CONTRACTS

Contract: A promise or a set of promises for the breach of which the law gives a remedy,
or the performance of which the law in some way recognizes as a dty! "#$%
&lements of contract:
' (tal Assent "Offer and Acceptance%
' Consideration
' Re)irement that no *efenses e+ist "(ista,e, -ac, of Capacity, .llegality, Statte
of /rads%
I. Mutual Assent (Offer and Acceptance): 0A meeting of the minds1!
a. Offer: (anifestation of willingness to enter into a bargain, so made as to 2stify
another person in derstanding that his assent to that bargain is invited and will conlde
it! "#34% /or a commnication to be an offer, it mst create a reasonable e+pectation:
There mst be e+pression of a promise, nderta,ing or commitment! *istingish
between statements of ftre intent and preliminary negotiations throgh langage,
srronding circnstances, prior practice and relationship of the parties, method of
commnication "if too broad 5 solicitation of an offer%, indstry cstom and
certainty and definitness of terms!
Terms mst be definite and certain: identity of the offeree, sb2ect matter, price to be
paid, time of the performance, )antity involved "sale of goods% and natre of wor,!
Reasonable price "6CC #3'789% and reasonable time "6CC #3'78:% may be
inferred!
The offer mst be commnicated to the offeree!
b. Termination of Offer:
By the Offeror (Revocation): (st be commnicated before the acceptance! An
offer may be effectively terminated if the offeree indirectly reveives: "$% correct
information, "3% from a reliable sorce, "7% of acts of the offeror that wold indicate to
a reasonable person that the offeror no longer wishes to ma,e the offer!
i! Offers not spported by consideration or detrimental reliance can be revo,ed at
will by the offeror!
ii! -imitations on offeror;s power to revo,e: Options, /irm Offers "6CC #3'389%!
iii! Traditionally, a nilateral contract cold be revo,ed at any time before
acceptance "performance completed%! Therefore, the offere is at the offeror;s
mercy! 6nder the Restatement and the 6CC, once the offeree begins to perform,
he is given a reasonable time to complete performance dring which time the
offer is irrevocable! An option contract is formed "#49%! Notification of the start
of performance may be necessary!
iv! <reparations may constitte detrimental reliance sfficient to ma,e the promise
binding "#:8%!
By the Offeree (Reection): Re2ection of the offer terminates it "#7=%! .t is effective
when received by offeror! Coter'offer may serve as a re2ection "#7:%!
i! >hen time of acceptance is not specified, mst accept within a reasonable time!
ii! The period of e+piration commences when the offer is received! .f there is a
delay that shold have been apparent to offeree it is not regarded!
By !a": *eath or insanity of parties "#4?%, which does not need to be
commnicated@ destrction of the sb2ect matter or spervening legal prohibition of
proposed contract "#7=%!
c. Acceptance: (anifestation of assent to the terms of an offer in the manner prescribed
or athorized in the offer! Throgh this manifestation of assent, the offeree e+ercises the
power given her by the offeror to create a contract!
i! The acceptance may be by promissing or by performing "with notification within
reasonable time%!
ii! Traditional contract law insists on an absolte and ne)ivocal acceptance of
each and every term of the offer! At common law, any different or additional term
in the acceptance constitte a re2ection and coteroffer!
iii! 6!C!C! sbtantially alters common law rles here! Additional or different terms
only constitte a re2ection and coteroffer if they e+pressely condition the assent
on the additional terms! Otherwise, the additional terms: "a% are considered to be
mere proposals sb2ect to the offeror;s agreement "if one or both parties are not
merchants% or "b% atomatically become part of the contract "if both parties are
merchants%, with the e+ceptions where terms materially alter the original terms,
where the offer e+pressely limited the acceptance to its terms, and where the
offeror has already ob2ected or ob2ects within a reasonable time to the particlar
terms!
iv! Some corts treat 0different terms1 differently form 0additional terms1, following
the 0,noc,ot rle1 "which annls conflicting terms and fills the gaps with the
6!C!C!%!
