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MBE Sample Chapter

 

PRIMER SERIES MBE REVIEW: CHAPTER 1

  CONTRACT AND UCC SALES ARTICLE 2

 

I.  INTRODUCTION

     Contract questions can arise on the MBE under the common law (court decisions and American Law Institute's (A.L.I.) Restatement (Second) of Contracts) or under the Uniform Commercial Code (UCC) Article 2. Contract issues are also occasionally present in constitutional law, property transactions, or tort subjects.

     A. MBE Exam Coverage

          1.  Weight and Format:  34 of the 200 MBE objective questions test contract subjects. All questions have a four-stemmed multiple-choice format. Two, three, and four string questions flowing from a common fact pattern are frequent. About 50% of the MBE testing covers offer, acceptance, and defenses to formation. Parol evidence rule, remedies, and excusable non-performance are also frequently tested.

          2.  Testing Areas: Most of the MBE contracts testing is under the common law. UCC Article 2 questions are approximately 25% of the subject coverage. The UCC is integrated with the common law in this Primer Series MBE review text. Special attention is given to areas where there is a different or expanded rule under the UCC.

          3.  Requirements: Question requirements frequently ask “will P’s claim for breach of contract prevail” and provide reasoning to support both conclusions. Another question is “What is P or D’s best or worst argument or theory for recovery or defense?” Some questions ask which factual alternative would have the most or least influence on the case’s outcome. The most difficult questions present alternatives with conditional or limiting modifying words leading to a rationale. (See the detailed question characteristics in the preface.)

     B.  Approach

     Unlike many subjects tested on the MBE there is no one recommended approach to contract questions. Most of the questions focus on only one topic such as the four requirements necessary for the application of the firm offer rule. Parties’ negotiation words stated in quotes always have a legal significance.

          1.  Conclusion and Conditional Modifiers: The answer conclusion (prevail or not prevail) is less important than the best reasoning to support your choice. The modifiers "because," "since," "if," "only if," and "unless"focus on the best reason for the conclusion.  See the preface for question characteristics and default rules.

          2.  Preferred Result: Read the facts very carefully. Everything else being equal, the odds on the MBE favor the answer alternative concluding a contract exists.

     C.  Overall Common Law Memory Ladder Acronym

     Your overall memory ladder acronym for contract law is OACLLS VIPR TAD.

  • Offer by offeror expressing intent to be bound that is not revoked or rejected
  • Acceptance by offeree through a return promise or performance
  • Consideration - benefit to promisor or detriment to promisee
  • Legal capacity of contracting parties - look for the 3 Is of infancy, insanity, or intoxication
  • Legal subject matter and not against public policy
  • Statute of frauds compliance if a MOULS contract 

 

  • Void or voidable circumstances - MUFFED
  • Interpretation of contract - II PACC
  • Performance and breach
  • Remedies - MRS DAISI

 

  • Third party beneficiary - creditor or donee
  • Assignment of Rights by promise
  • Delegation of Duties by obligor

     OACLLS represents the formation elements that are necessary for an enforceable contract.

     D.  Common Law v. UCC Distinction

     Questions frequently require a distinction between the common law and the UCC. The MBE heavily tests the issues where there is an expanded treatment or different result under the UCC than under the common law. If the UCC is silent on a particular issue, the common law state rule applies. It is not necessary to memorize the UCC section numbers.

