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Contract Law Outline

Contract – A promise the law will enforce.

TYPES OF CONTRACTS:

Classified by Formation
1) Express – contract formed by language, oral or written.
2) Implied – Contract formed by conduct
3) Quasi-contract – not a contract at all. Party can recover restitution to prevent
unjust enrichment.

CONTRACTS:

Classified by Acceptance
1) Bilateral – A promise for a promise
2) Unilateral – A promise for an act

Void, Voidable, and Unenforceable Contracts


1) Void Contract – Contract w/out any legal effect from the beginning (i.e.
contract to commit a crime)
2) Voidable Contract – Contract that a party may elect to avoid or ratify (i.e.
contract by a minor)
3) Unenforceable Contract – a contract that is otherwise valid except for the
existence of defenses against formation (i.e. Statute of Frauds)

CREATION OF A CONTRACT:

Three elements are required to create a contract:


1) Offer
“Mutual Assent”/ “Meeting of the Minds”
2) Acceptance
3) Consideration
• There must also be No Defenses To Formation (i.e. Mistake, Lack of Capacity,
Illegality, Statute of Frauds)
• All three elements above must be present.

MUTUAL ASSENT: (OFFER & ACCEPTANCE)


Offer – A communication of a promise, coupled with that which is expected in return,
and intent to incur a legal obligation.

Basic Test for Offer – Would the recipient reasonably believe the offeror intended
to give him/her the power to conclude a contract?

To be valid, an offer must be:

1) an expression of promise, undertaking, or commitment to enter into a


contract.
2) Terms must be certain and definite.
3) The offer must be communicated

Advertisements
Advertisements are usually not offers. Rather, invitations to make an offer, UNLESS
• Clear
• Definite
• Specific
• Promissory in nature

Termination of Offer:
An offer may be accepted only as long as it has not been terminated. It may be terminated
by 1) an act of either party or 2) operation of law.

Termination by Offeror:
The offeror may terminate by:
1) directly communicating the revocation to the offeree or
2) by acting inconsistently with continued willingness to maintain the
offer and the offeree receives correct info. Of this from a reliable
source.
a. Offers made by publication may only be only by use of
comparable means of publication.

Effective when Received:


1) revocation is effective when received by the offeree (in publications,
when published)

Offeror’s Power to Revoke


1) Offeror can revoke offers not supported by consideration at any time
even if he has promised not to revoke for a certain period of time.

Limitations to Offeror’s Power to Revoke:


1) Option Contract – offer is supported by consideration (i.e. party with
the power of acceptance has paid for the offeror’s irrevocability).
2) Firm Offer under UCC – signed writing by merchant promising to
hold the offer open for some period of time.

3) Detrimental Reliance (promissory estoppel) – the offeree has


detrimentally relied in the promise and the offeror could reasonably
have expected such reliance.

4) Part Performance in Unilateral Contracts – when offeree has started


performance.

Termination by Offeree:

Rejection
- An offeree may reject an offer by 1) expressly stating it or 2) by making a counteroffer
(as opposed to an inquiry)

- It becomes effective when the offeror has received it

- Offer may be terminated if offeree does not respond within the stated period of time in
the offer.

Termination by Operation of Law

- The following events will terminate an offer: Death or insanity of either party,
destruction of the contract’s subject matter, and any surpervening illegality.

Acceptance - Assent by the offeree to the deal on the table.

Elements of Acceptance:
1) Must be the party to whom offer is made.
2) Must be in the terms of the offer
3) Must know about the offer to accept it
4) Must be communicated

Communication of Acceptance:

 Unilateral Contract (promise for an act) – No notice required unless offeror


requests it or the performance is not likely to come to the attention of the offeror.

 Bilateral Contract (promise for a promise) – Notice Required

“Mailbox Rule” – acceptance is effective at the time it leaves the offerees hands.

Means of Giving Notice:

 Traditional Rule – respond by the same manner in which offer was made.

 Modern Trend – Any reasonable means


Acceptance Under UCC 2-207
UCC 2-207 reverses the mirror image rule of traditional contracts:

1) A definite and seasonable expression of acceptance or a written confirmation sent


within a reasonable time operates as an acceptance, even though it states terms
additional or different…unless acceptance is expressly made conditional on assent
to the additional or different terms.

Additional terms – treat as proposals for addition to the contract.

Between merchants, such additional terms become part of the contract unless:
a) Offer expressly limits acceptance to the terms of the offer;

b) They materially alter it; or

c) Notification of objection given within a reasonable time.

Different Terms – KNOCK OUT RULE


Knock-out Rule is applied by the courts to resolve the “battle of the forms” when the
forms contain conflicting terms.

- Different terms cancel each other out

Acceptance by Conduct
Formation by virtue of conduct. Terms will be what the parties agreed to. As to other
terms, gap fill.

Acceptance under UCC 2-206

- Any reasonable manner

- An order for goods may be accepted either by shipping the goods or by


promises to ship.

Indefiniteness
Contracts entered into by the parties may be unenforceable for vagueness.
 i.e. promise to pay “fair share of the profits”
 i.e. a lease providing for an additional five years at a rental “to be agreed upon”
The reason for this is that there is no meeting of the minds.

Sale of Goods
2-204 of the UCC
1) Did parties intend to make a contract?
2) Reasonable basis for remedy
If yes, then there is a contract.
CONSIDERATION

Consideration – Bargained-for legal detriment.


