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Contracts Outline
Contract law is primarily derived from the common law and the most important of these rules are collected and summarized in what is called the (Second) Restatement of Contracts.
The Restatement itself holds no force of law but it is highly influential and relied on and cited by the courts. Contract Law is primarily governed by state law rather than federal law and each states common law are sure to be different in certain respects from other states.
Choice of Law Provision (CLP): The agreement between parties of which state laws law’s will be used should a dispute arise.
CLP will be enforced except when
- The chosen state has no substantial relation to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
- Application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue.
Article 2 UCC: Primarily deals w/ the transaction of goods. Common law usually dictates all other transactions (i.e. services)
Sale: The passing of ownership from the seller to the buyer for a price.
Goods: For the most part any item which are considered “moveable”. Where money is not a “good” it can be considered such if it is sold as a commodity (i.e. rare coinage)
A sale of natural resources or a structure (or its materials), which is to be removed from land is a contract if the items are to be removed by the seller.
Good Rule for the removal of material from land: If it is easy to remove from the land it tends to be goods. If it’s difficult to remove from the land it tends to depend on who is doing the severing or whether removal will cause material harm to the land.
Article 2 UCC doesn’t apply to the sale of an interest in land, even if the buyers purpose is to obtain timber or minerals or similar items on the land.
Hybrid (Mixed) K: Deals with the sale of a good and something else, such as providing a service.
Predominant Purpose Test: A test to determine if the contracts PP is for the sale of goods in which the UCC will apply to the whole transaction. Should it be found that the PP is not for the sale of goods, the common law will apply to the entire transaction.
Gravamen Of The Action Test: The UCC applies if the gravamen of the lawsuit relates to the sale-of-goods portion of the contract, and the common law applies if the gravamen of the lawsuit relates to the other portion of the contract.
Factors in deciding a K predominant purpose
- The K language (language that refers to the transaction as a purchase, including “purchase order,” or that refers to the parties as “buyer” and “seller” suggesting that the PP is the sale of goods)
- The nature of the supplier’s business
- The intrinsic worth of the materials (i.e., the ratio that the cost of goods bears to the overall K price).
Merchant : A person who deals in goods of the kind involved in the transaction or who by her occupation or employment of an agent, broker, or intermediary, holds herself out as having particular knowledge or skill related to the practices or goods involved in the transaction and irrespective of the sales price.
The UCC applies to a transaction of goods even if neither parties are a merchant.
Merchant of Goods deals w/ the goods involved in a transaction while a merchant to business practices is a merchant because they have knowledge or skills related to the practices involved.
Promise Covenant: A formal agreement or promise in a K or deed, to do or not to do a particular act.
Types of K : Express, Implied in Fact, and Implied in Law (Quasi K)
Express Promise: Made through oral or written words that are promissory. No particular words are necessary to create an express promise.
Implied in Fact Promise: Is a promise inferred through circumstances, including non- promissory words or the non-verbal actions of the promisor. A K that is based on an implied in fact promise is called an implied in fact K.
Implied in Law Promise: Not an actual promise but a fictional promise the court creates to avoid injustice, usually to prevent unjust enrichment. The court makes these fictional agreements often called Quasi K or implied in law K to apply to situations of undue enrichment.
- The occurrence of any conditions to the defendant’s duty to perform, or that the non- occurrence is excused; and
- A repudiation or breach
Repudiation: A contracting party’s words or actions that indicate an intention not to perform the contract in the future; a threatened breach of K.
Consideration is the quid pro quo aspect of a K and deals w/ what the parties will exchange.
*A contract requires a bargain in which each party is required to do (or not do) something.
Elements of Promissory Estoppel claim:
- A promise
- The promisor should reasonably have expected the promisee to detrimentally rely on the promise;
- The promisee in fact detrimentally relied on the promise;
- A repudiation or breach of the promise; and
- Injustice can be avoided only by enforcing the promise.
Factors of Promissory Estoppel:
- The reasonableness of the promisee’s reliance,
- Whether the reliance was of a definite and substantial character; and
- The formality with which the promise is made (the greater the formality, the greater the likelihood the promise was actually made and that the promisor carefully considered the promise before making it).
_Promissory Estoppel requires detrimental reliance, but doesn’t require that the detrimental reliance have been bargained for. In contrast a contract does not require detrimental reliance for it to be legally binding._*
Elements of a Quasi K claim:
- The defendant has been enriched (i.e. benefited, either in the form of money, property or services)
- By the P; and
- (^) It would be unjust for the defendant to not pay the P for the benefit received.