          1.  UCC Intention of Reasonableness:  The UCC was created to provide a more practical way for buyers and sellers of goods to regulate transactions. It alleviates some of the rigidity and harshness of the common law by requiring less precision in contracting. [UCC 1-203] The UCC imposes a general standard of reasonableness and good faith on the contracting parties. For merchants, this standard is raised to honesty in fact and adherence to reasonable commercial standards of fair dealing in the trade. [UCC 2-103]

          2.  Application:

               a.  Common Law - SIR:  The common law rules apply to contracts involving services, intangibles, and real estate. Services include personnel (employee's work), professional (attorney's advice), and construction (builder's construction). Intangibles include investment securities, accounts receivable, legal claims, and money. Real estate includes contracts for the sale, purchase, or encumbrance of land.

               b.  Goods:  The UCC rules apply to contracts for the sale of new or used "goods" which are movable. Goods also include crops and timber that can be severed from the real property without harm.

               c.  Distinction:  This distinction can be quite subtle: a contract for the sale of a book is a UCC contract. In comparison, a contract to bind or repair the same book is a personal service contract and thus classified under the common law.

               d.  Mixed Contract:  If both "goods" and "services" are included in the same contract, the "predominant factor"test is applied.  The UCC rules control if the predominant purpose for which the parties contracted was the sale of goods. This is a question of intention not necessarily the relative prices of the goods and services covered by the contract.

               e.  Examples: A contract to purchase both a computer and a service contract is likely under the UCC. A construction contract is also heavily tested. An agreement to lay a foundation for a building would include the cement, the re-bars, and the labor (both goods and services). The common law of contracts would control both the inadequate performance of the contractor and a defect in materials under the "predominate factor" rule.

          3.  UCC Default Provisions: The UCC controls goods contracts and, if in conflict, supersedes the common law. A UCC default provision also fills in the blanks with “gap filling” terms where the contracting parties have not specified the treatment of an item or term. If the parties have not addressed the particular term in their agreement, the UCC rule controls. The court can fill in all open items, except quantity.

          4.  Duty to Communicate: The UCC may impose an affirmative duty on one or both of the parties to communicate under certain circumstances.

          5.  Merchant v. Casual Party: The UCC has special provisions that may apply if one or both of the parties is a “merchant.” A merchant is one who deals in goods of that type or holds himself out as an expert having special knowledge and skill in those goods. Wholesalers and retailers are usually merchants. A merchant is to be distinguished from a casual party. A merchant such as a car dealer is to be held to a higher standard of conduct than would a casual, private-party selling the same automobile. [UCC 2.104]

          6.  Application by Analogy: The court may always apply the UCC by analogy to a common law topic. Thus, such UCC authorized matters as requiring good faith, reasonableness, and a duty to mitigate damages may be imposed by a court upon the parties in a common law SIR contract.

     MBE Tip: Start your analysis by determining which law - the common or UCC - governs the question. The predominant purpose controls. If the conclusion is the common law, remember that the court may apply an appropriate UCC provision or treatment by analogy.

     E.  Express or Implied

          1.  Express Contract: An express contract is formed by written or oral language.

          2.  Implied Contract: An implied contract is exhibited by the actions of the parties even though an agreement is not explicitly made.

               a.  Implied in Fact: An implied in fact contract is made by circumstantial implication showing mutual intention (patient accepts a doctor's services without objection but did not agree on the exact fee).

               b.  Implied in Law: An implied in law contract arises from implied obligations. It is a method to impose justice and avoid unjust enrichment (plumber fixes a burst or a leaking pipe without the homeowner's knowledge). This doctrine is also called in quasi-contract or quantum meruit and allows recovery of the reasonable value of the services performed.

     F.  Acceptance by Promise or Act

          1.  Bilateral:  If the original promisor's offer is seeking a return promise for acceptance (I promise to pay you $1,000 if you promise me you will prepare my will or promise to ship the goods), the contract is bilateral. Both parties are both a promisee of a right and a promisor of an obligation; breach of either obligation can be the basis of a lawsuit.

          2.Unilateral:  If acceptance is in the form of a requested action (I promise to pay you $1,000 if you prepare my will or ship the goods), the contract is unilateral. If it is uncertain whether the contract is bilateral or unilateral, the objective intent of the parties controls. Reward offers always seek performance and thus are unilateral contracts.

     MBE Tip:  Vague wording in the offer - as to whether the requested acceptance may be rendered by a promise or only by performance - suggest consideration of a unilateral contract.

