Contract Law Rule Statements

Bilateral Contracts

A bilateral contract seeks a promise to perform the contract, not performance.

Common Law

A common law contract must be very definite as to its terms including definite quantity, time for performance, the identity of the parties, subject matter, and price. For real estate contracts there must be a price term and a legal description of the property.

Contract

A contract is a set of promises between two or more people, the performance of which the law recognizes a viable duty, and for the breach of which the law provides a remedy. A valid contract contains offer, acceptance, and consideration, with no applicable defenses to contract formation.

Integrated Writing / Merger Clause

A merger clause indicated that a written contract entail the final expression of an agreement that integrates all aspects of the contract into a binding contract. A merger clause includes a statement such as, "this contract is specifically limited to the terms herein." Such a contract may not be later supplemented or contradicted. Under the traditional or Four corners Rule, a court would look only at the four corners of the document itself and the information contained therein in order to determine if a contract was fully integrated. Under the modern or Corbin view, all available evidence and testimony may be used to interpret the intent of the parties even if there is a total integration.

Mistake of Fact

A mistake of fact is applicable where there is no actual meeting of the minds necessary for contract formation because the material factual basis of the contract was mistaken. If there is a combination of mistake of market conditions and fact, a court will treat such a situation as a mistake of fact.

Misunderstanding

A misunderstanding of the parties as to what they are agreeing to may prevent the required meeting of the minds required for mutual assent and proper contact formation. There will be no mutual assent if the parties have a different subjective understanding about a material term of the contract and neither party knew or had reason to know of such a misunderstanding.

Exception - Partial Integration

A partial integration is not intended as a total integration and therefore extrinsic or parol evidence such as verbal terms and understanding may be introduced to supplement consistent additional terms.

Mutual Mistake

A party may avoid a contract if there is a mistaken belief about a basic assumption of the contract by both parties which has a material effect on the agreed performance and where the adversely affected party bore the major risk of mistake. The normal remedy for mutual mistake is recession or voiding of the contract.

Crossing Offers

A request for clarification or an inquiry about further or different terms is neither an acceptance nor a rejection of an offer.

Land-Sales

A seller of real property will bear a risk that minerals or other valuable natural elements will later be found on their property and a seller cannot void a contract if such minerals are later found.

Bargained for Exchange

A sham / nominal amount of money will indicate that no bargaining process actually took place and the contract will be void for lack of consideration. However, where someone agrees to pay an inadequate amount, but which is higher than a sham / nominal amount, a bargaining process will be said to have taken place.

Merchant's Firm Offer

A signed and written offer by a merchant which states that it will be held open / irrevocable for a stated prior of time will be irrevocable for that period of time. If no prior of time is stated, then it will be held open for a reasonable period of time. Neither period of time, stated time, or reasonable period of time may exceed three months. There must be an actual signature, not just an authorization.

Unilateral Contracts

A unilateral contract seeks performance of the contract, not a promise to perform.

Contract

A valid contract must have appropriate offer, acceptance, and consideration, with no viable defenses to contract formation.

Acceptance

Acceptance of an offer is an assent to the terms of the offer by the offer in the manner invited by or require by the offer or through a reasonable means if no method is stated. Only the person to whom an offer was made may accept the offer and this will include people who knew about the offer such as in a reward situation.

Mailbox Rule

An acceptance is effective upon dispatch unless the offer provides otherwise. When a rejection is sent first and an acceptance is sent second, an acceptance is only effective if it is received before the rejection. The mailbox rule is not applicable if a specific time is set for acceptance and the correspondence is not received by the specific date. If an unauthorized and slower medium of communication is used, then an acceptance is effective only upon receipt. Also, exercise of an option contract is only effective when received. The mailbox rule does not apply to other irrevocable offers. If an acceptance is lost or delayed in transmission, the acceptance will still be effective if it was properly addressed. However, if an acceptance was improperly addressed or not properly dispatched, then there will be an acceptance only if it is received within the time in which a properly dispatched acceptance would normally have arrived. Otherwise, it is effective only upon receipt.

