Contract Outline - Fall 2011

7/30/2019 Contract Outline - Fall 2011

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I. Contract Basicsa.Sources

i. Restatements created by the American Law Institute (ALI)1. Goal: Pick the best rules from existing rules and promote

clarity

2. The restatements are not themselves law but many stats adoptthemii. Versions:

1. Original Restatement adopted 1932a. Very rule oriented

2. Second Restatement published 1981a. The U.C.C. was biggest productb. U.C.C. consists of set of statutes adopted by 49 states

i. Article 2 governs sales of goodsb. Definitions

i. Contract is a promise that the law will enforce.1. Longer Definition: A set of promises for which the breach ofwhich the law gives a remedy; or the performance of which the

law in some way recognizes as a dutyii. Promise a commitment, however manifested, to act or refrain from

acting in some manner in the future1. A promise, by definition, is forward looking

iii. Consideration a promise made during the consideration of adeal/bargain

1. May include a detriment or a benefit2. May take two forms:

a. A (bargained for) return promiseb. A (bargained for) performance

3. BOTH must be bargained for, not merely given (gift promise)a. This has developed into the modern day bargain process

4. Our focus is on the mutual inducement, not the harm ordetriment

iv. Executory Promise an unperformed promise waiting to be executedII. Gratuitous Promises

a. Gratuitous Promisesi. One way promise that a party is not induced to make

ii. Not enforceable when consideration is lackingiii. A promise or performance given without being bargained for is not

consideration1. The party, in giving the promise / performance, must be to

some extent induced into obtaining the promise / performanceof the other

iv. Case: Kirksey(Brother offers place to live if sister moves)b. Reliance

i. Adequate reliance, even on a gift promise, makes the promiseenforceable


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1. This is true even if there is no consideration or bargainingii. This is known as equitable estoppel which prevents the from raising

a defense of want of consideration1. Estoppel disallows an opposing party to raise an otherwise

allowable defense (i.e. gift promise, statute of limitations, etc.)

iii. The modern day term is promissory estoppeliv. Case: Rickets v. Scothorn (Grandpa gave granddaughter $2,000 so shedidnt have to work any longer and she quit her job in reliance)

c. Considerationi. Consideration is not necessary to make a promise enforceable

1. The core of consideration is the bargaining processii. A gratuitous promise without inducement can be revoked at any time

iii. Defined (Restatement 2nd):1. To constitute consideration, a performance or a return promise

must be bargained for2. A performance or return promise is bargained for if it is sought

by the promisor in exchange for his promise and is given by thepromisee in exchange for that promise

a. Comment B: In the typical bargain, the consideration andthe promise bear a reciprocal relation of motive orinducement: The consideration induces that making ofthe promise and the promise induces the furnishing of

the consideration.iv. Forbearance can also constitute consideration

1. Forbearance of performing an act that one is legally entitled todo, in exchange for anothers performance or promise, isconsideration (Hammer v. Sidway)

2. In this case, the detriment is giving up a right and thatdetriment is performance / consideration

d. Mutual Inducementi. If at least somepartof the inducement is to gain what the other party

gives as an end in itself, then there is a bargain.1. We are not focusing on the benefit / detriment analysis

because the courts allow actors to make their own market incontract

2. We are only concerned that the inducement is in some parttheobjective of the actor giving the performance or promise

a. WHAT IS GIVEN DOES NOT HAVE TO BE EQUAL TOWHAT IS RECEIVED

ii. Note: Offer and acceptance must BOTH occur during the life of theparties

1. If an offer is extended and acceptance is not made and theofferor dies, the deal is incomplete and revoked

iii. Under the Restatement 2nd view of Promissory Estoppel, the reliancemust be foreseeable by the party


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1. That is, there needs to be direct linkage between the promiseand the reliance upon said promise

e. Evaluation of Inducementi. We are looking not at the actually motive of the actors but rather at

what a reasonable person would conclude that the motivation was

1. Therefore, if a reasonable person would conclude thatat leastpart of the actors motivation was to induce the other intoaction, then consideration is present (Langer v. Superior Steel)

ii. Note: Contract questions must be objective and observed by what areasonable person would perceive that parties under similar situationswould have intended.

1. Question: Would a reasonable person, based on all thecircumstances, believe that the promisor was acting to obtainwhat the promisee provides?