     G.  Executory Contracts

     An executory contract is where there is not yet full performance. If wholly executory, only promises have been given, and there has been no performance by either contracting party. Partial executory means there has been some performance by at least one party. It may also mean that one side has completely performed while the other party has only promised. The contract is executed when both parties have fully performed and no obligations remain.

     H.  Divisible Contracts

     A divisible contract is capable of being divided into more than one portion (lot), each of which is independently enforceable. This interpretation may validate performance for part performance thus requiring an equivalent payment amount. This concept may apply even though performance of a subsequent portion does not conform to the contract's specification.

     MBE Tip:  Interpreting a contract as divisible is a way a court can avoid a total forfeiture.

 

STOP!   Go to page 1-Q1 and work learning questions 1 to 7.

 

II.  OFFER

     A person who makes an offer is called an offeror, and the person to whom it is addressed is called an offeree. An offer is usually in the form of a promise. A valid offer must include present contractual intent to be bound, certainty and definitiveness of essential terms, and communication to the offeree. Upon receipt of the offer, a power of acceptance is created in the offeree. If the offeree exercises this power, a contract is created.

     A.  Definiteness

     The common law requires an offer to be clear, unambiguous, certain and definite on all material terms. The offeror's manifest actions must be sufficiently definite so as to indicate a clear intention to enter a present binding contract. ("I am thinking about selling at $1,000." or "would you paint my house for $5,000?" are only pre-offer forms of negotiations.)

          1.  Objective Test:  Courts apply an objective test (how would a reasonable offeree have interpreted the offeror's apparent expressions of intention?). The more definite the offeror's apparent intent to be bound, the more likely the expressed communication will be characterized as a valid offer.

          2.  Examples:  The offer must rise above mere puffing, jest, or an invitation/ solicitation to a potential buyer to submit offers such as, "I am looking for a buyer willing to pay $1,000 for this car." Also not rising to the level of a formal offer is an advertisement, price list, price quotes, or mere inquiry such as "will $1,000 buy this car?"

      MBE Tip:  To qualify as an offer it must create the power of acceptance in the offeree. Even if the acceptance seems quite definite, there can be no contract if the offer is too indefinite.

     B.  Open Items

     The treatment of terms not addressed in an offer depends upon whether the court can determine what the parties intended.

          1.  Common Law:  Under the traditional common law, the parties, subject matter, price, quantity, and time of performance must be specified. A contract to purchase land must contain an adequate description of the property and the price.

          2.  UCC Missing Term Treatment:  The UCC recognizes that the actions and conduct of the parties may establish an agreement even though terms are left open. UCC authorized or default terms may be used to fill in the gaps (missing term) if there is a reasonable basis for giving an appropriate remedy. If the price is missing, the court may impose a reasonable market price.

               a.  CPU Order of Imposing Terms:  The court looks to three sources in order to determine what term to impose. First, the course of performance in the existing contract if there was prior performance. Second, any past course of dealings in prior contracts between the parties. Third, usage of trade in the industry.

               b.  Result:  The UCC's "gap filling" function thus fosters the formation of a greater number of sales contracts than would be the result under the common law. [UCC 2.204]

     MBE Tip:  Wherever you spot a UCC missing term in the question, look for a dual issue involving open items and the Parol Evidence Rule. The CPU "course of performance," "past course of dealings," and "usage of trade," are exceptions to the Parol Evidence Rule and are the evidence to which the Judge will look to determine what is a "reasonable" term to impose in the circumstances.

     C.  Revocability

     Offers are generally revocable (can be withdrawn) at will by the offeror prior to acceptance. Revocations are effective when received by the offeree. If a public offer (such as a reward), an effective revocation must be made with comparable publicity.

          1.  Common Law:  A promise to hold open an offer is not enforceable under the common law; the offer is revocable at will. Revocation may be made by any act or statement that is inconsistent with a continuing intent to enter into a contract.