The recovery under a quasi K is based upon the value of the benefit provided, which often makes such a claim difficult to distinguish from an implied in fact K.
*** An implied in fact K requires interaction between the parties. A quasi-contract does not.**
*** A quasi-contract claim requires unjust enrichment.** 1
Quantum Meruit: A claim based on the breach of an implied in fact promise or an implied in law promise as long as the P provided service to the D and is seeking to recover the reasonable value of those services.
Quantum Meruit simply discloses that it is a claim for payment for services provided; it does not disclose the legal basis for the claim.
Manifestation of Mutual Assent
Elements of an Offer:
- The offeror’s MOW to enter into an agreement
- Communicated or Delivered to the Offeree
- The Offeree would be justified in understanding her assent is invited and will conclude the agreement without further manifestation from the offeror.
Objective Theory of K: The concept that a K is not an agreement in the sense of a subjective meeting of the minds but is instead a series of external acts giving the objective semblance of an agreement.
***** An offer is not effective until received by the offeree, though the offeree does not have to be aware of its receipt.
***** An advertisement is ordinarily not an offer, but a solicitation for an offer.
Advertisement as Offer Factors:
- Includes language of commitment
- Clear, definite, and explicit
- Leaves nothing open for negotiation
- Specifies the method of acceptance
- Includes a limitation on quantity available
Price Quotation as an Offer:
- Whether the price quotation was in response to a consumer’s solicitation seeking a quote
- The quote’s detail
- Number of Persons to whom it is made
Purchase Order: Ordinarily an offer to purchase a good or service.
Exercise of Dominion: Where an offeree does any act inconsistent with the offeror’s ownership of offered property.
By an Offeree: An offeree is simply one to whom an offer is made. If the offeree dies, the offeree’s personal representative typically can’t accept on the estate’s behalf, and an offeree typically can’t assign their power of acceptance to a third party. An offer can be accepted by an agent of the offeree on their behalf.
General Offer: An offer that is made to an unlimited number of persons (i.e. a reward offer)
Whether a person is an offeree is based on the OTOK.
There are two exceptions to the second element of acceptance. First, if an option exists and the offeror dies then the estate gains the power of acceptance. Second, if an option exists the offeror can assign their power of acceptance to a third party, unless the offer states otherwise or the offeror is relying on the offeree’s credit or personal performance.
Mirror-image rule: An attempted acceptance is ineffective if it varies the terms of the offer. Any purported acceptance deviates from the offer and is thus a counteroffer, which must be accepted by the original offeror.
An offeree’s suggestion or request for additional or different term made along with acceptance without conditional acceptance will not render ineffective an otherwise effective manifestation of assent.
Battle of the Forms: The last form that is written and accepted determines which terms will make it into the contract.
_The UCC rejects the mirror image rule and implements 2-207(1),(3) which deal with definite and seasonable written confirmations and performance as acceptance._* Misunderstanding (Peerless) Doctrine: Applies when the parties, at the time the apparent agreement is formed, attach materially different meanings to one of the terms, and the OTOK cannot provide an answer as to which meaning is more reasonable because they are both reasonable.
Latent Ambiguity: When a word appears clear on its face, but extrinsic facts disclose an ambiguity.
Patent Ambiguity: When a words ambiguity is apparent on its face.
_Unless required otherwise by the offeror, an offer can be accepted in any manner that is reasonable under the circumstances._*
Master of the Offer Doctrine: Not only does the offeror have the privilege to specify the terms of the proposed deal, but also has the privilege to insist on a particular manner for the offeree to manifest assent.
Bilateral Contract: When an offeror only intends for the offeree to give a return promise as assent.
Unilateral Contract: When an offeror only seeks the completion of the task as the means of assent.
Case of Doubt: When it is made unclear as to whether the offeror wished for a return promise or for completion of performance.
***** Unless an offer specifies a required method of acceptance, an offer can be accepted in any reasonable manner.
Dispatch (Mailbox) Rule: When the offeree accepts by making a return promise, and the parties are not negotiating face to face or by instantaneous two way communication, acceptance is effective as soon as the return promise is put out of the offeree’s possession, regardless of whether it reaches the offeror.