(Legal detriment = the thing = what is given / Bargain = the process)

Legal Detriment: the promise must:


1) Do an act or,
2) Promise to do an act or,
3) Forbear or,
4) Promise to forbear

Past Consideration / Moral Consideration


Past consideration is not consideration. However, in some jurisdictions, if the promissory
received some material benefit (i.e. his life saved) for something that happened in the
past, then the court will find consideration.

Gifts
There is no bargain involved (i.e. no consideration) when one party gives a gift to
another.

1) An act or forbearance by promise – An act or forbearance will be sufficient if


it benefits the promisee.
2) Economic benefit nor required – if one party gives the other peace of mind or
gratification, it may be sufficient to establish a bargain.

Adequacy of the Consideration


In general, courts do not inquire about the adequacy of the consideration. However, if
something is completely devoid of value it is not sufficient. Sham consideration/nominal
consideration is also not sufficient.

Pre-existing Duty Rule


Performing or promising to perform an existing legal duty is not sufficient consideration,
UNLESS:
1) A new or different consideration is promised; or (pay earlier, etc.)
2) There is an honest dispute as to duty (i.e. dispute of light bill)
3) There is an unforeseen hardship (granite rock on land while building)
4) Old contract is rescinded and new one is created
5) Some courts – modification should be enforced b/c party is giving up the
power to breach the contract.

UCC – eliminates the requirement of new consideration, only requires good faith.

Forbearance to Sue
A promise to refrain from suing on a claim may constitute consideration if the claim is
valid or the claimant in good faith believed the claim was valid.
SUBSTITUTES FOR CONSIDERATION

1) Promissory Estoppel / Detrimental Reliance – a promise which the promissor


should reasonably expect to induce action or forbearance on the part of the
promisee and which does induce action or forbearance is binding if injustice can
only be avoided by enforcing the contact.

2) Unjust Enrichment – courts will not uphold contract/promise but will allow for
restitution for the harmed party to avoid unjust enrichment.

3) Seal – at common law, contracts made “under seal” were recognized by courts
without the need for consideration. No longer the case.

DEFENSES TO FORMATION

Mutual – both parties mistaken about a basic assumption. Contract may be voidable if
the mistake is material.
- risk assumed by receiving party

Unilateral – only one of two parties mistaken about a material fact. No relief is granted.

Mistake by Intermediary (Transmission) – if an intermediary makes a mistake, the


message will operate as transmitted unless the other party should have been aware of the
mistake.

Latent Ambiguity Mistakes – subjective intent is taken into account is there is an


ambiguity in the contract.

Fraud and Misrepresentation – fraud and misrepresentation prevent mutual assent,


therefore no contract.

Absence of Consideration – if promises exchanged at the formation stage lack elements


of bargain or legal detriment, no contract exists.

Public Policy Defenses – if the subject matter or consideration (i.e. contract to commit a
crime) of a contract is illegal, the contract is void.

Incompetency
 Infancy – contract by minors are voidable. May be disaffirmed for a reasonable
time after the infant reaches majority. Liable for necessities on a quasi contract
theory.

 Mental Incapacity – Adjudicated mentally incompetent – contracts are void,


otherwise, voidable.
 Intoxication – contract is voidable if person if unable to understand nature of
transaction. Proof merely that drunk does not per se show incapacity.

DEFENSES TO ENFORCEMENT

Statute of Frauds
Certain Agreements Must Be In Writing

Within the Statute – Need a Writing


Outside the Statute – No Need for Writing

M – Marriage – contracts in consideration of marriage (if you marry me, I’ll give you
the moon – the moon need to be in writing)

Y – Year Rule – contracts that cannot be performed within 1 year

L – Land – contracts for the sale of land

E – Executorships – promise by executor/administrator to answer for debt of a decedent.

G – Goods – contracts for the sale of goods in excess of $500

S – Suretyship – promise to answer for the debt or default of another. (if for benefit of
promissory, no writing needed)

Exceptions to writing requirement under the UCC:


1) Part payment
2) Receipt and acceptance o goods
3) Admission in pleading
4) Failure to object to confirmatory writing

Memo Requirements
1) a writing
2) signed by the party to be charged
3) containing the essential terms of the deal

Sufficiency under UCC


1) indicate a contract has been made
2) identify the parties
3) quantity specified
4) signed by the party to be charged

Unconscionability
A contract may be voidable where the clauses are so one sided as to be unconscionable.
IMPORTANT DIFFERENCES BETWEEN COMMON LAW & U.C.C.
Common Law U.C.C.

Option contract requires consideration or Merchant’s firm offer is irrevocable


Promissory Estoppel without consideration
Acceptance must be absolute and Proposal of additional terms does not
unequivocal; otherwise it will be treated as constitute rejection; terms may become part
a rejection and counteroffer. of the contract per battle of the forms rules.
Contracts cannot be modified without Modifications sought in good faith are
consideration. binding without consideration.
Rule of substantial performance Perfect tenderrule (with exceptions)
(performance need not be perfect)

DAMAGES

1) Expectancy Damages – benefit of bargain

2) Restitutionary Damages – restore whatever benefit plaintiff conferred upon the


defendant.

3) Reliance Damages – expenses incurred

4) Consequential Damages – “natural and probable consequences of the defendan’s


breach”

5) Liquidated Damages – set forth in contract – reasonable in relation to actual or


anticipated harm.