          2.  Option With Consideration (Option Contract):  An exception applies in the case of an option. An option is an irrevocable promise supported by independent consideration flowing to the offeror. For example, the buyer of land offers to pay $10 if the seller will hold the sales price offer for the land open for a week period of time. The consideration creates a separate option contract that is irrevocable for the specified period of time. Rejections and/or counteroffers do not terminate an option contract.

          3.  UCC Firm Offer:  A "firm offer" is a signed writing by a merchant which gives explicit assurances that the offer will be held open. [UCC 2.205]

               a.  Irrevocability:  A firm offer may not be revoked or withdrawn for the stated period of time up to three months. This concept applies even if consideration is lacking. If no time period is specified, a firm offer is irrevocable for a reasonable period of time. If the firm offer is for four months, the offeror regains the power to revoke during the final month.

               b.  Rejection and Subsequent Acceptance:  An offeree's rejection of a "firm offer" does not terminate the offer as would occur under the common law. Thus, under the UCC "firm offer" principle, an offeree's acceptance subsequent to an earlier rejection may result in a valid contract.

     D.  Termination

     Termination of an offer (by the offeror) can only occur before the offeree accepts.

          1.  Usual Situations:  Termination will be effected by a revocation which may be expressed by the offeror or if the offeree learns of the sale of the item to another. Also the expiration of the time period stated in the offer; a time period begins to run on the date the offer is received by the offeree. Termination is by operation of law if there is death or insanity of the offeror, the subject matter of the offer becomes illegal, or the subject matter is destroyed.

          2.  Refusal or Rejection:  The receipt of an offeree's unequivocal refusal or rejection will also terminate an offer such as "I refuse to accept" or "I reject your offer."  Depending on the language, such a communication may also create a counteroffer that can be accepted by the original offeror; the parties change position. For example, "I accept your offer only if you agree to pay in advance."

     E.  Contractor and Subcontractor Rules

     Special rules apply to a general contractor's solicitation of bids from subcontractors.

          1.  Bids by Subcontractors:  Bids by subcontractors are usually treated as irrevocable offers until the general contractor prime bid is awarded or rejected. This is an application of the doctrine of promissory estoppel (see IV E below).

          2.  Contract Formation:  A contract does not exist until the general contractor accepts the subcontractor's bid or "offer."

          3.  Low or Suspect Bids:  The general contractor may not rely on a low subcontractor bid if the offered price is unreasonably below the other bids. Similarly, the subcontractor may not be required to perform if the general contractor has reason to believe that there might have been a mistake in the submitted bid. (See mistakes discussion below.)

 

STOP!  Go to page 1-Q2 and work learning questions 8 to 12.

 

III.  ACCEPTANCE

     MBE Tip:  Regardless of how strong the responsive communication appears to be, a contract can only result if the acceptance is in response to a valid offer.

     A.  In General

     The offeree has the power to accept an open offer that has not been revoked or terminated and thereby create a contract. Acceptance may be an unequivocal return promise in a bilateral contract. Acceptance of a unilateral contract requires performance.

          1.  Intended Offeree:  Offers are not assignable and the power of acceptance is thus personal to the offeree. Acceptance must be made by the party to whom the offer was directed. Reward offers are intended to be accepted by any member of the public.

          2.  Terms:

               a.  Stipulated in Offer:  If the offer stipulates details of the method, manner, means of communication, price, or timeliness of acceptance, such terms are binding on the offeree.

               b.  Stipulated in Acceptance:  If the offer does not stipulate a particular term, the analysis shifts to the acceptance if it contains the same particular term. Under the common law, the original offeree becomes the new offeror of a counteroffer.

               c.  In Neither Offer nor Acceptance:    If neither communication contains the term and there is a reasonable basis for finding a contract, the court may provide a UCC missing term. A reasonable price may thus be imposed. [UCC 2.204 and 2.305]

     MBE Tip:  The offeror is the master of the terms in her bargain; such terms are generally binding on the offeree. This concept is frequently tested on the exam.