v! Traditionally the mode of commnication sed by the offeror is athorized to
trasmit the acceptance! (ost corts today, however, accept any 0medim
reasonable in the circnstances1 "6!C!C! #3'38=%! An acceptance transmitted by
nathorized means "or improperly transmited by athorized means% is effective
if the offer is still open!
vi! (ailbo+ Rle! Acceptance by mail creates a contract when dispatched "of
properly addressed and stamped mail%, nless the offer stiplates that acceptance
is not effective ntil received or an option contract is involved "#=7%! Aypos:
a! Offere sends acceptance, then re2ection: (ailbo+ Rle generally applies,
i.e., a contract is created on dispatch! .f offeror receives re2ection first and
changes his position on reliance on it, the offeree is estopped from
enforcing contract!
' Offeror receives re2ection after acceptance: CONTRACT
' Offeror receives re2ection before acceptance: CONTRACT
' Offeror receives re2ection before acceptance and detrimentally relies on it:
NO CONTRACT
b! Offere sends re2ection, then acceptance: (ailbo+ Rle does not apply!
>hichever one is received first is effective:
' Offeror receives re2ection before acceptance: NO CONTRACT
' Offeror receives re2ection after acceptance: CONTRACT
"c! Offeror sends offer, then revocation:
' Offere sends acceptance before he receives revocation: CONTRACT
' Offere sends acceptance after he receives revocation: NO CONTRACT%
d. #nilateral or bilateral contract:
.f the acceptance is possible only by performing a stiplated act, the contract is nilateral!
.f there is an e+change of promises, ir creates a bilateral contract! The term 0nilateral
contract1 is not sed by 6!C!C! and Restatement, bt the traditional nilateral contract
occrs where the offeror clearly "nambigosly% indicates that performance is the only
manner of acceptance or where there;s an open offer to the pblic!
#nilateral: .s advantageos for the offeror since his offer can be accepted only by
the contract performance he desires! Only the offeror has e+ectory "nperformed%
dties once the contract is formed! -imitations on revocation were developed to
protect offeree!
i! .n the ma2ority of 2risdictions, the offeree mst act with ,nowledge of the offer
and be motivated by it!
ii! .f offeror has re)ested notice of the acceptance or if the performance wold not
normally come to the offeror;s attention within a reasonable time, the offeree
needs to notify him in order to form the contract!
Bilateral: Offeree only needs to promise to do an act! .n order to protect the offeree,
modern corts generelly interpret an offer as nilateral only if terms clearly warn
him that an act is re)ired for acceptance, constring ambigos offers as bilateral
and allowing acceptance by act or promise ' #73, 6!C!C! #3'38="$%"b%!
i! Ob2ective manifestation of the offeree;s conterpromisse, whether by words or
acts, is sally sfficient for acceptance and the formation of a bileteral
contract! The sb2ective intent is irrelevant if the offeree ta,es steps that a
reasonable person wold consider acceptance!
ii! 6!C!C! #3'38= and #=3 deal with bilateral contracts! The beginning of
performance operates as an implied promise!
iii! Offeree;s ignorance of certain contractal terms may be a defense to the
formation of a bileteral contract! The offeree is then bond by all contract terms
that a reasonable person wold have noted and nderstood!
II. $onsideration: Only the presence of valable consideration on both sides of the
bargain will ma,e an e+ectory bilateral contract flly enforceable! Consideration is the
price for enforceability in the corts! There mst be a bargained'for e+change between
the parties, and that which is bargained for mst be considered of legal vale "benefit to
the promisor or a detriment to the promisee%!
a. Bar%ained&for e'chan%e:
i! .f the promisor;s motive is to indce the detriment, the detriment is treated as
consideration@ if the motive is no more than to state a condition of a promise to
ma,e a gift, there;s no consideration!
ii! <eace of mind and emotional gratification may be sfficient to establish
consideration!
iii! <ast or moral consideration is not generally sfficient! There is, however,
sbstantial disagreement with this general rle!
b. !e%al value:
i! Corts normally will not in)ire into the ade)acy of consideration "the relative
vales e+changed%! They may, however, deny an e)itable remedy where they
find a contract to be nconscionable, or when there;s sham consideration!
ii! To,en consideration is treated as gift!
iii! <ossibility of vale in the bargained'for act is ade)ate consideration!
