Skip to main contentContract Formation Through Modification
Which Law is applicable?
The common law governs all contracts while the UCC modifies those contracts for the sale of goods.
UCC 2-105 - Goods are those things that are moveable and tangible.
Mixed Contract?
A mixed/hybrid contract involves both a common law and a UCC element. If those elements are not severable from each other then the predominate purpose of the contract will govern.
Severability?
Contracts are severable so long as the promises are independent and apportionable.
Are the promises independent?
Promises are independent if the party’s intent evidences they would have contracted for the promises separately.
Are the promises apportionable?
Promises are apportionable so long as the can be allocated promise to promise.
Predominate purpose?
If the mixed/hybrid contract is not severable, what was the predominate purpose of this contract as evidenced by the parties intent?
CONTRACT?
A contract is an offer, acceptance and consideration.
Express contract?
An express contract is a contract in which the offer, acceptance and consideration are all expressly stated by the parties either orally or in writing.
Implied in Fact Contract?
An implied in fact contract is a contract in which the offer, acceptance or consideration is evidenced by the parties actions rather then words.
Implied in Law Contract/Quasi-contract?
An implied in law contract is not a contract but an equitable remedy created by the court if:
- The moving party had an expectation of receiving a benefit in return for his performance,
- the moving party has in fact conferred a benefit and
- it would be unjust to allow that party to retain that benefit without compensation.
Offer?
An offer is an intent to be bound by certain definite terms which are communicated to the offeree.
Intent?
Intent is judged by the objective standard of contract law.
Certain definite terms?
Certain definite terms under the common law are Material terms.
The Certain definite term under the UCC is quantity.
Material terms?
Material terms are those terms necessary for a court to determine if there was a breach and if there was a breach to create a remedy.
UCC gap filler provisions
If there is both an intent and quantity evidenced the following “gap filler” provisions may be applicable:
- 2-305 Price
- 2-308 Place of delivery
- 2-309 Specific Time
- 2-310 Time of Payment.
UCC gap filler provision - 2-305 Price
(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties and they fail to agree; or
(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price.
(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.
UCC gap filler provision – 2—308 Place of delivery
Unless otherwise agreed
(a) the place for delivery of goods is the seller’s place of business or if he has none his residence; but
(b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and
(c) documents of title may be delivered through customary banking channels.
UCC gap filler provision - 2-309 Specific Time
(1) The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be a reasonable time.
(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
(3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.
UCC gap filler provision - 2-310 Time of Payment
Unless otherwise agreed
(a) payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery;
Communicated to offeree?
Did the offeree receive and understand the offer?
Is the offer capable of being terminated?
Are there facts for?
A. Option contract
B. UCC Merchant’s firm offer 2-205
C. Offer for a unilateral contract with starting of performance
D. Promissory Estoppel
Option contract
An option contract is a contract for the purpose of making an offer irrevocable.
Merchant’s Firm Offer - 2-205
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
An offer to a unilateral contract will become irrevocable for a reasonable period of time upon the begging of performance by the offeree.
Promissory Estoppel
- Was a promise made?
- Was it foreseeable that the promisee would rely upon that promise
- Did the Promisee in fact rely upon that promise and
- has the promisee suffered a detriment by that reliance?
If the offer was not irrevocable, has the offer been terminated?
A) Death
B) Insanity
C) Time
D) Illegality
E) Revocation or Rejection
Death
Death of an offeror will automatically terminate the decedent’s revocable offer.
Insanity
Insanity of an offeror may terminate their revocable offer.
- Majority - Offer terminated automatically
- Minority - Offer terminated when offeree knows or should have known of the offeror’s insanity
Time
An offer is open for either the time specified by the offeror or if none is stated than for a reasonable period of time.
Illegality
If the subject matter of the offer becomes illegal after the offer was made but prior to acceptance than the offer will be terminated by illegality.
Revocation?
Revocation is the termination of the offer by the offeror.
Rejection?
Rejection is the termination of the offer by the offeree.
Acceptance?
Acceptance is an assent to the terms of the offer in the proper form.
Assent?
Did the offeree intend to be bound by the terms of the offer or did the offeree attempt to change the terms of the offer thus triggering the mirror image rue under the common law or 2-207 under the UCC.
Mirror image Rule
Under the common law a purported “acceptance” can not function as an acceptance if the offeree has changed any of the terms from the original offer. However that purported “acceptance” will now in fact operate as a counter offer.
Counter offer
A counter offer is both the rejection of the original offer and the publication of an entirely new offer. (i.e. A (offeror of offer 1) makes an offer to B (Offeree of offer 1), B then rejects A’s offer and makes a new Offer to B(thus B is now the offeror of Offer 2 and A is now the offeree of offer 2).
UCC 2-207
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
Was this an offer to a bilateral or unilateral contract?
Bilateral?
An offer to a bilateral contract may only be accepted by a promise. (Express or implied)
Implied promise?
