Governing law
- Test whether a contract is enforceable
For US law students: work a fact pattern through governing law, offer, acceptance, consideration and defenses to a conclusion.
General US common law and UCC Article 2 as enacted by the states. States vary, so check your jurisdiction. Study aid, not legal advice.
On an exam, state each issue, the rule, how the facts apply and a conclusion, even when the answer seems obvious.
- Is the deal a sale of goods?
Goods are things movable at the time they are identified to the contract, including specially manufactured goods and growing crops (UCC 2-105). Money, securities, land and services are not goods.
- Goods only: go to step 3, Apply UCC Article 2
- Services, land or other: go to step 4, Apply the common law of contracts
- Goods and services: go to step 5, Which part predominates?
- Apply UCC Article 2
Article 2 also has special rules for merchants, people who deal in goods of the kind. Note whether each party is one.
Then go to step 6, Did one party make an offer?
- Apply the common law of contracts
Then go to step 6, Did one party make an offer?
- Which part predominates?
Courts may use the predominant factor (predominant purpose) test. Is the contract mainly a service with goods incidental, or a sale with labor incidental?
Look at the contract's wording, how the price splits between goods and work, and what the seller's business is. Some courts use a gravamen of the action test instead.
Many states have enacted the 2022 UCC amendments. They apply the UCC to a mixed contract when goods predominate, and only to the goods part when services predominate, unless the parties agree otherwise. Check your state.
- Goods: go to step 3, Apply UCC Article 2
- Services: go to step 4, Apply the common law of contracts
Offer
- Did one party make an offer?
An offer is a communication that would lead a reasonable person to expect that accepting it creates a binding contract.
Under the UCC, a contract can be made in any manner that shows agreement, including conduct, and open terms don't defeat it if the parties meant to contract (UCC 2-204).
- Was the offer still open when the other side accepted?
An offer ends by rejection, by counteroffer (which acts as a rejection) or by revocation communicated before acceptance. An option contract keeps it open.
Acceptance
- Which law governs acceptance?
- Common law: go to step 9, Does the acceptance match the offer exactly?
- UCC Article 2: go to step 13, Is there a definite expression of acceptance?
- Does the acceptance match the offer exactly?
The mirror image rule. Acceptance must be an unconditional assent to the offer's terms as they are. A reply that changes terms is a counteroffer.
Mailbox rule: an acceptance sent by an invited medium is effective when sent, unless the offer says otherwise or it is an option contract.
- Did the offeror accept the counteroffer, by words or conduct?
- Contract formed on the counteroffer's terms
Then go to step 20, Was there a bargained-for exchange?
- No contract. The reply was a counteroffer
The counteroffer rejected the original offer, and nobody accepted the counteroffer.
Check: did the parties perform anyway? Conduct can still show acceptance of the last offer made.
- Is there a definite expression of acceptance?
An offer invites acceptance in any reasonable manner (UCC 2-206). An order for prompt shipment can be accepted by shipping, even nonconforming goods, unless the seller says it is shipping only as an accommodation.
Under UCC 2-207(1), an acceptance works even if it adds or changes terms, unless it is expressly conditional on the offeror agreeing to them.
- Yes: go to step 14, Are both parties merchants?
- No, but both performed: go to step 19, Contract by conduct under UCC 2-207(3)
- No: go to step 21, Did someone make a promise the other side relied on?
- Are both parties merchants?
- Do the additional terms become part of the contract?
Under 2-207(2), between merchants they do, unless the offer limits acceptance to its terms, they materially alter it, or the offeror objects within a reasonable time.
- Contract includes the additional terms
Then go to step 20, Was there a bargained-for exchange?
- Contract on the offer's terms without the additions
Then go to step 20, Was there a bargained-for exchange?
- Additional terms are only proposals
If either party is not a merchant, additional terms are proposals the offeror can accept or ignore. The contract is on the offer's terms.
Then go to step 20, Was there a bargained-for exchange?
