Virginia Bar Exam Blog
Sunday, June 25, 2006
  More Contracts...
UCC: Article 2
· Subject matter sensitive:
o Sale of goods
§ Art 2 has NO application is the good is sale in land or interest in land, personal services, intangible
o Parties must both be merchants:
§ Any person who makes a livelihood dealing with the subject matter or makes affirmative representations that is how he make a livelihood even if not true

1. Offer and Acceptance:
Did the parties form an agreement?
1. Can you find an offer?
2. If you can find an offer, at the time acceptance was attempted, was the offer still outstanding?
3. If you found an offer and the offer was still outstanding, was their a defective acceptance?
· Courts want to find a contract – positive bias in contract formation → objective theory of contract formation
· What a reasonable person would believe whether there was a contract

Offer: 1. Can you find an offer?
3 elements of an offer:
1. Intent - must be an intent to form a present contract – manifestation to presently enter into a contract
· Obligations may not mature for 6 years, but the intent is to form a contract now for performance in 6 years
· State of mind:
o An objective test – would a reasonable person understand that there was an offer?
· Preliminary negotiations:
o At the point 1 of the parties thinks he has a contract, the other party thinks there is only preliminary negotiations.
2. Content - the offeror must set forth the essential terms of her proposal
· The offeror must set forth the essential terms, identifying the parties, the subject matter, time for performance and price.
· Under the CL a communication that lacked ANY of the essential terms was too indefinite as a matter of law to constitute an offer.
o But trend is to conclude a contract has been formed.
o CL reform – if there is total silence in the contract on 1 of the essential terms of the bargain a ct will attempt will treat their total silence as a mutual manifestation to trade on a reasonable term
§ What is a reasonable term?
· If the parties have done business before – look to prior history
· Never done business before – look to common trade or business
o If ambiguous term – then no ct can apply a reasonable term
o UCC – if both of the traders are merchants and the subject matter is goods, then the code provides great flexibility in settling the essential terms:
§ 1. Merchants are free to adopt term setting machinery which will fix the content the essential terms in the future
§ 2. Agreeing to agree on the future on price – binding
§ 3. Ct will imply a reasonable term
3. Communication – Communication of the offer and its terms by the offeror to the offeree
· There must be communication of the offer –
o Rewards

2. If you can find an offer, at the time acceptance was attempted, was the offer still outstanding?
· An offeror is in complete control of the offer
o At a specific time, on occasion of a specific event, no matter how unreasonable
o If life of offer is silent –
§ A lapse of time – reasonable time only
· Produce – very limited time because perishable
· Tray of diamonds – open for a very long time because not perishable and price not very volatile
§ Death or destruction of subject matter terminates the offer by operation of law –
· Fire destroys the house
· Death or insanity or legal incapacity of the offeror or offeree
· Supervening illegality of the proposed subject matter – government intervenes the transaction illegal
· Termination by rejection – rejection as a matter of law terminates an offer
· Revocation by the offeror – even if the offeror states a time when the offer will expire, an offer is inherently irrevocable at any time prior to acceptance
o 3 exceptions:
§ 1. Purchase an option over the offer – an option is always a separate contract with its own offer, acceptance and consideration, though usual of nominal economic value. It is irrevocable under the terms of the option
§ 2. Cut off the power of revocation under the theory of estopple – if offeree changes his position in foreseeable reliance of the offer, offeror may be estopped from revoking the offer due to foreseeable detrimental reliance of the offer
§ 3. A merchant’s firm offer (UCC) – only the offeror needs to be a merchant. If goods are the subject matter than an offer that is in signed writing by a merchant trader is irrevocable according to its terms.
· Up to 90 days even if the writing states a longer time

3. If you found an offer and the offer was still outstanding, was their a defective acceptance?
· Was there a defective acceptance?
· An acceptance must amount to – to a present unconditional unequivocal assent to each and every term of the offer
· If the response has this quality then at what time is the contract is form?
· Mailbox Rule: the contract is formed when the acceptance is dispatched if it is communicated in any commercially reasonable manner (any mode that is at least as fast and reliable as the one utilized by the offeror). Contract is formed the moment the acceptance is placed in the channel of communication even if the offeror is not aware that formation has taken place.
o All risk of delay or misplacement if borne by the offeror
· Rejection Counter Offer Rule - If the acceptance is any way different than the offer, not only is no contract formed, but the offer is revoked as well.
o Acceptance must be a mirror image of the offer
· Incorporation by Reference: revives the original offer
· A mere request made by the offeree to the offeror that the offeror consider other different terms which makes quite clear that the offeree is not rejecting offer does not create a contract nor reject the offer.
· Merely making explicit terms that were in the contract or making reference to an annex of the offer does not trigger the rejection counter offer rule.
o Implied merchantability
· UCC – if goods are the subject matter of the attempted exchange and both parties are merchants, then additional terms by the offeree in the acceptance, there will be a contract unless:
o 1. There must be an acceptance by the offeree
o 2. If an offeror may not be bound by other terms of the offer by making a take it or leave it offer
§ Even if the offeree accepts with “additional” terms, the contract will be formed with only the take it or leave it terms of the original offer
o 3. If the offeror does not make an ironclad offer and the offeree makes changes in its acceptance, then a contract will be formed. However, what are the terms?
§ Whether or not the new terms are consistent or inconsistent with the original terms
· If consistent – a contract is formed and the additional terms form the new contract unless the offeror promptly rejects the additional terms in writing.
· If consistent – the new terms are not included unless the offeror expressly accepts them
o If the terms materially shift the economic advantage of the original offer
o Shift the incidents of law – shift the risk
o Per se rule – if any term of the acceptance would impair a remedy which would otherwise be available upon a breach of the contract
§ Arbitration clause