III. Considerationa. Value of Consideration

i. A contract is enforceable regardless of the relative values ofconsiderationii. If a promise given is worth much more than the promise received, this

is of no concern parties are free to set market price (Browning v.Johnson)

1. Ex: Promise to pay $400,000 for property worth $100,000 isenforceable provided that the parties agreed to it

iii. Exception: If consideration is so nominalas to be deemed frivolous,manifestly false, or a sham, the contract is not enforceable.

b. Nominal Considerationi. Nominal consideration is no consideration at all

1. Reason: The bargain element is gone, at least on the side of thepromisor

ii. Consideration must be given in an effort to get what the other has tooffer

1. Therefore, the party is not making a promise in order toreceive the $1 the other party is offering

iii. Nominal consideration promises are generally just gift promisesdressed up to look like an enforceable contract

1. Note: Does not matter if the words good & valuableconsideration are included or not

c. Decline of the Seali. Contracts by seal (signature) have largely gone away

ii. The focus is on the elements of the contract (promise, consideration,inducement) rather than formalities

iii. Note: Most states have abolished contract by the seal1. Exception: Model Written Obligations Act (drafted by the ULC)

which was only adopted in Pennsylvania allows for a contract,lacking consideration, to be enforceable if the parties sign awritten release agreeing that the contract is to be enforceable


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2. A few states allow a seal to be a rebuttable presumption ofconsideration (emphasis being it is rebuttable if none present)

d. Invalid Claimsi. Forbearance to pursue an invalid claim is consideration provided that

the claim was based on an honest and reasonable belief that the action

was valid (Fiege v. Boehm)1. Honesty is objective and reasonableness is subjective

a. Therefore, the person making the claim must actuallybelieve, and a reasonable person would have to alsobelieve the claim had a plausible chance to win in orderfor the claim to be enforceable

2. State of mind is a factual determination for the jury to make3. Alternatively: The Restatement 2nd says the claim must be

based on an honest belief OR good faitha. Therefore, it can be objective or subjective under

Restatement view

4. Note: Mutual inducement would probably notsupport this(there is nothing of true value being given up) but this testallows the value requirement to be circumvented

a. There is no legal value but, as long as it seems like thereis a reasonable claim, there is contractual value

e. Novelty of An Ideai. A contract does not have to involve a novel / new idea to be

enforceable, there only needs to be a showing that the idea had value1. Source: (Apfel v. Prudential)

ii. It is sufficient to show that the party to whom the idea was shown didnot have knowledge of the idea at that time

iii. The fact that a party does not have a property right in the idea doesnot, itself, show a lack of value

1. Value may be derived from the lack of work the company hasto expend gathering the information, etc.

iv. Reasoning: Traditionally, parties are free to agree on the value of theirconsideration even if consideration exchanged is unequal

1. Therefore, the presence of value makes consideration validv. Bottom Line: The fact that one does not own the subject of the

contract will not negate the contract if it has value to the party.

IV. Exceptions to Consideration Doctrinea. Promissory Estoppel

i. A gratuitous promise may be enforceable if the party sufficientlyrelies on the promise given

ii. In arguing promissory estoppel, the party making the argument isattempting to preclude the other party from asserting an otherwisewinning argument (that it was a gift promise)

1. Restatement 1st90: Generally, if promise is enforceable, thenit is an all or nothing premise


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a. [This is the traditional view and, even under theRestatement 2nd, things tend to follow this view]

2. Restatement 2nd 90: A promise which the promisor shouldreasonably expect to induce action or forbearance on the partof the promisee or a third person and which does induce such

action or forbearance is binding if injustice can be avoidedonly by enforcement of the promise.

a. The remedy granted for breach may be limited as justicerequires

i. [This is in contrast to Restatement 1stwhich wouldnot allow for partial enforcement]

iii. Elements of Restatement 2nd Broken out:1. Promise2. Reasonable Action of Forbearance3. Injustice can only be avoided by enforcement

a. May be limited as justice requires (partial enforcement)iv. Note: Under Subsection 2, a charitable subscription or marriagesettlement is binding under Subsection (1) without proof that the

promise induced action or forbearanceb. Pre-Existing Duty Rule / Subsequent Promise

i. At common law: performing a duty which is already owed under acontract does not constitute consideration

ii. Exceptions:1. If a contract is still executory (no performance executed by

either side) it can be vacated by agreement and a new contractentered into

a. This only works if neither party has fully executed2. Changing of a term to a way that would benefit both parties

a. i.e., changing the date payments are due, etc.b. Even though these are seemingly nominal consideration,

for the purposes of the doctrine, any consideration forthe new undertaking, however insignificant, satisfies therule

i. This would be used if one party had fully executedc. The consideration must be separate from the original

consideration and bargained foriii. Note: The rule is a blunt instrument that sometimes gets bad results

c. Movement Away from Pre-Existing Duty Rulei. Both the UCC and the Second Restatement move away:

1. The U.C.C discards the pre-existing duty rule all togetherby saying that no consideration is necessary to modify a

contract

a. Includes a provision saying that modification must bemade in good faith


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b. Test of good faith between merchants or againstmerchants includes observance of reasonablecommercial standards of fair dealing in trade

i. The emphasis in UCC Article 2 is no longer uponconsideration but upon good faith

2. Restatement 2nd followed the UCC (written afterwards) but didnot eliminate the pre-existing duty rule altogether.a. Instead, it created an exception that enforces a

modification if the parties voluntarily agree and:i. The promise modifying the original contract was

made before full execution by either partyii. The underlying circumstances which prompted the

modification were unanticipated by the parties1. [*NOTE: On exam, be able to discuss how

unanticipated / unforeseeable thecircumstances requiring the change are!!!*]

iii. The modification is fair and equitableb. Reasoning: Intention is to prevent hold-up games whilenot going as far as to eliminate necessity of consideration

c. By requiring modification before either side has fullyexecuted, Restatement prevents one side from beingforced into modification after they have fully executed

ii. Final Note: Massachusetts is an oddity that allows for the abstinenceof breach to constitute consideration for the formation of a newcontract