          3.  Knowledge Necessary:  Acceptance by the offeree must be made with knowledge of the offer. Unknown reward offers are frequent on the MBE. Crossing offers or performance without knowledge of an offer does not create a contract.

          4.  Objective Standard:  Whether an offeree's actions constitutes acceptance is measured by a reasonable person standard; this is the outward manifestation of assent.  An acknowledgement by the offeree that the offer was made or "thank you" is insufficient.

          5.  Silence:  Silence is not usually unilaterally imposed under the common as constituting acceptance.

               a.  Exception:  An exception exists if the parties expressly or through their past course of dealings intend silence to constitute acceptance of an open offer. The custom of a trade or industry may also recognize silence as acceptance. In these situations, there may be a duty to speak to avoid contract formation.

               b.  Unsolicited Items:    Unordered newspapers, periodicals, and other unsolicited goods or services provided are deemed gifts. The receiver has no duty to return or pay for such items received in many states.

          6.  Counteroffer:  A response to an offer that specifies different terms is known as a counteroffer.  Such a response is a rejection of the original offer and the extension of a new offer in its place.  For example, one party offers to buy a good at $40.  If the other party responds, "I will sell it for $50."  This is not an acceptance but rather a rejection and a counteroffer.  The original offeror could accept at $50.

     B.  Unilateral Contract

     A unilateral offer requires acceptance in the form of performance of the act requested within the specified time limit; a promise to perform is not acceptance. Acceptance of a unilateral offer requires complete performance by the offeree unless other terms are agreed.

          1.  Offer Revocation - Common Law:  It would be inequitable to allow the offeror to revoke after the offeree has made a substantial beginning of performance. Substantial part performance by the offeree is considered sufficient under most states' common law to prohibit an offeror's revocation. The Restatement of Contracts goes one step further and deems mere commencement of performance sufficient to temporarily suspend the offeror's power to revoke.

          2.  UCC Bilateral Acceptance:  An ambiguous UCC offer looking to (but not expressly demanding) current shipment of the goods may be accepted by either an actual shipment or a promise to ship. Note that this provision may convert a unilateral offer into a bilateral contract. To eliminate the possibility of an acceptance by promise, the offeror should explicitly state that a mere promise to ship the goods is not acceptable to constitute acceptance. [UCC 2.206(1)]

          3.  UCC Notification Necessary:  The offeree must notify the offeror she is beginning performance to bar the offeror's right to revoke. The beginning of performance without notification is ineffective to create acceptance under the UCC. [UCC 2.206(2)]

          4.  Reward Offers:  A frequent MBE question is an advertisement offering a reward; the offeree must be aware of the reward offer at the time of performance. Read the conditions of the reward offer very carefully; are all conditions met? An exception is a bounty offer; knowledge is not necessary to collect a bounty in many states.

     MBE Tip:  Unilateral contract requires the offeree's performance to create the required acceptance, while bilateral only requires a promise indicating an intent to be bound.  A court may find a contract by interpreting the offeree's action of performance as an acceptance.

     C.  Output and Requirement Contracts

     A contract that measures the quantity by the total output of a seller or the total requirements of a buyer is enforceable. This is the only exception to the rule that a UCC contract must state the quantity. [UCC 2.306]

          1.  Mechanism:  Such a contract means the actual output or requirements as may occur in good faith.  Be on the alert for an illusory promise such as, "I will buy as much as I will order."  This section is limited in that a quantity may not be tendered or demanded if it is unreasonably disproportionate to a stated estimate or prior output or requirement quantities.

          2.  Responsibilities of Parties:  An output or requirement exclusive dealings contract imposes an obligation on the seller to use her best efforts to supply the goods and on the buyer to use best efforts to promote the product. The UCC section comments state that the seller under such a contract is expected to refrain from supplying another dealer or agent within the exclusive territory, if such is specified.