Accommodation Shipment / Seller Sends Wrong Goods

An accommodation shipment occurs where the seller ships non-conforming goods with an explanatory memo that the buyer can accept or reject. The accommodation shipment serves as a conditional acceptance. If the buyer accepts, this will establish a new contract for the goods of the quantity and type accepted, instead of those which were originally ordered.

Advertisements

An advertisement is not an offer because it does not contain sufficient words of commitment. However, an advertisement will be considered a valid offer if it contains specific words of commitment and specific terms such that it could be said to have specific terms communicated to an identifiable person. Therefore, if there is a stated quantity and an indication of who may accept, such as "first come, first served," there will be an offer.

Auction Items

An auction item is not an offer unless the item is stated as "without reserve." When goods are put up without reserve then there is an offer to sell at any price that is bid by the highest bidder.

Exception - Goods Accepted and Paid for Exception

An exception to SOF occurs where the goods have been received and accepted or where payment has been rendered and accepted.

Exception - Specially Manufactured Goods Exception

An exception to the SOF occurs where goods are specifically manufactured for a buyer, are not suitable for sale to others, and the seller has made a substantial start on the project or a commitment for the procurement of the goods.

Illusory Promises

An illusory promise is not supported by consideration because it seems to promise something but it does not actually commit the promisor to do anything.

Offer

An offer is a communication from one person to another of an intent to be bound to definite terms which creates in the offer the power of acceptance.

Detrimental Reliance / Part Performance

An offer which invites performance of an act as acceptance under a unilateral contract rather than a return promise becomes irrevocable as soon as the offer has started to perform the act. Part of the actual performance requested must have been given in order to render the offer irrevocable. Under detrimental reliance, where the offeror knew or had reason to know that the offeree would make preparations based on the offer, the offer will be irrevocable for a reasonable period of time in order to prevent injustice. However, mere preparation for performance, no matter how detrimental to the offeree, will not affect the offeror's power and privilege to revoke a unilateral offer.

Modification - Pre-Existing Duty Rule

Any agreement to change an existing contract is a potential modification of the contract. However, under the pre-existing duty rule, if the parties to a current contract modify the contract for the benefit of only one party this will violate the pre-existing duty rule and the contract will be void for a lack of consideration unless the modification is fair and equitable given the current circumstances not anticipated at the time of contract formation.

Remedies for Mistake

Avoidance of the contract through recession or voiding is the normal remedy for mistake situations. The contract is treated as though it was never made and the parties are restored to their positions before the contract.

Builders

Builders will bear a risk of unexpected building conditions and cannot void a contract because building conditions are a little more difficult than expected.

Land-Sale Contracts

Contracts for the sale or the transfer of land, including leases of over one year, need to be in writing to satisfy the Statute of Frauds and must state the price, be signed by at least the seller, and must give a full description of the land. This provision does not include contracts which are only incidental to land-sale contracts.

One-Year Rule

Contracts which take more than a year to complete from the execution of the contract must be in writing to satisfy the Statute of Frauds. The time starts tolling at the execution of the contract and complete performance must be impossible not just highly unlikely at the time of the execution of the contract not from the time performance is to start. Hindsight may not be used as an interpretation of how long a contract would take to complete. If a contract is to last exactly one year then no writing will be required, but if a contract is to last one year and a day after the time in which the contract was executed, then SOF applies and there must be sufficient writing. If there is an indefinite time period, such as a lifetime contract, then the SOF does not apply.

Course of Dealing

Course of dealing considers the manner in which the parties conducted themselves in previous contracts. Evidence is used from course of dealing when the court did not garner enough information from which to fashion missing terms from a course of performance analysis.

Course of Performance

Course of performance considers the manner in which the parties conducted themselves in the current contract. Information gained from an analysis of the course of performance of the parties is considered the best evidence through which to clarify uncertainty.