1. This is a rare exception to the rule, NOT the normal rule.d. Duress

i. A circumstance in which a party agrees to a contract undercircumstances in which the party is not free to bargain

1. It is the process of yielding to an unlawful threatii. Duress is more concerned with the surrounding factors and context of

the environment than the pre-existing duty rule ise. Quasi-Contract (Implied-in-law)

i. Essentially is a contract created by the courts based on the law ofrestitution

ii. Under this concept, one must return to the other amounts that theyhave obtained which constitute an unjust enrichment

1. These are not created by the will of the parties and are often incontrast to the will of the parties

iii. Goal: To provide a remedy for unjust enrichment1. Note: A true gift could never be unjust enrichment

iv. We are not enforcing the existing contract; instead, the court iscreating a new contract for the reasonable value and enforcing it.

f. Test for Quasi-Contract (Aka: Wade Test)1. No intent to act gratuitously2. Confers a measurable benefit upon another


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a. [Note: The person making being unjustly enriched mustbe the person the contract involves one cannot recoveragainst a father for the action conveyed on the son(Mills)]

3. Other has opportunity to decline benefit OR has a reasonableexcuse for failing to do so, AND,

4. The benefit is retained by the other without payment of thevalue thereof (unjust enrichment)

ii. Note: One who, without intent to act gratuitously, confers ameasurable benefit upon another, is entitled to restitution, if heaffords the other an opportunity to decline the benefit or else has areasonable excuse for failing to do so.

1. This is where the test comes fromiii. Note 2: If the other refuses the benefit, he is not required to make

restitution unless the actor justifiably performs for the other a duty

imposed upon him by the law (Bailey v. Westhorse stable case)iv. Note 3: In the event of situations where the party cannot decline or

accept (life saving surgery) the value imposed will be the reasonablevalue of the services performed

1. Therefore, we have three states of actor state of mind:a. Gratuitously (not-compensable)b. Intent to be paid (compensable)c. Neither intent to act Gratuitously or to be paid

i. Acting spontaneously (compensation varies)v. In quasi-contract, we are asking someone to give up a benefit that

they have already received.

g. Promises Founded on Moral Obligationi. In order for a promise founded on moral obligation to be enforceable,

it must meet the 4 prong Wade testii. Moral obligation is sufficient consideration under the following

circumstances:1. Debts barred by the statute of limitations

a. If, after the statute of limitations has run and you re-affirm part / all of the debt, it is enforceable

b. The original contract is still invalid, but the promisecreates a new one without using additionalconsideration

i. The consideration consists of whatever made thefirst contract enforceable

ii. This is an exception to the consideration doctrineiii. Many states require the new promise in writing

2. Debts incurred by infants3. Debts of bankrupts

h. Material Benefit Doctrine


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i. If a subsequent promise is made based on a prior, material,measurable benefit, then that promise is enforceable based on theprior benefit

ii. Restatement 2nd 86 says:1. A promise made in recognition of a benefit previously received

by the promisor from the promisee is binding to the extentnecessary to prevent injustice

2. A promise is not binding under Subsection 1:a. If the promisee conferred the benefit as a gift or for other

reasons the promisor has not been unjustly enriched;OR,

b. To the extent that the value is disproportionate to thebenefit

iii. Note: There is no written requirement under Restatement view butmany legislatures have formalized this aspect upon adoption

V. Elements of Contractinga. Objective Theoryi. Under the objective theory, one is not bound by what he thought or

meant but rather would be bound by what a reasonable person, givenall of the facts and circumstances, would believe he intended to mean

1. This is a transition away from the meeting of the minds2. Under this old, subjective intent theory (meeting of the minds)

there had to be intent to enter into a contracta. Under the objective theory, actual intent is irrelevant

ii. Language alone is not the sole source of meaning:1. Sometimes language combined w/ conduct2. Sometimes conduct w/o language

a. Main Idea: Hidden intent is irrelevant (Lucy)iii. Exception: If the contracting party had an actual reason to know that

the other party was not intending to enter into a contractb. Communication under Objective Theory

i. Under an objective theory, ALL communication must be received for itto be effective

1. Exception: Acceptances (only exception)a. This is because of the mailbox rule, reward contracts, etc.

ii. Reasoning: Under an objective theory, a reasonable person would notknow of the conditions / changes / etc. until communication isreceived (reasonable person would think contract still existed)

c. Damagesi. Courts generally give substitution damages to compensate for the

amount of monetary harm doneii. Courts do NOT usually order the damages be paid

1. In the event of non-payment, a party can invoke the executionprocess which involves getting the sheriff to seize the propertyassets of the defaulting party


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2. The court does not order performance itself but rather makes afinding that money is due

iii. Alternatively, the court can issue a decree of specific performance1. Court order requiring actual performance of the contract2. This is disfavored by the courts because they have to supervise

the execution of the contract (more work)3. Usually invoked in situations with rare / irreplaceable /

invaluable goodsVI. Offers / Acceptances

a. Offeri. Restatement 2nddefines an offer as the manifestation of willingness

to enter into a bargain, so made as to justify another person inunderstand that his assent to the bargain is invited and will concludeit.

