitute acceptance?
What is the MAILBOX RULE?
Generally, an ACCEPTANCE is effective when MAILED.
- - Offer states otherwise
- - Irrevocable offer (e.g., an option)
- - Rejection sent first (whichever ARRIVES first is effective)
What are EIGHT defenses against formation of a legally enforceable agreement?
- Economic Duress
- Misrepresentation/Non-Disclosure of a Material Fact
- Mutual Mistake
- Lack of Consideration
- Public Policy
What is the general rule for the INCAPACITY defense against formation?
An incapacitated defendant may disaffirm the contract.
NY distinctions: limited exceptions for minors
EXCEPTION: an incapacitated party is liable for NECESSARIES (i.e., food, shelter, clothing, and medical care), but only for the REASONABLE value, not the contract price
What are THREE categories of INCAPACITY?
- Minors (under 18)
- Mentally Incompetent
What is IMPLIED AFFIRMATION?
retaining the benefit after regaining capacity
The other party may enforce the contract against the party that gained capacity,
What are the requirements for there to be an ECONOMIC DURESS?
- There is a THREAT to break an existing contract
- The buyer agrees ONLY to get the first deal done
- There is NO REASONABLE ALTERNATIVE
Is FRAUD required for there to be a valid misrepresentation or a non-disclosure of a material fact defense against formation?
No. Even an honest misrepresentation or non-disclosure is a FATAL FLAW in the agreement process as long as it's MATERIAL.
Does an AMBIGUITY or a misunderstanding ALWAYS result in the nullification of a contract?
No. If either party KNOWS or has REASON TO KNOW, the innocent party's meaning will prevail.
When can a MUTUAL MISTAKE about a fact nullify an agreement?
when the mutual mistake is of a MATERIAL fact
Does the mutual mistake regarding the market value of an item nullify the contract?
No - market value is NOT material
Do UNILATERIAL MISTAKES result in the nullification of a contract?
Not necessarily. ONE party's mistake is NOT a fatal flaw in the agreement process UNLESS the other party KNEW or had REASON TO KNOW about it.
What is CONSIDERATION?
bargained-for legal detriment/benefit
List THREE general categories of valid consideration.
Is PAST consideration constitute a valid consideration?
- MBE--NO. You cannot bargain for something that has already been done.
- NY--MAYBE. Past consideration is consideration if it is EXPRESSLY stated in a SIGNED writing and can be PROVEN.
Does the ADEQUACY of consideration matter?
No, as lnog as there was a BARGAIN.
What is required in order to MODIFY a contract?
- Common Law: NEW CONSIDERATION is required (ANY extra work or money is okay) UNLESS you're using NY rule AND the modification is in WRITING. Performing a preexisting duty is not enough ("Preexisting Duty Rule").
- Art. 2 Sale of Goods: Consideration is NOT required to modify a contract, but you must show GOOD FAITH.
Can a third party use the Preexisting Duty Rule as a defense not to perform the "modification" of a contract?
No - the Preexisting Duty Rule can only be used by a party to the original contract.
What results when you make a PARTIAL payment of a debt that is DUE and UNDISPUTED because the debtor promised to forgive the remainder of the debt? Can the debtor still collect?
- MBE--YES, regardless of whether it is in a writing. e.g., The debtor promises to forgive your debt in return for a partial payment and you pay the partial payment. That partial payment is NOT consideration because you already owed the money.
- NY--If the agreement in is WRITING, NO. There is no consideration needed if the promise to forgive is in a writing.
What results when you make a PARTIAL payment of a debt that is in DISPUTE because the debtor promised to forgive the remainder of the debt? Can the debtor still collect?
No. The law favors settlement of DISPUTED claims. Thus, settlement constitutes the necessary "consideration."
How can a TIME-BARRED DEBT become collectible?
If you make a WRITTEN promise to pay a debt, the collection of which is barred by the statute of limitations, it is enforceable even WITHOUT CONSIDERATION.
What is PROMISSORY ESTOPPEL?
It is a SUBSTITUTE for consideration.
FORESEEABLE RELIANCE may make a promise enforceable even without consideration.
NOTE: this is never the FIRST choice for an answer. ONLY choose this when there is NO consideration.
What TWO contract clauses are susceptible to court modification on PUBLIC POLICY grounds?
- Covenant Not-To-Compete
- Exculpatory Clause
When will a court invalidate a COVENANT NOT-TO-COMPETE? What TWO factors will the court consider?
- The court will invalidate or narrow it if it is a RESTRAINT of trade. The court will consider:
- - SCOPE of the covenant (duration & geography)
- - NEED for the covenant (uniqueness of services)
Will the court always uphold an EXCULPATORY CLAUSE?
Only for NEGLIGENCE.
For gross negligence and intentional torst, the exculpatory clause will not eliminate liability.
Is UNCONSCIONABILITY a valid defense against enforcement?
What are the two types of UNCONSCIONABILITY?
- SUBSTANTIVE: terms are unfair (e.g., indentured servitude)
- PROCEDURAL: agreement process was unfair (e.g., small print)
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