Duress

Duress entail a wrongful act or threat by one party which overcomes the free will of the other party to enter or modify the contract. The standard is not a person of reasonable firmness, rather, whether the party in question was in fact coerced. Actions that will constitute duress are acts or threats of action which are abusive or oppressive such as violence or threats of violence, imprisonment, wrongful taking of property, and threats to breach a contract or to commit wrongful acts. Duress does not include threats of civil litigation.

Economic Duress

Economic duress occurs where a person inter meddles in the contract making another person's access to needed necessities much more costly.

Satisfaction of SOF by Memorandum Between Merchants

Even without a signed contract, a signed memorandum which summarizes the agreement and includes the quantity will be enforceable if: the memorandum reasonably identified the subject matter of the contract; there is a solid indication that a contract was formed between the parties; the essential terms of the contract were stated with reasonable certainty; the memorandum was signed by or on behalf of the party to be charged; and there was no objection within 10 days.

Missing Terms

For a partially integrated contract, courts will generally supply missing terms if it is apparent that the parties wanted to bind themselves to certain components of a contract and there is a reasonable way for the court to go about formulating missing terms. The court will normally impose a duty of good faith on each party.

Exception - Full Performance by One Party

Full performance by one party will serve as an exception to the SOF even if the performance takes longer than a full year.

Gifts

Gifts do not constitute valuable consideration because there is no bargained for exchange and the promisor gets nothing in return for their promise to act.

Non-Merchant Party

However, if one party it not a merchant, additional terms are treated as proposals that the offeror must expressly approve.

Construction Bids

If a contractor makes a mistake in the bid and the other party has not yet relied on the bid, the contractor may be able to show unconscionability based on the fact that severe harm would occur to the contractor if the contract were to be enforced.

Modification

If a modifying agreement changes the duties only on one side and leaves the duty on the other side the same, there is no new consideration and the modification is unenforceable. However, a promise on both sides for a new or different performance will serve as valid consideration as long as there is such a promise on both sides.

Exception - Admissions / Part Performance

If an opposing party during court-related activity admits that a contract for the sale of goods was in fact made, the contract will be enforceable up to the amount admitted. For goods, part-performance will suffice to the extent of performance.

Usage of Trade

If needed, courts will consider evidence of the practices and methods that occur with regularity in a trade / profession in order to fashion missing terms.

Inconsistent Conduct

If the offeror engages in conduct unambiguously indicating a change of mind to terminate the offer and the offeree is aware of such conduct, this may terminate the offer.

Additional terms in the Acceptance

If there are specific additional terms added in an acceptance of a common law contract this will terminate the offer and instead will constitute a new offer.

Additional Terms in the Acceptance

If there are specific additional terms added in an acceptance, this will terminate a common law offer and instead will set a new counter-offer into motion.

Accord and Satisfaction

In an accord, parties agree to contract through which one party promises to render a lesser substitute performance in the future while the other party promises to accept the substitute performance in discharge of the existing duty. The accord is the new agreement and consideration. Discharge of the pervious contractual duty only occurs when the terms of the accord are performed at which time there is said to be a consummation of the accord through satisfaction. A non-breaching party may sue for either breach of the original contract or for breach of the accord but not for both.

Common Law Method of Interpretation

In interpretation of a common law contract, courts will normally give the primary purpose of the contract great weight. Ambiguous terms will be construed against the drafter of the contract because the drafter had the power to use more specific language. Negotiated terms will rule over standardized / boilerplate terms contained in standard form printed agreements. Handwritten terms will rule over typed terms. specific disclaimers will be honored, worded prices control over numeric prices, statutes control if no language is included about specific points, and oral agreements as to enforceability of a duty owed will generally be allowable as evidence.

Unilateral Mistake

It is more difficult to void a contract under unilateral mistake than under mutual mistake. The basic requirements for mutual mistake must be met and additionally the mistake must operate to make the contract unconscionable and the other party should have had reason to know of the mistake or have actually caused mistake. The normal remedy for unilateral mistake is recession or voiding of the contract.