1. Not an offer: A manifestation of willingness to enter into abargain is not an offer if the person to whom it is addressed

knows or has reason to know that the person making it doesnot intend to conclude a bargain until he has made a furthermanifestation of assent.

ii. Summed up: An offer is the manifestation of willingness to enterinto a contract so that a reasonable person would believe that the

person had a power to accept it and thus conclude that the

offeror has no more power to modify it.

b. Length of Time Openi. A contract can state the explicit amount of time it is to be held open

(ex: The offer will be open for three days. Open until Saturday. etc.)ii. An offer that does not state the time open is open for a reasonable

period of time1. For offers by mail, the court will determine what is a

reasonable period of time based on the circumstancessurrounding the offer

2. In verbal offers, the reasonable time is usually a very shortperiod if not immediate (i.e., offer expires at end of convo)

c. Acceptancei. An offeree has a power of acceptance that is made upon the extension

of an offer1. A party accepting an offer must have receivedthe offer before

he can except

a. Ex: Two parties mailing each other independent offerswith identical terms is NOT an acceptance

ii. The offeree can exercise this acceptance and conclude the bargainingand create the contract (thus disallowing any further negotiation)

iii. If acceptance by mail is appropriate, then acceptance is effected whenacceptance is placed in the mail (Mailbox Rule)

d. Revocationi. An offer can be revoked at any time before an acceptance is effective


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1. That is because the promise to keep it open is a gratuitouspromise

ii. The revocation mustbe communicated to be effective1. The revocation is not effective until it has been received2. (Reasoning: Objective theory says a reasonable person would

believe contract remains until revocation is communicated)iii. Note: An un-communicated revocation is no revocation at all

1. It is merely a change of mind (no legal significance)e. Advertisements

i. The general rule is that an advertisement does not constitute an offer1. The level of detail in an advertisement is not important

ii. Advertisements are not ordinarily intended or understood as offers tosell but are rather take as requests to consider and examine andnegotiate

1. Exception: Advertisements may create a power of acceptancewhen the advertisement is clear, definite, and explicit and

leaves nothing open to negotiation.a. Clear / definite refers to the persons ability to accept,

not the terms of the advertisement itselfi. Ex. Will be sold to the first person at the lot with

cash in hand on September 9, 2012 at 6:03am CST!iii. Reasoning: Without limitations on advertisements as offers, the

multiple acceptances problem would be prevalent1. More people would attempt to accept than items available2. Legally, you can have as many contracts as you choose on an

item but you will be responsible for breach on any of them thatyou cannot fulfill

3. Terminology such as first come, first served solves this issueiv. An advertisement can be an offer if:

1. There is sufficient specificity as to the terms, AND,2. Identifies the person(s) who can accept

f. Unilateral Offeri. A one-sided agreement where the offeror makes a promise in

exchange for an act1. Ex: Reward Contracts (I will give you $1k to find my dog.)2. The acceptance can be made without any communication

g. Master of the Contracti. The offeror is the master of the contract and can demand conditions of

acceptance in anyway that he desires1. Ex: You may only accept this offer by signing while wearing a

blue suit and rubbing your belly. would be effectiveVII. Methods of Acceptance

a. Ambiguous / Silent Contractsi. If an offer does not state a mandatorymethod of acceptance, the offer

may be accepted in any manner reasonable under the circumstances1. Two most common ways (considered reasonable):


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a. A return promiseb. A performance on the part of the offeree

ii. Note: Any offer that does not state a mandatory method of acceptanceis ambiguous (even if itsuggests a method or is silent all together)

b. Reasonableness of Acceptancei. The method of acceptance must be reasonable able to provide theofferor with sufficient confidence that the contract will be performed

1. Therefore, a promise to perform in a reward scenario isunreasonable because the party cannot rely on finding the item

ii. In cases of reward contracts, the only thing that can form the contractis the completion of performance of the action sought by the promisor

c. Promise to Performi. Upon receiving the promise to perform, the person receiving the

promise is entitled to rely on the promise and that would satisfy thenecessity of a reasonable method of acceptance

1. Reason: Underlying goal is to encourage start ofperformance on contracts ASAP while protecting reliance

d. Commencement of Performancei. Requires the offeree to begin performance of the action

ii. Completion of the performance is NOT necessary1. Commencement infers an implied commitment on the actors

part to complete the performanceiii. When acceptance by performance is appropriate, it does not have to

be communicated unless the offeror specifically requires it in the offere. Writing

i. Although a written contract can be construed as a promissory act,most contracts are not required to be in writing