An implied promise occurs when the offeree begins performance with awareness of the offeror.
Consideration
Is a bargained for exchange involving a legal benefit for a legal detriment.
Bargained for Exchange
There must be quid pro quo relationship or this for that relationship between the promise for promise (bilateral) or promise for performance (unilateral).
Legal detriment
A legal detriment is incurred when someone either:
- Performs or promises to perform an act that they have no preexisting legal duty to do. Or
- Refrains or promises to refrain from performing an act that they have a legal right to do.
If Consideration is lacking is there an applicable substitute?
A) Promissory Estoppel
B) UCC - Modification 2-209
C) Moral Obligation
D) Unforeseen Difficulties
UCC Modification
A UCC modification does not need new or different consideration so long as the parties act in good faith.
“2-209 (1) An agreement modifying a contract within this Article needs no consideration to be binding.”
Moral obligation
In a minority of jurisdictions a moral obligation may substitute for consideration.
Unforeseen Difficulties
A modification in a minority of jurisdictions will not need new consideration so long as:
- neither party has fully performed,
- the difficulties were unforeseeable from the formation stage of the contract and
- the resulting modification if fair and equitable.
- Capacity?
- Mistake?
- Misrepresentation?
- Duress?
- Undue Influence?
- Unconscionable?
- Illegality?
Contract Categories
All potential contracts will fall into one of the following categories:
- Valid contract
- Void contract
- Voidable contract
- Valid Contract - A potential contract that consists of an offer, acceptance, consideration and is not subject to any valid defenses to formation.
- Void Contract - a potential contract that is lacking one or more of the requisite elements of a valid contract.
- Voidable contract - A potential contract in which at least one party has a valid capacity defense to formation but no other applicable valid defenses. A voidable contract will either become void or valid upon the actions of the party who lacks capacity.
Defenses Explained
Capacity
Can be raised only by a party who lacks capacity due to 1) Minority and/or 2) Insanity and even then only for contracts not relating to necessities of life.
- Minor - Under the common law anyone under 21 modernly anyone under 18 who has not been emancipated.
- Insanity - Can be established through the cognitive test or product test even if caused by intoxication.
- Cognitive test – requires that the individual not know the nature and extant of what they are doing in the formation of this potential contract. This can be established either by a factual analysis or by a court’s adjudication.
- Product test - expert testimony establishes that this contract was the product of insanity and the other party to the contract was aware of the other party’s infirmity.
- Necessities of life - Potential contracts for the necessities of life (food, shelter, clothing, etc) can not be voidable due to lack of capacity to the extent that the contract is truly necessary for life and not just a nicety.
Mistake
If one (unilateral mistake) or both parties (mutual mistake) made a mistake as it related to the CDTs of that potential contract that mistake may act as a defense to formation so long as there was not an assumption of risk.
- Unilateral mistake - is only a defense to formation if the non-mistaking party knew or should have known of the mistake.
- Mutual/bilateral mistake – is always a defense to formation. Usually established through a latent ambiguity.
Misrepresentation
Misrepresentation of a material fact (CDT) whether intentional (fraud) or negligent (was there a duty owed?) may be a defense to formation so long as the other party did in fact reasonably rely upon that misrepresentation in the formation of their potential contract.
- Fraud in the factum - If the party asserting the defense did not know nor should they have known they were entering into the “contract” by signing the document the contract is void and not voidable.
Duress
May be physical or economic but in either case the contract was formed without the subjective intent of the party asserting the defense.
- Physical Duress – a subjective defense in which the asserting party must establish that they were completely broken down to the point that the contract was not their choice.
- Economic Duress - a subjective defense in which the asserting party must establish that there was an existing contractual relationship and the other party refuses to perform their contractual obligation and there are no alternate choices available.
Undue Influence
Was the party asserting the defense susceptible to the undue influence of the other party who had both the opportunity and disposition to exert that undue influence which resulted in an unnatural transaction.
Unconscionable
Although objectively and subjectively agreed to the terms are so unconscionable that a court of law should not be involved in the enforcement of the contract.
Other Key Concepts
Both parties are free to unilaterally reform a mistake in the writing to reflect the true terms of the contract.
Parol Evidence rule
Bars the admission of evidence if:
- There is a valid contract,
- There is an integrated writing (Total/Partial),
- The evidence is prior or contemporary as to that writing and
- It is being introduced to contradict that writing.
Modification
A contract to change the terms of an existing valid contract that requires an entirely new formation discussion.
Accord and satisfaction
A specialized form of modification in which the consideration is supplied by a dispute involving an unliquidated debt. With the accord functioning as an offer and the cashing of the check as the satisfaction in place of an acceptance.
Rescission
A specialized form of modification in which both parties agree to discharge an existing contract and the consideration is supplied by the fact that neither party has fully performed. If one party has already fully performed then new consideration must be supplied or the attempted rescission will fail for want of consideration. 