Market Conditions

Market conditions are normally not considered basic assumption of a contract so mutual mistake cannot be used as a defense where a party was mistaken about a change in market conditions.

Both Parties Merchants

Minor additional terms will become part of a merchant-to-merchant contract unless the offer expressly precludes adding any additional terms or the additional terms materially alter the contract. If additional terms materially alter the contract, the offeror must notify the offer of their objection within ten days of the notice of the new terms.

Fraud in the Inducement

Misrepresentation occurs where a person makes a material misrepresentation with scienter / culpable state of mind with an intent to induce reliance on the false material statement where plaintiff justifiably relies on the false statement and where plaintiff suffers a pecuniary loss due to their reliance on the false material statement. A negligent misrepresentation may trigger this defense as long as the misrepresentation pertains to a material fact.

Mistake Situations

Mistake situations occur where one or both parties is mistaken in some fashion about some element of the contract. Mistake situations include misunderstanding, reformation for an error in transcription, ambiguity, mutual mistake, and unilateral mistake.

Common Law

Modifications to a common law contract will need additional consideration in order to be effective. Any clauses that require a common law modification to be in writing will not be enforceable.

UCC

No agreement which modifies a UCC contract will need additional consideration as long as both parties operate with good faith and fair dealing. A "no oral modifications" clause in the original contract must be heeded, but feeble attempts at oral modifications will be considered as evidence of a waiver. Modifications for $500 or more will need to satisfy the Statute of Frauds.

Termination of An Offer

Offers may be terminated through a rejection of the offer, time lapse, death, revocation of the offer, or at the end of a conversation where a verbal offer is not accepted.

Outputs and Requirements Contracts

Output contracts are where the buyer promises to sell all of the seller's product. Requirements contracts are where the seller promises to supply the buyer with a sufficient quantity of product to satisfy the buyer's needs. Outputs and requirements contracts often appear to be indefinite but this appearance of indefiniteness is cured through the good faith and fair dealing requirement under the UCC. Sudden increases or decreases in quantity are not allowed as they are violative of good faith and fair dealing.

Exception - Contract Defenses

Parol or extrinsic evidence may be used to show evidence of duress, ambiguity, mistake, fraud, subsequent modifications, oral condition precedent, illegality, or lack of consideration.

Preliminary Negotiations / Solicitations / Inquiry

Preliminary negotiations and solicitations are not offers but merely invitations to conduct a negotiation. Mere price quotes are not an offer, unless the price quote is in response to a specific inquiry.

Death or Insanity

Prior to acceptance, the death or insanity of the offeror will automatically terminate the offer. However, the death of the offeror will not terminate an irrevocable offer.

Additional Terms in the Acceptance

Reasonable additional terms in the acceptance will be included in the contract and the acceptance will still be valid.

Rejection of an Offer

Rejection of the offer by the offeree will constitute non-acceptance of the offer unless the offeror indicates that the offer will remain open or the offeror revives the offer on the original terms.

Requirements and Output Contracts

Requirements and outputs contracts sometimes appear to have illusory promises. However, the duty of good faith and fair dealing imputed in these UCC contracts will often cure any otherwise illusory promises.

Sale of Goods of $500 or More

Sale of goods of $500 or more must be in writing to satisfy the requirements of the Statute of Frauds and must state the quantity but the price is not necessary.

Silence

Silence by the offer will normally not constitute acceptance unless the offer authorizes silence as a valid form of acceptance, there are previous dealings that imply acceptance, or the offer exercises control of, receives benefit from, or exercises dominion of goods. An offeror cannot by themselves indicate that an offeree's silence is acceptance.

Statute of Frauds

Some contract are unenforceable unless they are accompanied by a written agreement. These contracts include land-sale contracts, marriage contracts, goods for the sale of $500 or more, suretyship contracts, executor or administrator contracts, and contract lasting a year or more. The writing must be signed by the party to be charged which is the defendant or their authorized agent and must contain all material terms.

Part Performance

Subsequent performance of an indefinitely termed contract may cure for indefiniteness of the terms and thus form a valid offer.