Exceptions to the Mailbox Rule:
- The offer provides that acceptance is effective at some other point;
- (^) The offer includes an option, unless the offer indicates the DR applies;
- The offeror’s MOA is dispatched after a rejection is dispatched (Whichever arrives first is effective) _In general an acceptance by return promise, when the parties are not face to face is effective on dispatch._* Power of Acceptance There are six conditions under which the offeree’s power of acceptance is terminated:
- Offeror or offeree’s death or legal incapacity;
- Offeror’s revocation of the offer;
- Lapse of time
- (^) Counter Offer
- Offeree’s rejection of the offer (unless the offeror manifested a contrary intention); or
- The non-occurrence of any condition of acceptance under the offer’s terms (this occurs when the offeror specifies something that must occur for the offer to be accepted, and it does not occur)
If an offeree’s POA has been terminated the only way the offeree can accept the original offer is if the offeror renews it.
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- At the time set forth in the offer (remember, the offeror is the master of the offer) or;
- In the absence of a specified time, a reasonable time.
Reasonable Time:
- (^) The nature of the proposed contract
- The purpose of the parties
- The course of the dealing between them; and
- Any relevant usage of trade.
Rejection: A manifestation of intention by the offeree not to accept an offer…unless the offeree manifests an intention to take it under further advisement.
An offeree’s rejection terminates the power of acceptance unless the offeror has manifested a contrary intention.
An offeror revokes an offer whereas an offeree rejects the offer.
Counter Offer: An offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.
A counter offer does not terminate the power of acceptance unless and until received by the offeror. A counter offer is treated like a rejection and thus terminates the offeree’s POA.
Non Occurrence of any condition of acceptance under the offers terms: Offeror may insist on that the offer may terminate upon the occurrence of a condition and that it may only be accepted in accordance with the conditions stated by it.
Expressed Conditions: POA is terminated upon occurrence or non-occurrence of some particular event.
Implied Conditions: Supervening impossibility or illegality terminates the offeree’s POA. Also the first acceptance of a reward offer typically terminates the POA of other offeree’s.
Options Options (Option Contract, Irrevocable Offer): An option is an actual or implied in law binding promise to not revoke an offer for a particular amount of time. The offeree’s power of acceptance is not ordinarily terminated by an offeror’s revocation, rejection, counteroffer, or by the offeror or offeree’s death.
Four ways to create an option:
- Formality
- Equitable Option
- Promissory Estoppel
Consideration: An option contract created through consideration is essentially a subsidiary contract that exist prior to the formation of the underlying, principal contract. This can be referred to as a paid-for option though it doesn’t need to be money.
Option Through Formality
Firm Offer: Under the U.C.C. rule a merchant’s assurance to keep an offer open for the buying or selling of goods, in a writing signed by the offeror, is irrevocable for the time stated or, if no time is stated, a reasonable time (but in no event beyond three months), even if the offeror didn’t receive anything for the promise.
A person is only a merchant if the person is acting in his or her business (mercantile) capacity.
A promise to keep an offer open longer than three months is binding only for the first three months, but can be renewed by a subsequent firm offer. It can also be extended past three months if the offer is supported by consideration.
The restatement has a rule similar to the firm offer rule which states the offer is (1) in writing (2) signed by the offeror (3) recites a purported consideration for promise to keep the offer open; and (4) the offer proposes a fair exchange within a reasonable amount of time.
Equitable Option Once an offeree begins performing in response to an offer of a unilateral contract, an option arises.
Determining whether an offeree’s conduct is starting performance or mere preparations to perform are the following:
- The extent to which the offeree’s conduct is clearly referable to the offer
- The definite and substantial character of that conduct
- The extent to which it is of actual or prospective benefit to the offeror rather than the offeree; and
- The terms of the communications between the parties, their prior course of dealings and any relevant usages of trades.
Option through Promissory Estoppel For an option to arise through promissory estoppel based on an express or implied in fact promise, the offeree must establish:
- A promise by the offeror to keep the offer open;
Even though there is no consideration for a promise in recognition of a past benefit, the promise might be enforceable under the doctrine of promissory estoppel.
Moral Obligation: A promise that is inferred from (1) a signed, written voluntary acknowledgement to the creditor admitting the present existence of the debt, (2) part payment of the debt, or (3) a signed, written statement to the creditor that the statute of limitations will not be pleaded as a defense. Promissory Restitution (material-benefit rule): A promise is enforceable under promissory restitution if these elements are met:
- A promise made in recognition of a benefit previously received by the promisor from the promisee;
- The promisee did not confer the benefit as a gift;
- The promisor breached or repudiated; and
- (^) Enforcement is necessary to prevent injustice
Implied-in Fact Promise as Consideration _Consideration can consist of an implied-in-fact promise_*
U.C.C. § 2-306(2): “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposed unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
Illusory Promise Illusory Promise: A communication that appears to be a promise but, upon closer inspection, turns out not to be a promise because there is no commitment.