(. Benefit and detriment:
i! (a2ority of corts adhere to the view that legal detriment to the promisee
is the e+clsive test of consideration! -egal benefit on the other party is
not sfficient! Hamer v. Sidway! The minority view is that either detriment
or benefit are sfficient!
ii! The Second Restatement departs from the se of benefitBdetriment test,
)estioning only whether something has been a bargained for and given in
e+change!
). *pecific *ituations:
i! &+isting legal dty is not sfficient consideration C e.g. when a party
discovers he cannot ma,e profit at crrent price and demands higher pay!
ii! &+ceptions to the pree+isting legal rle: "a% promisee gives something in
addition for the new promise "corts are an+ios to avoid the pree+isting
dty rle%@ "b% pree+isting legal dty to third parties "Second Restatement
and a ma2ority of corts hold that the new promise constittes
consideration ' #D7%@ "c% scope of dty owned is sb2ect of honest dispte@
"d% nforeseen difficlty rises to the level of impracticability@ "e% both
parties acting in good faith C 6!C!C! #3'38:"$%!
iii! <ayment of a smaller sm than de "of a pree+isting debt% is not sfficient
consideration "no benefit and no detriment%!
iv! /orbearance to se is sfficient consideration, if the claim is valid or if the
claimant reasonably and in good faith believes it to be valid!
c. Mutuality + mutual and illusory promises: Consideration mst e+ist on both sides of
the contract! .f one party has become bond bt the other has not, one of the promises is
0illsory1! There are cases in which mtality is fond even thogh the promisor has
some choice or discretion:
i! Re)irements "all that . will re)ire% and otpt "all that . manfactre%
contracts: )antities shold not be nreasonably disproportionate "6!C!C!
#3'78=%!
ii! Conditional <romises: are enforceable nless the condition is entirely
within promisor;s control! (oreover, promise conditioned on satisfaction
is not illsory "good faith ' 6!C!C! #$'387%!
iii! 6n)alified right to cancel, if restricted, is valid!
iv! Eest efforts implied, e.g. 6!C!C! #3'78="3%!
v! 6nilateral and option contracts!
vi! Sretyship promises!
vii! Right to choose among alternative corses! This ,ind of promise is
illsory nless every alternative involves some legal detriment to the
promisor! Aowever, if the power to choose rests with someone else, this is
itself legal detriment! (oreover, the selection of valable alternative cres
illsory promise!
d. *ubstitutes for consideration:
i! ,romissory estoppel or detrimental reliance. The ma2ority view is that
consideration is not necessary where the promisor shold be estopped
from not performing! 0A which the promisor shold reasonably e+pect to
indce action or forbearance on the part of a promisee or a third person
and which does indce sch action or forbearance is binding if in2stice
can be avoided only by enforcement of the promise "#:8%!
ii! ,romises in "ritin%. The 6!C!C! states that consideration is not necessary
to a good faith written modification of a contract "6!C!C! #3'38:%!
(erchants may bind themselves to ,eep an offer open "6!C!C! #3'389%!
iii! ,romises to pay le%al obli%ations barred by la". .f the new promise is
in writing "or if there has been part performance% a promise to pay a legal
obligation barred by law is enforceable!
iv! Reafirmation of voidable promise. .f an incapacitated person affirms the
contract pon attaining capacity, his promise at that time will be binding!
v! ,romises under seal. At common law, the seal is a sbstitte for
consideration! A sealed promise is enforceable withot more! .n some
states, the seal will raise only a presmption of consideration! .n many
other, distinctions between sealed and nsealed contracts have been
abolished! 6!C!C! has eliminated the seal "6!C!C! #3'387%!
6nconscionable clases 6!C!C! #3'783!
-. .efenses:
a. /alidity of $ontract:
' Foid: Totally withot any legal effect from the beginning "commit a crime%
' Foidable: <arty"ies% may elect to avoid or ratify "infants, mentally ill%
' 6nenforceable: Falid bt may not be enforceable do to defenses e+traneos to
contract formation "statte of limitations, statte of frads%