Surety / Executor

Suretyship entail a contract to perform the duty or to pay the debt of another. Such a contract is formed when a surety makes a promise to either a creditor or a debtor. Consideration related to the creditor will exist if the loan is extended or goods are delivered and consideration related to a debtor will exist if a debtor receives the benefit of a surety's participation.

UCC

The UCC is much more liberal about missing terms and will be open to making a contract even if some terms are missing but the quantity and the parties should be present. Under the UCC an agreement can be found through the words or conduct of the parties. The timing and specific terms may be ambiguous under the UCC but a court will find an offer as long as an intent to enter the contract exists and a court could fashion a reasonable remedy.

Applicable Law UCC v. Common Law

The Uniform Commercial Code governs the sale of moveable goods which are properly identified at contract formation. The Common Law of contracts consist of all other contracts, generally contracts for services.

Misrepresentation / Fraud

The normal remedy for fraud is recission.

Fraud in the Execution

The normal remedy is to void the contractual instrument. Fraud in the execution occurs where an innocent party was tricked into signing a document that was later turned into a contract by another person.

Intent to Be Bound

The objective theory of contract law employs the use of a reasonable person in the offeree's position in order to determine if an offer to enter a contract has been extended.

Common Law Mirror Image Rule

The offeror is master of the offer and where the offer by its language prescribes the manner in which the offer must be accepted, the offer can only be accepted in that manner without any qualification, conditions, or additional terms.

Revocation of an Offer

The offeror may revoke an offer at any point before acceptance even if they originally stated it would be open for a longer prior of time. A revocation is effective upon receipt by the offeree even if the communications is delivered through a third party. For a public offer, the revocation must be communicated through the same modality as the offer or through a comparable publication.

Party to Be Charged / Defendant

The party to be charged / defendant must have signed the writing. An actual signature is not needed, rather, just an authentication of the writing is needed such as initials or an unsigned company letterhead that contains the name and address of the defendant.

Legal Detriment

The promisee must do something they do no have to do or refrain from doing something they have a right to do. The result must be a detriment to the promisee, a benefit to the promisor, or both.

Definite Terms

The terms of a contract must be definite enough so that a court may determine the duties of the parties and be able to fashion an appropriate remedy.

Ambiguity

There will be no contract if a material term is open to at least two reasonable interpretations, each party attaches different meaning to the term, and neither party knew or had reason to know of the meaning attached by the other party. If one party does know of the ambiguity, enforcement of the contract may be based on the understanding of the other party.

UCC Customs of Interpretation

UCC contracts are normally interpreted by customs which include course of performance, course of dealing, and usage of trade.

Cure for Indefinite Terms

Under certain conditions, a party may cure an indefinite offer.

Gap Fillers for Omitted of Missing Terms

Under the UCC, a court will use gap fillers to reasonably fill in indefinite terms if the court determines that the parties intended to include the terms and it is reasonable for the court to fashion the missing terms. The sequence in which courts will look to evidence in order to supply the missing terms is: course of performance, course of dealing, and usage of trade.

Merchants

Under the UCC, a merchant is someone who trades or deals regularly with the goods involved in the contract, or who otherwise holds themselves out as an expert knowledgeable about the goods in the contract.

Good Faith and Fair Dealing

Under the UCC, each party is required to bargain and proceed in their contractual duties while being held to a duty of good faith and fair dealing.

Mutual Assent Through Conduct by Both Parties

Under the UCC, unless there is an express condition requiring a specific response to accept an offer, mutual conduct which recognizes the existence of a contract for sale will establish such a contract even if the writings of the parties do not otherwise establish a contract and even if the exact moment of contract formation is not determined.

Time Lapse

Under the face to face conversation rule, an offer expires at the conclusion of a face to face conversation unless there is an acceptance. Where the offer is open but the time for acceptance has passed, the offer is terminated. Where a reasonable time has passed without acceptance, the offer is terminated.