1. Even if a signature is construed to be a promissory act, it is notpart of the performance

2. Instead, signature is saying, When the time comes, I willperform. signifying assent to the terms offered

ii. Exception: The law dictates that real estate contracts must be inwriting

1. The rule does not carry over to any other areas besides realestate

f. Communicationi. Part of promising is communication

ii. Therefore, when acceptance is by promise, the promise must becommunicated to be effective

1. Ex: A signed but un-communicated offer (left on a desk, forexample) is an un-accepted which could be revoked

a. The acceptance has to be communicated (in this case,signed paper tendered) for contract formation

iii. Exception: The offeror, master of the contract, may dispense with thenecessity of communication

VIII. Unilateral Contract


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a. In Generali. One party promises something, usually a payment, in exchange for a

performance and wants nothing but full performance as the exclusivemethod of acceptance

1. Note: Although rare, they can be created by the language of thecontract

b. Reward Casesi. The offer is for the formation of a unilateral contract

ii. There is only a promise by one party conditioned on the completedperformance of the other party

1. There is no contract until performance is completed.iii. Reward cases are exceedingly rare.

c. Option Contracti. 45 of Restatement If there is an offer for a unilateral contract AND

the offeree commences performance of the work, there is not, at thatpoint, a contract

1. However, the offeror would be estoppedfrom revoking theofferii. Once performance has commenced, he restatement requires the

opportunity be given to the party to complete performanceiii. Two options after commencement:

1. Fully perform2. Walk away

iv. Reasoning: The idea is to protect the part who is performings reliance1. Once he commences performance, offeree has relied2. Therefore, he is given the option to complete (protecting his

reliance) or walk away (forfeiting his reliance)

IX. Fatal Ambiguitya. A contract may be so ambiguous in terms that it is deemed fatal to the

formation of a valid contracti. Otherwise, the courts can generally determine a reasonable

interpretation of the terms given or supply gap fillersb. Ex: Carbolic case would be fatally ambiguous but for the fact they

deposited the money into the banking accounti. Otherwise, it did not give a length of time of use, if continued use was

required, how long after use the user was protected, etc.c. A claim would generally not be valid if it was constructed in a way so that

no one could intend or construe the offer to be serious

X. Commencement of Performancea. Historical view:

i. Unilateral was historically used to mean that a contract could onlyexist by full performance

ii. Bilateral was an exchange of express promises1. Even if the offer was ambiguous about how it could be

accepted, it could only be accepted by a return promise2. The offeree always had to guess what the offeree wanted


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a. The buyer could argue that, even with full performance,the only means of acceptance was a return promise

b. Goal: Contracts work best when they channel people into reasonableconduct and encourage them to act best rather than mandating behavior

c. Modern View:i. 2nd Restatement changes the forms of contracts:1. A unilateral contract is an offer that can be accepted by full

performance2. The Restatement does away with bilateral contracts all

togetherii. Policy Reasoning: The offeror is the master of the contract and may

state of method of acceptance (contract doesnthave to be vague)1. If it is left open, it relieves the offeree of the negative

consequences of guessing wrong found in the old systema. Whatever acceptance chosen, if reasonable under the

circumstances, will suffice to satisfy acceptance

2. The other main reason is to protect reasonable reliancea. Investment can begin immediately after reasonableacceptance is tendered without having to worry aboutlosing the investment

i. Same reason (just difference mechanism) as givenfor the mailbox rule

b. Reliance isntnecessaryfor contract formation butcontract doctrine is willing to stretch to protectreasonable reliance

i. Note: It is a two way rule: It is a huge benefit, but thebenefit also comes with constraint

1. If the commencement of performance occurs,the party commencing performance is boundeven if the offeree has no knowledge or way toknow that the offeree had commenced

XI. Acceptance by Performance under Second Restatementa. Exclusive methods of acceptance can be dictated by:

1. The language of the offer / offeror2. The circumstances under which the offer exists, OR,3. A combination of the language and the circumstances

XII. Acceptance by Silence or Exercise of Domain (69)a. Where an offeree fails to reply to an offer, his silence and inaction operates

as an acceptance in the following cases only:i. Where an offeree takes the benefit of offered services w/ reasonable

opportunity to reject them and reason to know that they were offeredwith the expectation of compensation

ii. Where the offeror has stated or given the offeree reason tounderstand that assent may be manifested by silence or inaction, andthe offeree in remaining silent and inactive intends to accept


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iii. Where, because of previous dealings or otherwise, it is reasonablethat the offeree should notify the offeror if he does not intend toaccept

b. 69 says: An offeree who does any act inconsistent with the offerorsownership of offered property is bound in accordance with the offered

terms unless they are manifestly unreasonable.i. But, if the act is wrongful as against the offeror, it is only an

acceptance if ratified by him1. [Note: If it is not ratified under the last sentence, he can choose

to instead pursue his tort claim for trespass damages]a. If he does ratify, and accepts the contracts as it goes

along, then at some point he has given up his tort actionb. Basically, it is a gamble that the tort claim is more

valuable because of the wrongful conduct than thecontract would have been

2. Reasoning: Again, we are trying to protect reliancea. If a party reasonablyrelied that there was a contractbecause of silence, then we are tying to protect that

partyc. Note: Although acceptance may be made by silence, the affirmative

conduct (silence) is what is really making the acceptance / contract validd. Federal legislation provides that:

i. Except for (1) free samples clearly and conspicuously marked as such,and (2) merchandise mailed by a charitable organization solicitingcontributions, the mailing of unordered merchandise is not allowed