Unilateral Offer:
· A promise for an act
· Acceptance can only be made by total completion of an act
· An offer can still be revoked until completion of an act, but there are 2 protections available to the offeree:
o 1. Rule of Construction – whenever possible, a ct will construe an offer as inviting formation in the bilateral mode (for UCC)
§ Seller’s prompt shipment of the goods
§ OR the promise to promptly ship the goods
o 2. Common law rule – once the offeree the begins the substantial performance of the requested act, he does not form a contract, but he does cut off the power of the offeror to revoke so as to give him the reasonable opportunity to complete the act requested
§ Must have substantial performance by the offeree
§ Offeree is under no obligation to complete the act once it is started

Mistake and Ambiguity: Can preclude the formation of an agreement
· Ambiguity: when language betrays: either precludes the formation of an agreement
o 1. Latent/Hidden Ambiguity:
§ If at the formation stage of the bargain neither trader recognizes that a term is ambiguous and it affects an essential terms of the contract and each party has subjectively attached a different definition to that term their bargain is flawed by latent ambiguity and there can be no contract because the ct cannot give favor to one reasonable definition over another reasonable definition of a term.
o 2. Patent/Obvious Ambiguity:
§ If both parties are at fault for not clarifying an obvious ambiguous term there can be no contract.
§ When one of the parties is not at fault, the other party is guilty of fault because the ambiguity was obvious to that party. Protect the interest of the innocent party and give the definition of the term of the non-faulting party and a contract is formed.
· Mistake: here ambiguity is not the problem, but that the terms do not convey the actual intention of 1 or more of the parties.
o 1. Mistake by the parties:
§ When both parties share a mistake (mutual mistake):
· Each party has the equity of recession and can refuse to perform his party of the promise depending on the gravity of the mistake:
o If the mistake goes to the essence of the contract then can rescind the contract
o If the mistake does NOT go to the essence of the contract, then the parties cannot rescind the contract
· Where are the parties due to the mistake?
o Executory (neither parties have performed)
o If both parties have already performed, there is little remedy
§ When 1 party is mistaken (unilateral mistake):
· When only party is mistaken –
o Mechanical miscalculation – may provide grounds to relieve the mistaken party
§ Will depend on the state of mind of the non-mistaken party and whether she has formed a commercially reasonable expectation
· If the non-mistaken party had no reasonable grounds to suspect the mistake and did not have notice of the mistake, then the contract is formed and the mistaken party has no defense
· If the non-mistaken party has notice that there was a mistake, he cannot leap upon the mistake of the other party. The mistaken party may be able to rescind the contract.
o Error in business judgment – no defense to either party
§ The knowing party does not need to inform the unknowing party
§ The knowing party however may not deceive the unknowing party
o 2. Mistake by a 3rd party intermediary:
§ 3rd party made a mistake in transmission – same rules as mechanical miscalculation apply

Parol Evidence Rule:
· The parties formed an agreement and reduced the agreement into writing. One of the parties wants to bring in evidence not found in the written agreement.
· Is there an integrated writing?
o Parol evidence only protects an integrated writing
o An integrated writing shows the full and final intent of the parties. If the parties did not form the agreement with that intent, then the parol evidence rule has no application.
o The ct will determine whether the agreement looks as if it is the full and final intent of the parties
o What is the evidence the parol evidence rule is trying to bring in?
§ Parol evidence is any evidence of any promise, representation or understanding between the parties that formed the integration that was arrived prior to or contemporaneous with the formation of the integrated writing.
§ Evidence of a subsequent modification is not parol evidence.
§ What is the impact on the agreement of the parol evidence?
· Evidence may not be brought in which contradicts a term in the written agreement
· If it defines an ambiguity or defines a term, then the evidence may be admitted
· Notwithstanding that parol evidence contracts, varies or adds to the terms of the written agreement, there are 3 exceptions when parol evidence may be admitted:
o 1. Proof of Fraud
o 2. Partial Integration
§ CA – if the party seeking to introduce the parol evidence can show any reason why the term was left out in the writing, it goes to the jury
§ More strict jurisdictions – look to the writing. Does it look like an integrated contract?
o 3. Collateral Agreement
§ “2nd Agreement” –
· The judge must determine that the proposed 2nd agreement is of far lesser importance than the integrated writing
· No term of the alleged collateral agreement may contract the terms of the integrated writing
o If the integrated writing states that it is the final contract or that all the terms are present in the contract, then the 2nd agreement cannot be introduced
· There must be some nexus between the 2 agreements and a reasonable reason that there were 2 separate agreements
UCC Article 2 does NOT require BOTH parties to be merchants.
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