Parol Evidence Rule

Under the parol evidence rule, evidence of other prior or contemporaneous agreements may not be introduced to vary or contradict the terms of a fully integrated writing. The purpose of the parol evidence rule is to prevent fraudulent claims.

Undue Influence

Undue influence may be an applicable defense where a fiduciary with specialized knowledge who occupies a position of significant confidence with respect to the other party and who has much more knowledge or experience than the other party acts pursuant to the special fiduciary relationship to unduly influence or persuade the less experienced party.

Partial Payment Rule

Where a debt is liquidated with no dispute as to its existence and is undiluted as to its amount, there can be no accord or satisfaction because there is no consideration to support the obligee's acceptance of a lesser performance. Where a debt is unliquidated or disputed, a tender made by debtor consisting of money or other things on the condition that the lesser sum be accepted as a full discharge of a debt and which is accepted by the creditor of that which is tendered will constitute a complete discharge of the debt through accord and satisfaction. A "full payment" statement on a check for less than the disputed amount is an accord and if payee cashes the check, there is satisfaction because payee has agreed to accept the lesser payment in satisfaction of contractual rights. However, under the minority rule, a creditor may cash a "full payment" check while retaining all rights to the full amount by endorsing the check "under protest" or other similar words, indicating that no accord or satisfaction exists.

Surrender of a Legal Claim

Where a party promises not to pursue a legal claim which they believe in good faith to be a valid claim, in return for the other party's promise to pay money, then legal detriment will exist. Surrender of an invalid claim will still constitute consideration if a reasonable person surrendering the claim could have believed that the claim was well-founded. It does not matter if the claim is later revealed to be invalid or that the disputed claim is not a person's own claim.

Irrevocable Offers

Where an offer is irrevocable, it will render the offeror's attempts at revocation invalid.

Conflicting Terms / Battle of the Forms / Knockout Rule

Where both parties later object to the other's treatment of a term, the conflicting terms in both the offer and the acceptance are knocked out of the contract. The resultant contract includes non-conflicting terms. Missing terms will be filled through gap fillers by a court. However, if there is an increase in quantity, the offeror's quantity maximum controls.

Standard Option Contract

Where consideration is stated in a signed contract or actually paid by offeree in order to keep the offer open then an offer will be irrevocable. A payment need be made, not a mere acknowledgment of consideration. Some jurisdictions may allow an options contract where no consideration had been exchanged and in such jurisdictions an offer will be kept open for the time stated.

Moral Obligation

Where former consideration was surrendered innocently, courts may sometimes impose a moral obligation.

Contract Modification

Where one party threatens to breach a contact if it is not modified and the other reluctantly agrees, the doctrine of good faith and fair dealing will be used, and if a party was seeking to gain an unfair advantage through a modification, then the duress defense would be applicable. However, duress would not be an applicable defense if a party were only trying to modify the contract due to unforeseen difficulties.

Past Consideration

Where prior consideration is used for current consideration, the current consideration will be considered invalid.

Agreement to Agree

Where the parties have agreed to agree on specific terms at a later date, courts will normally supply the missing terms if the parties later disagree about the final terms thus forming a valid offer.

Promissory Estoppel

Where the promisor makes promises which the promisor reasonably believes will induce action, forbearance, or detrimental reliance by the promisee and which actually does induce such action, forbearance, or detrimental reliance by the promisee, the original promise will be binding to prevent injustice and consideration will be served in a replacement fashion. The amount of recovery will generally be in reliance damages.

Exception - Part Performance, Possession, Improvement

Where vendee acts in reliance on an oral contract and makes a down payment, takes possession, and makes improvements to the land, this will serve as an exception to the Statute of Frauds. In general, the possessor must show ownership characteristics more extensive than that of a tenant.

Ambiguity

Without specific and definite terms a contract will be void for indefiniteness.

Consideration

consideration is a bargained for exchange of acts or promises with either detriment to the promisee or benefit to the promisor, or both. consideration for a unilateral contract is the offeree's performance, not a returned promise. If there is a lack of consideration, promissory estoppel can serve as a substitute for consideration.