1. (b) any merchandize mailed in violation of subsection (a) ofthis section, or within the exceptions contained therein, may be

treated as a gift by the recipient.e. Note: AN offer can also lapse by rejection an effective rejection ends the

offeri. Acceptances = effective when sent

ii. Rejections = effective when received1. Therefore, an offer valid until Nov. 31 can be rejected by a

phone call on Nov. 1stthus eliminating the offerees power toaccept.

XIII. Mailbox Rulea. Under a subjective theory of contracts (old style), both parties had to be

contemplating a contract at the same time

i. Under this theory, a mere change of mind by EITHER party (not both)and without communication still was valid revocation

ii. The mailbox rule was therefore enacted to remedy some of thisunfairness

b. Reasons for keeping the rule:i. The offeror, in almost every circumstance, would prefer the result of

the mailbox rule1. The offeror wants performance ASAP


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2. Therefore, the rule allows the offeree to begin performanceimmediately while still protecting reliance

c. Remember: Offeror is stillthe master of the contract and may overcomethe mailbox rule through express language (Acceptance valid uponreceipt)

d. The date of receipt (or if it was ever received) is irrelevant under this rulee. Note: If an offeree mails an acceptance, then mails a rejection and therejection is received first, estoppel is used to prevent enforcement becausethe appearance of no contract was conveyed

i. Therefore, the offeree would be estopped from using promissoryestoppel

ii. So, under this case of estoppel, whatever gets there first will controlf. Because the rule is so embedded in the law, most courts will strive to

uphold it and will rarely overturn / overcome itg. REMEMBER: Under an objective theory, all communications except for

acceptances are effected only when received.

XIV. COUNTEROFFERSa. Counteroffers, just like a rejection, are only valid once receivedb. A counteroffer, under normal circumstances (without a qualified

responsive offer) inherently includes a rejection of the original offerc. Note: An offer can create a range within which acceptance can occur

i. Ordinarily, saying I accept. Is a mirror acceptance of the quantityoffered

1. If a subsequent acceptance accepts within this range, this is aregular acceptance not a counteroffer

2. However, when the quantity is vague, the offeree can accept byspecifying the number of the item they wanted

ii. Otherwise, the contract would be to vague for the court to enforced. The old mirror image rule requires that the terms be the same but does

not require a verbatim recitation of the termsi. Therefore, if the offer gives a range, acceptance within this range is

still a mirror image acceptancee. Core of the Counteroffer Rule a counter offer constitutes rejection of the

original offer (thus closing it) and creates a new offer than can then beaccepted or rejected by the original offeror

i. Note: A counteroffer, being a rejection is notsubject to the mailboxrule

ii. Therefore, once a counteroffer is mailed before an acceptance, thefirst communication to actually reach the offeror is binding, even if anacceptance is mailed afterthe original counteroffer was sent orreceived

f. At common law, the counteroffer rule was known as the mirror image rulebecause the terms of the acceptance had to mirror the offer

i. It is not so rigidly enforced that something trivial added into thecontract would negate it


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ii. However, to be assured of acceptance, mirage image of the terms isalways the safest, foolproof route

g. Shipping Non-Conforming Goodsi. At common law, this was considered a counteroffer

1. Acceptance by silence or dominion (69) could control if theparty receiving the goods did not communicate back that theydidnt want them

ii. UCC 2-206 takes a different approach:1. (a) Unless the language or circumstances are unambiguous, an

offer may be accepted in any manner reasonable under thecircumstances

2. (b) An order or other offer to buy goods for prompt or currentshipment shall be construed as inviting acceptance either by aprompt promise to ship or by the prompt or current shipmentof conforming or non-conforming goods, but such shipment ofnon-conforming goods does not constitute an acceptance if the

seller seasonably notifies the buyer that the shipment isoffered only as an accommodation to the buyer.

a. Ex: Corinthian Pharmaceuticals case3. Note: Under this concept, the shipment of non-conforming

goods simultaneously creates a contract and breaches the

contract at the very same time.

a. The buyer is now harmed by the sellers act and can nowrecover

b. This provision prevents the seller from playing thegame

4. Result of UCC position:a. Ex: Buyer orders 1000 widgets, seller ships 50 in

response to this offer.i. Result: Shipment of 50 (non-conforming) =

acceptance of the 1,000 and the seller is now inbreach until the remaining 950 are shipped

b. The buyer is placed in a much stronger position and,although not entitled to buy the widgets at the lowerprice, he can recover damages that have occurred to him,likely offsetting the price to nearly what it would havecost him to buy the widgets at the original price

iii. Gap-Filler Rule: Unless the parties stipulate otherwise, an order is tobe filled in one shipment