     D.  Sales by Auction

     The bid is the offer and the fall of the hammer the acceptance. A bid may be withdrawn until the fall of the hammer. An auction sale is "with reserve" unless the goods are stated in explicit terms to be put up "without reserve."

          1.  With Reserve:  "With reserve" means the auctioneer retains the right to withdraw the goods before completion of the auction.  It is not necessary to accept the highest bid.  Similarly the bidder may withdraw a bid before the fall of the hammer and this retraction does not revive the prior bid.

          2.  Without Reserve:  "Without reserve" means the auctioneer has made an irrevocable offer to sell the goods to the highest bidder.  Once the bidding starts the auctioneer must accept the highest bid even if this amount is less than the seller desired.  A bid may be withdrawn until the fall of the hammer. [UCC 2.328]

     E.  Conditional or Additional Items

          1.  Common Law:  A valid acceptance must be unequivocal, unconditional, and a mirror image of the offer under the common law.  A reply that adds qualifications, conditions, or additional terms is not an acceptance.  Such a communication is usually treated as a rejection and counteroffer that vests in the offeror the power to accept the counteroffer.

          2.  Mere Inquiry:  A mere inquiry about further or different terms or a request for clarification is neither acceptance nor rejection.  This may be treated as crossing offers.  Examples include "Interesting offer, will you accept $X," "I can pay $X," or "I would be willing to pay $X."  The original offer stays open and a second offer may be created.

          3.  Acceptance With a Demand for Different Terms:  A response that affirmatively accepts the offer but specifies different terms is known as an acceptance with a demand for different terms.  For example, one party offers to sell an item for $40 and the other party responds, "I accept but will only pay $35," or "I accept subject to the condition of being able to secure financing to buy the land." These are to be treated as a rejection that terminates the original offer and a counteroffer may be created.

          4.  Request for Additional Terms:  A grumbling acceptance that "requests" minor additional terms can still be a valid acceptance unless the additional terms are an express condition of the acceptance.  "I accept; will you please pay an extra $2,000?" A contract is formed and the additional price is treated as a proposal for an addition to the contract.

     MBE Tip:  The exact wording of the acceptance is very important. Almost any response by the offeree creates a counter-offer and if there is a subsequent communication by the offeror it may be deemed an acceptance.  Read each stem of each question carefully so that you are sure whether the "final controlling" offer is made by the original offeror or offeree; likewise with the acceptance.

          5.  UCC Treatment:  The UCC rejects the literal "mirror-image" acceptance rule.  Unless the offer specifies to the contrary, acceptance in any manner and by any medium is adequate. [UCC 2.206(2)]

               a.  Minor Additional Terms:  An acceptance with proposed consistent minor additional terms is allowed under the UCC. Look for "add-on"  terms not specified in the offer.  Acceptable minor new terms include such new terms as fixing a reasonable time for complaints, imposing credit terms and interest on overdue invoices, or limiting the right to reject goods within trade tolerance.  Unless both parties are merchants, these minor additional terms are treated as mere proposals that the offeror must expressly approve. [UCC 2.207]

               b.  Merchant to Merchant:  Between merchants, the minor new additional terms become a part of the contract.  To avoid the additional terms, the original merchant offeror must notify the offeree of an objection to their inclusion within a reasonable period of time.  If either party is not a merchant or the additional terms materially alter the original bargain, explicit assent to the additional terms by the offeror is required.

               c.  Materially Alter Bargain:  The comments to UCC 2.206 give examples of clauses that materially alter the bargain of the original agreement.  The concern is that material new terms may result in surprise or hardship if incorporated without the other party's express awareness.

                    (1)  Examples:  Included is an arbitration clause, provisions negating standard warranties, a clause reserving to the seller the right to cancel upon a buyer's failure to pay an invoice when due, or a clause requiring that complaints and/or rejections be made within a time period materially shorter than customary or reasonable.  These terms are not minor and thus are excluded from the automatic inclusion rule.