- Contract by conduct under UCC 2-207(3)
Terms are those on which the writings agree, plus the UCC's gap-filler terms.
Consideration
- Was there a bargained-for exchange?
Each side must take on a binding obligation. A gift, a vague "I might pay you", or a promise to do what you already had to do is not consideration.
- Did someone make a promise the other side relied on?
Promissory estoppel: the promisee reasonably and detrimentally relied, the promisor could have foreseen that reliance, and only enforcement avoids injustice.
- Yes: go to step 22, Enforceable through promissory estoppel
- No: go to step 23, No enforceable contract
- Enforceable through promissory estoppel
A substitute for consideration, not a full contract. On an exam, also argue whether recovery should be limited to reliance losses.
Check: was the reliance reasonable, and did the promisee actually change position?
- No enforceable contract
No bargain and no reliance means no contract. The promise is a gratuitous promise.
Check: look for restitution if one side conferred a benefit the other kept.
Defenses
- Must this contract be in writing?
The statute of frauds most commonly covers sales of land, contracts that can't be performed within one year, and sales of goods for $500 or more (UCC 2-201). States add other types. In states with the 2022 UCC amendments, the term record can replace writing, so check your state's wording.
- Is there a signed writing, or does an exception apply?
UCC 2-201 exceptions: a merchant's written confirmation not objected to within 10 days; specially manufactured goods; an admission in court; goods paid for and accepted, or received and accepted.
- Unenforceable under the statute of frauds
The contract may exist but neither side can sue on it.
Check: common law courts may also enforce through part performance or promissory estoppel in some states.
- Did a party lack capacity?
Capacity rules require a minimum age and a sound mind. A contract made by someone without capacity may be void or voidable.
- Voidable by the party who lacked capacity
A minor can usually choose to affirm or reject the contract. The adult party cannot.
Check: some contracts, such as those for necessaries, may still bind a minor under state law.
- Was assent obtained by deceit or threats?
- Misrepresentation: go to step 30, Voidable by the misled party
- Duress: go to step 31, Voidable by the threatened party
- Neither: go to step 32, Was there a mistake about a basic assumption?
- Voidable by the misled party
A false or misleading statement, or a material omission when there was a duty to speak, made to induce reliance.
Check: statements of opinion are generally not actionable unless the speaker didn't believe them or they implied false facts.
- Voidable by the threatened party
In contract law, duress makes the contract voidable, not void.
Check: was the threat improper, and did the victim have a reasonable alternative?
- Was there a mistake about a basic assumption?
- Both parties: go to step 33, Voidable for mutual mistake
- One party: go to step 34, Did the other side know or cause it, or would enforcement be unconscionable?
- No: go to step 36, Is the contract or a term unconscionable?
- Voidable for mutual mistake
The mistake must go to a basic assumption, materially affect the exchange, and the party seeking relief must not bear the risk of it.
Check: a mistake about value or a bad bargain is usually a risk the party bore.
- Did the other side know or cause it, or would enforcement be unconscionable?
- Voidable for unilateral mistake
Same elements as mutual mistake, plus either unconscionable enforcement or the other party's knowledge or fault.
- Is the contract or a term unconscionable?
Procedural: no meaningful choice or unequal bargaining power. Substantive: terms that unfairly favour one side. Courts usually look for both.
- Court may refuse to enforce the contract or the term
A court can strike the whole contract or sever the unfair clause. A severability clause makes severing more likely.
Check: unconscionability is judged at the time of formation, not by how things turned out.
- Is the purpose or performance illegal or against public policy?
- Yes: go to step 39, Unenforceable for illegality
- No: go to step 40, Enforceable contract
- Unenforceable for illegality
Courts will not enforce a contract whose purpose or performance is illegal, and may sever an offending term instead.
Check: if only one term is illegal, ask whether it can be severed and the rest enforced.
- Enforceable contract
Offer, acceptance and consideration are present, and no defense applies.
Check: next issues are usually the terms (parol evidence, interpretation), breach and remedies.