Mutuality of Obligation: Is required in a bilateral contract where both parties must be bound or neither party may be bound.
A power of termination renders the agreement illusory only when the power is unrestricted.
Requirements Contract: A sale-of-goods contract under which a buyer promises to buy exclusively from the seller all of the goods required by the buyer during the contract period and in exchange the seller promises to supply the goods.
Output Contract: In an output contract, a seller promises to sell to the buyer all of the seller’s output during a particular time period, and in exchange the buyer promises to buy all of the seller’s output.
- Requirements contracts and output contracts are not illusory
Bargained-For Even if, under the agreement, each party makes a promise, performs an act, or forbears from performing an act, each party’s promise, act, or forbearance must be bargained for by the other party.
Mixed Motive: For an exchange to be a bargain, only part of each party’s manifested motive must be a bargain motive. Thus, a mixed bargain/gift motive is sufficient.
Peppercorn Theory of Consideration: Provides that as long as what each party is required to provide is bargained-for, there is no additional requirement for purposes of establishing consideration that what either party received was “adequate” for what the party gave up.
If what was exchanged was not bargained for and was included to create the pretense of a bargain, it is called the sham consideration, token consideration, or nominal consideration and is not in fact consideration.
If there is a bargained-for exchange, the first element of consideration is established, even if there appears to be disproportionate values with respect to what is being exchanged. But disproportionate values is evidence that there was not a bargained-for exchange.
Meritorious (Good) Consideration: Refers to a promise being made solely because the promisor has love and affection for the promisee, and despite its name, it is not “consideration” because it does not involve an exchange.
A few states still recognize the seal as a basis for making a promise legally enforceable. Also, remember that a very small amount can be consideration for an option because the value of an option is typically very small.
Consideration vs. Condition on a Gratuitous Promise
The following factors help to determine whether a required act by the promisee is consideration or merely a condition on a gratuitous promise:
- Whether the performance of the condition benefits the promisor and, if so, the extent of the benefit (if it benefits the promisor, this weighs in favor of it being consideration)
- The difficulty involved in performing the condition (a promise of a gift usually does not include an onerous condition, unless necessary to acquire possession of the gift)
- The extent to which the condition is related to the promise (the more related, the more likely it is a condition on a promise as a gift)
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Composition: An agreement between a debtor and two or more creditors for the adjustment or discharge of an obligation for some lesser amount; an agreement among the debtor and two or more creditors that the debtor will pay the creditors less than their full claims in full satisfaction of their claims.
Promissory estoppel can be used to make a promise to modify legally binding in situations where preexisting-duty rule means there is no consideration. Unlike the general rule of promissory estoppel, the promisee need not prove the reliance was foreseeable; it is presumed.
Modifying Contracts For The Sale Of Goods *Article 2 of the U.C.C. does not require consideration for an agreement to modify a contract for the sale of goods to be binding. All that is necessary is that the promisee act in “good faith” in securing the modification. “Good Faith” with respects to seeking and obtaining a promise to modify a contract means that (1) the person was in fact motivated by a legitimate commercial reason (such as increased cost of performance), and (2) such a reason would cause an ordinary person to seek modification of the contract. *A modification because of a market shift that makes performance come to involve a loss is typically considered a modification in good faith even if the market shift was foreseeable.*
Unanticipated Circumstances Doctrine: A promise to modify a contract is binding despite a lack of consideration if:
- (^) The promise modifying the original contract was made before the contract was fully performed on either side;
- The underlying circumstances which prompted the modification were unanticipated by the parties; and
- The modification is fair and equitable.
This is an exception to the general requirement that a promise to modify be supported by consideration.
Release: The act of giving up a right or claim to the person against whom it could have been enforced.
Contract Not to Sue: A promise not to assert a claim and is a contract under which the oblige of a duty promises never to sue the obligor or a third person to enforce the duty or not to do so for a limited time.
An obligor is one who is under a duty and an obligee is one to whom a duty is owed. * A release immediately terminates the claim, whereas a contract not to sue is a promise not to enforce the claim.