                    (2)  Treatment:  An acceptance containing such terms would still create a contract with the new material terms treated as proposals for addition.

     MBE Tip:  UCC 2.207 is heavily tested on the MBE. Determine first if the contract is for "goods" and if there are "add-on" terms in the acceptance.  Second, are both parties merchants?  If so, any minor additional terms are binding unless there is an objection.  Third, remember the above material terms.  Fourth, if either party is not a merchant, there may still be a contract created, but the offeror must agree to the additional terms to be included.

     F.  Conflicting Terms

          1.  Common Law:  Where the offer and acceptance differ on a particular term, the common law rule is that a non-conforming acceptance is deemed to be a counteroffer. This leads to a "battle of the forms" as the parties' roles change.  Acceptance of the last counteroffer may be by performance of the other party.  The terms of the last communication usually prevail under the "master of the bargain" - "last shot"  rule.

          2.  UCC:  The UCC addresses the "battle of the forms" by assuming both parties object to the other's term.  The conflicting terms are to be disregarded (or "knocked out") and do not become a part of the contract.  The contract consists of the terms upon which both parties have expressly agreed plus any applicable code "gap filling" provision. [UCC 2.207]

     MBE Tip:  Conflicting terms, such as different performance dates, are heavily tested on the MBE.  Frequently, neither party explicitly accepted the other's term, but there was performance.  Unlike additional terms, both parties do not have to be merchants.

     G.  Effective Date

     The effective date of all communications is usually upon receipt by the other party.

          1.  Revocation by Offeror:  If the offeror revokes or withdraws the offer prior to acceptance, there is no contract since the offer is no longer open.  Under the common law, revocability is generally at will, unless there was consideration paid to the offeror.  Revocations are effective on receipt by the offeree.

          2.  Mailbox Rule:  The common law "mailbox rule" applies where parties are communicating at a distance.  If the terms of the offer require that acceptance is effective only on receipt, the mailbox rule is not available to the offeree; acceptance would only then be effective on receipt by the offeror.

               a.  Acceptance is Effective On Dispatch:  The rule allows acceptance upon dispatch as long as the offeree uses authorized means or medium of communicating the acceptance. This includes the same means as the offeror used or faster. (Letter offer authorizes acceptance by letter, telegraph, fax, e-mail, or messenger.)

               b.  Offeror's Revocation or Unawareness:  The mailbox rule might result in a valid acceptance (and thus a contract) even if the offeror had sent a previous revocation or was unaware of acceptance.  Because there is a contract on dispatch, the parties are theoretically bound even if the acceptance is lost in transit to the offeror.

               c.  Unauthorized Means/Options:  If an unauthorized (slower) medium of communication is used, the acceptance is only effective upon receipt. Also, the exercise (in effect an acceptance) of an option (irrevocable offer supported by consideration) is only effective when received by the offeror; the mailbox rule does not apply.

     MBE Tip:  The mailbox rule and situations where it doesn't apply - acceptance of an option, slower means, or precluded in the offer - are heavily tested on the MBE.

          3.  Rejection Exception:  An exception to the mailbox rule applies if the offeree first rejects and then subsequently attempts to accept. In such a case, the effective date of acceptance goes back to the general rule that is the date of receipt by the offeror. The effectiveness of the acceptance would depend on which arrived first, the rejection or the subsequent acceptance. This is also heavily tested on the MBE.

     MBE Tip:  For there to be a valid subsequent acceptance there must be an open offer. If the prior rejection reaches the offeror, it will terminate the offer. Thus a tip that this provision is being tested is that the rejection was delayed or lost in transmission to the offeror. This is necessary so that the subsequent acceptance reaches the offeror before the rejection.