1. If the parties agree on installments, this gap filler would notapply

XV. CONTRACT FORMATION UNDER UCC ARTICLE 2a. Common Law Rule:

i. Parties must have reached agreement on all material terms typical ofthe type of contract at issue before the contract has formed

ii. If any certain type of material term is missing, there was no contract


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1. Ex: No matter how certain the parties were that a contract hasformed, there would have been no contract until the specificjob to be performed or duration had been clearly laid out

iii. Same result would be true if certain terms are necessary butambiguous

1. Ex: In real estate contracts, there must be a very cleardescription of the real estate that is for sale (unless the twoparties happened to both be aware of the specific contours ofthe property)

b. UCC Article 2 Approach:i. 2-204(3): Even though one or more terms a left open, a contract for

sale does not fail for indefiniteness if the parties have intended tomake a contract and there is a reasonably certain basis for giving anappropriate remedy

1. Left open can be either omitted or ambiguous2. Parties intended = objective intent (not subjective)

a. Looking to see if a reasonable person would believe thatthe parties intended (manifested assent) to form acontract

ii. Common material terms:1. Price2. Delivery Date3. Quantity4. Payment Terms5. Standard of Quality

a. (This is necessary to resolve defectiveness inquiries)iii. Note: Materiality will vary from party to party and contract to

contractiv. Gap Fillers:

1. If a gap filler is used, it will kick in automatically without theconsent against the parties

a. That is, GFT are matters of law, not the intent of theparties

2. Think of it as if the drafters of Article 2 have written in advancea standard form contract with provisions that will kick inautomatically even if they are not discussed in the specificcontract

a. We can then essentially overlay our contract over theform contract and then apply the necessary provisionsfrom the form contract that were omitted from ouroriginal contract

b. Remember: Terms to the original contract may beexplicit or implicitly

i. Explicit = formally agreed upon by the parties (suchas spoken or in writing)

ii. Implicit = course of dealing


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c. If there is no explicitor implicitremedy, then the GFT canbe applied and supply any missing information

3. These terms allow a court to provide a remedy as necessary4. Ex: Buyer calls seller and says, We need 100,000 of your half-

inch steel screws. to which the seller responds, You got em!

a. Under Article 2, a contract has been formedi. The price would likely be the catalog priceii. The delivery terms would be a reasonable time

under the circumstancesiii. Payment is due on delivery

b. Note: If a party doesnt want the standard GFT to apply,they have the responsibility to negotiate otherwise inadvance (too late at this point)

5. Benefit of GFT is to conduct business smoothly / efficientlya. Intended to reduce transaction costsb. Intend to provide results that are commonly accepted in

practice to reduce problems / disagreementc. Bottom Line: It is much easier to find oneself in a contract under Article 2

than it is under the common lawi. Agreement, as distinguished from contract, means the bargain of the

parties in fact, as round in their language or inferred from othercircumstances regarding the formation of the contract (implied)

1. Bargain is based on thefactualmatrix2. Contract may be based on facts and legal conclusions

a. Contract means the total legal obligation that resultsfrom the parties agreement AND legally implied GFT

ii. Ex: A party always orders from the same supplier, and the vendoralways ships the items to arrive in 3 days. A reasonable time to fulfillan order like this is 10 days.

1. Under 1-303(b) Course of Dealing the fact that the partyhas always fulfilled in three days would make this the amountof time allowed to fulfill

a. This is because the implied wishes of the party (Thecourse of dealing) trumps the legally implied GFTs

b. Note: If the course of dealing is always 3 days but, UPONacceptance of the offer, the seller alerts the buyer that itwill take 10 days to fill, that term would control.

XVI. BATTLE OF THE FORMS: UCC 2-207a. Goal of 2-207: Eliminate the impact of the last shot rule

i. Problem: Buyer could ship non-conforming goods to a buyer (often ata higher price)

1. 2-206 shipping of non conforming goods accepted the offer(if buyer kept / used them)

ii. The last shot rule is another way to describe the mirror image ruleproblem


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b. Note: NEVER ACCESS RULE 2-207 UNLESS ONE PARTY IS USING ASTANDARDIZED FORM WITH STANDARDIZED LANGUAGE!

c. On a normal form contract:i. The top will include negotiable, dickered terms

ii. The bottom will contain the boilerplate standard terms1. Problem: Buyers and sellers with standardized forms willalmost certainly have conflicting boilerplate terms

iii. Under common law, the last form sent (usually seller) would havetheir terms control the agreement

1. This was the last shot ruled. For our purposes, read 2-207 as A definite expression of acceptance

operates as an acceptance even though it contains terms additional to ordifferent from those offered

i. Essentially, if the dickered terms are the same on our contracts, thereis a definite expression of acceptance and a contract is formed

1. Note: This turns the common law rule on its heada. This would have been a counteroffer2. Note 2: If the dickered terms are different, the same result

would occur under the UCC or at common lawa. The offer would be rejected and a counteroffer would be

tendered consisting of the new dickered termse. After the contract is formed (by agreement of the dickered terms) the next

question is, What are the terms of this contract?i. For unspecified terms:

1. First, look at the prior course of dealing2. Second, look at usage of trade3. Third, use the legal GFT

ii. For additional terms [2-207(2)]:1. Terms can become effective in 2 ways:

a. Assenti. Buyer explicitly accepts terms by signing, writing,

calling, or otherwise affirmatively expressing sob. Between Merchants Rule

i. If both parties are merchants, then un-objected to,minor additions automatically become part of thecontract

ii. Exceptions:1. Buyer indicates a my terms only clause (MTO)

a. Anything differing is a counteroffer2. Material terms (that materially alter contract)

a. Material terms cannot come inautomatically

3. Notification of objection has already been givenor is given in a reasonable time after terms havebeen received


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a. Ex: Got your form, we have a deal, I objectto your arbitration clause so that is struck.

iii. For our purposes, a merchant is anyone who is not aconsumer1. Anyone acting in some sort of business capacity

a. Ex: Universities, hospitals, etc.2. Merchants are supposed to know how thecontract game is played

iii. For different terms:1. Doesnt tell us what to do2. Courts have gone in different directions

a. Some have said the original term controls (because it isan acceptance)

b. Some say both knock each other outi. This leaves course of dealing, GFT, etc.

iv. NOTE: DFFERENT TERMS WILL NOT BE ON THE FINAL EXAM!!!!f. Remember: Under the UCC, no consideration is necessary for changes to acontractg. Definite and Seasonable Expression of Assent

i. There does not have to be two forms1. However, the acceptance needs to be in standard form or else

we should not apply 2-2072. When the offer is an acceptance by standard form, there can be

a battle of the forms even though there is only one forma. The battle is referring to the battle over standard

terms3. NOTE: On the exam, if there is not a response in standard

format, dont go into rule 2-207.ii. It is not necessary to read something to be boundby it

1. If a form is signed, all terms in it are assented to.a. Ex: Signing credit application, clicking accept on TOS

iii. Terms added to the acceptance that conflict with the terms of theoriginal offer are merely proposals to adopt the change

1. NOTE: On the exam, we will only deal with conflicting termsh. If there are two forms involved and the forms have conditions that agree,

then the terms are obviously accepted and become part of the contracti. The debate is only over the additional terms

i. 2-207(3) If there is a response that would be an acceptance by for aMTO provision being included, then a contract is still formed

i. Conduct by the parties is sufficient to establish a contract although thewritings of the parties do not establish a contract

ii. In such a case, the terms of the contract consists of the terms that:1. The parties agree on (the same terms)2. Prior Course of dealing3. Trade norms4. GFTs


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iii. RESULT: Neither party gets exactly what they wanted1. Solution to party that wants to enforce MTO strictly: have the

other party sign the MTO agreementa. Every term in a signed agreement is binding

XVII. CONFIRMATIONSa. MAIN POINT:A confirmation is a proposal to modify a contract thatcan be expressly agreed to or can become operative automatically

between merchants.

i. A confirmation cannot contain material terms that have not beenpreviously agreed upon or disclaimed if it is to be effective

ii. The addition of material terms in a confirmation are a request foradditional terms.

1. Note: Can only become operative by express agreement, orbetween merchants ifimmaterial

b. Most courts in recent years follow the Hillrulei. That is, they generally ignore 2-207

ii. The terms in a confirmation will control if agreed to (accepted)1. Most courts following this approach will enforce the returnwindow allowed if the party rejects the agreement

2. Furthermore, generally return must be allowed with nopenalty or restocking fee

3. Consumer activists lost their battle for none of the terms onthe box to control and have simply won a right to return

XVIII. HOLDING CONTRACTS OPENa. An offeror stating I will hold the contract open for 5 days. is not binding

i. This is a gratuitous promiseii. If no consideration is given, the offeror may revoke at any time

b. If there is consideration given to hold the contract open:i. Then a contract has formed to hold the contract open

ii. Generally, an offeree can make as many counteroffers as he wantsduring this period without closing the original offer

1. That is, even after 30 rejected counteroffers, he can still acceptthe original offer if within the time frame still

2. The normal counteroffer rules simply do not apply when aparty has paid to keep the contract open

c. Caveat: If there is a flat out clear rejection of the offer, the contract is stillable to accepted (within the time frame paid to keep the offer open) unlessthe offeror has already disposed of the property

i. In these instances, the courts may allow the offeror estoppel in theseinstances

1. Note: There is no reason for an offeree to ever do thisd. Take Away:

i. Normal rules of revocation dont apply to option contracts1. Option contracts can be created by:

a. Estoppel (45)b. Paying to keep an offer open


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2. An offeree can do whatever he wants (unlimited counteroffers,etc.) during the time the offer is open

3. If an offeree rejects the offer (after the option contract wasformed) AND the offeror relies on this rejection, the court willlikely allow estoppel (p. 379)

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Contract Outline - Fall 2011

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