Also, even though a release is intended to immediately terminate (waive) the claim, and does not involve a promise, consideration or a consideration substitute is still necessary to make it legally binding.
*As a general rule, a settlement agreement needs consideration or a recognized consideration substitute to be binding, irrespective of whether the agreement includes a release or a contract not to sue.
Accord and Satisfaction: Is a type of settlement in which an agreement between a creditor and a debtor under which the creditor promises to accept from the debtor a performance different from the currently owed (including less money than originally owed), and the debtor promises to provide the different performance (if the accord is a bilateral contract) or actually provides the different performance without a promise (if the accord is a unilateral contract) with the understanding that the debtor’s original contract duty will not be discharged unless and until performance.
Substituted Contract: Is a contract under which the parties take on new and different duties, and manifest an intention to immediately discharge the old duties.
Novation: A substituted contract where a new party is added.
Agreement of Rescission: A contract under which each party to a prior contract agrees to discharge the other’s remaining contract duties without taking on any new and different duties.
Reasonably Certain Terms A bargain can lack reasonably-certain terms in three ways:
- A vague term
- A gap and
- An agreement to agree
Vague Terms: Is a term whose meaning is unclear
Gap: Occurs when the agreement fails to address a particular matter.
Agreement to Agree: When the parties agree to fill a gap in the future with a mutually agreeable term.
Constructive Condition: A condition implied in law to do justice (an implied in law gap filler).
Conditions are also categorized into three different types based on when the condition is to occur. Typically, a condition is an event that must occur before the other party’s duty can mature.
Condition Precedent: A condition that must occur before the other party’s duty can mature.
Concurrent Conditions: A condition to one party’s duty to perform must occur at the same time as a condition to the other party’s duty to perform.
- An express or implied-in-fact condition must occur completely. Substantial performance is insufficient.
Promissory Condition: Is a condition that is also a promise (a promise/condition hybrid)
- Courts disfavor express and implied-in-fact conditions, and, when possible, construe a provision as a promise.
Condition of Satisfaction: A contract provision that provides that one of the parties need not perform if he or a specified third party is not satisfied with the other party’s performance.
- A condition of satisfaction, no matter how it is interpreted, does not make the agreement illusory.
Implied in Fact Condition: This condition is not stated expressly, but is inferred from the parties’ words and actions, including the nature of the transaction.
Constructive Condition: A condition that the parties did not actually agree to, but which the court will impose as a matter of justice. Because the constructive condition is created from a promise to perform, the duty to substantially perform is both a promise to perform and a condition to the other party’s duty to perform.
When the performance of a promise is conditional upon the other party’s prior performance, the promise is called a dependent covenant. Otherwise, it is called an independent covenant.
In the absence of an express or implied in fact agreement on the order of performance, the order is as follows: They are due simultaneously if the parties’ performance can be rendered simultaneously. Where the performance of only one party will require a period of time, that parties’ performance is due first.
Divisible Contract (Severable Contract): A contract that treats consequences of material nonperformance of a contract duty as separate.
Divisible Contracts Factors:
- Whether different types of goods or services are being provided
- Whether providing the different type was to occur at different times
- Whether the parties identified the portion of the total contract price applicable to each of the different types.
Excusable Nonperformance Material Breach (Total Breach): When a material condition of the contract is not met by one of the parties.
Rescission: The power to terminate a contract after a material nonperformance.
Substantial Performance Factors
- The extent to which the injured party will be deprived of the benefit of the bargain
- The extent to which the injured party can be adequately compensated for the breach
- The extent to which the party in breach would suffer a forfeiture
- Whether the nonperformance can be cured and, if so, the likelihood of cure, taking into account all the circumstances, including any assurance of cure and the extent of delay in performance.
- Whether the breach was willful
Whether there has been substantial performance (or lack of material nonperformance) is based on whether the performance meets the contract’s essential purpose. Perfect Tender Rule: Under the UCC a buyer, acting in good faith, has the privilege to reject any goods under a sale-of-goods contract if the goods or the tender of delivery fail in any respect to conform to the contract and the buyer exercised the power to reject the goods within a reasonable time after their delivery.
For the most part, the UCC rejects the common-law’s material nonperformance rule.
Mitigating Rules:
- The buyer must pay at the contract price for any of the goods accepted
- Once the buyer has accepted the goods they must notify the seller within a reasonable time after discovery of the breach or when they should have discovered the breach, or be barred from remedy 1