          4.  UCC Treatment:  The mailbox rule also applies to acceptances under the UCC. The statute liberalizes the common law treatment by requiring that acceptance must only be made in a reasonable manner and by any reasonable medium. This may be slower than the offer such as a letter acceptance in response to an e-mail, telegraph, or telephoned offer. [UCC 2.206]

          5.  3-Day Cooling-Off Rule:  The Federal Trade Commission (FTC) allows a consumer a three-day period to cancel a contract.  To qualify for this cancellation right, the goods must be purchased in the consumer's home or at a location other than the merchant's main place of business.  The salesman must inform the consumer of the cancellation right at the time of the sale.

     H.  Approach to Offer-Acceptance Cross Problem

          1.  Skeleton for Analysis:  Offer/acceptance cross-problems are often tested on the MBE. To sort out the various communications and keep the relevant dates straight, you might want to consider the following skeleton:

         PARTY                COMMUNICATION                SENT                RECEIVED                EFFECTIVE

          2.  Example:  A offered in a June 1 letter to sell land to B without dictating any required details about effective acceptance.  B received the offer on June 2.  B, on June 2, sent a rejection by mail, but A never received it.  On June 3, A revoked her offer by letter.  On June 4, B sent an acceptance letter that was received by A on June 6.  On June 5, A's revocation letter was received by B.  Did a contract result?

  • PARTY COMMUNICATION SENT RECEIVED EFFECTIVE
    A Offer 6/1 6/2 6/2
    B Rejection 6/2    
    B Acceptance 6/4 6/6 6/6
    A Revocation 6/3 6/5 6/5

     Answer:  No.  B's attempted rejection of 6/2 operated to terminate the use of the mailbox rule.  (If the rejection would have been received by A, the offer would terminate.)  Therefore, a subsequent acceptance can only be effective upon receipt by the offeror.  Acceptance on 6/6 is too late because A's revocation was effective on 6/5.

     MBE Tip:  Every MBE exam has multiple contract formation questions containing offer and acceptance issues.  You must understand every detail of the topics we have just covered.

     I.  Formation Checklist

     First, look to the offer - were acceptance terms dictated by the offeror?  If so, they are binding on the offeree.  Second, analyze the wording of the purported acceptance.  Was this communication an acceptance, mere inquiry, or an effective rejection such as an acceptance with a demand for difference terms?  Third, if an acceptance, what was the effective date?  Look for the mailbox rule.

 

STOP!    Go to page 1-Q3 and work learning questions 13 to 21.

 

IV.  CONSIDERATION

     The general rule is that a promise is not enforceable unless it is made in a bargained-for exchange.  Consideration provides the "quid pro quo" (something for something) to bind the parties to their naked promises.

     A.  In General

          1.  Legal Sufficiency:  Consideration must have legal sufficiency and be bargained for.

               a.  Test:  Sufficiency is satisfied if there is a benefit to the promisor or a detriment to the promisee.  The promisee may incur a future detriment such as something that one is not legally obliged to do; an example is agreeing to quit smoking or forebear in filing suit.  Being hired for a new job, a pay raise or a promotion given to an existing employee may provide the consideration for an employee's non-compete promise.

               b.  Unilateral Contract:  In a unilateral contract, the consideration detriment may be the offeree's performance.

          2.  Mutuality, Gifts, and Past Consideration:  The parties' exchange does not have to be of equal value, but there must be mutuality of consideration such as mutual promises or a contemporary exchange.  A promise to make a voluntary gift lacks consideration because it is not a bargained-for exchange.  Also frequently asked on the MBE is where the requested act has already been performed such as "In consideration of your past act, I promise to pay;" past consideration is no consideration.

          3.  Illusory Promises, and Aleatory Contracts:  Be alert for an illusory promise, such as an expression of a "moral commitment," a statement, "I will perform if it suits me," or an option revocable at will.  Distinguish this from an aleatory contract where performance of one party's obligation is conditional upon some extrinsic future event such as "I will pay if I win the lottery;"  this may be enforceable if the condition occurs.

     MBE Tip:  Past consideration, gifts, and illusory promises are frequent on the MBE.

 

 

 

 

Last updated on 9/9/2010 3:40:32 PM