CONTRACTS FORMATION MODEL ANSWER

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1 MODEL ANSWER Please compare your answer to the sample below, noting the issues you missed, whether your rule statements were included and completely stated, and whether you included the relevant key facts in your analysis of each issue. Also notice how the organization of your answer compares to the sample. Also, please pay close attention to the comments provided following the model answer. They provide guidance on how to best evaluate your own work and on how to improve when analyzing similar issues in the future. Continued on next page

2 2 MODEL ANSWER: I. Buyco v. Sellco A. Was a valid contract formed between Buyco and Sellco? It must be established that a valid contract was formed in order for Buyco to assert a cause of action against Sellco. A contract requires mutual assent which is generally established when one party s offer is met by the other s acceptance, and consideration. Because this is a contract for the sale of goods the UCC, rather than the common law, will apply. 1. Did Sellco make a valid offer to sell the generator to Buyco? An offer is a statement made by one party (the offeror) to the other party (the offeree) which contains the essential terms of a contract and reasonably is intended to create the power of acceptance in the offeree. Here, Sellco s letter to Buyco stating that Sellco "offers to sell the generator to Buyco for one million dollars... delivery within three months from acceptance" is a valid offer because it contains the essential contract terms (e.g., price, quantity, subject matter and time for performance were all stated) and was intended to give Buyco the power to accept the offer. Therefore, a valid offer was made. 2. Was Sellco s offer still open for acceptance at the time it was accepted by Buyco? As a general rule, an offer is revocable at any time before acceptance, even where it expressly states that it will remain open for a certain time. Thus, no contract was formed if Sellco effectively revoked its offer prior to Buyco s acceptance.

3 3 a. Did Sellco revoke its offer before or after Buyco s acceptance? The facts indicate that ten days after Buyco received the offer, it received another letter from Sellco stating that "we hereby revoke our offer." On this same day, Buyco decided to accept Sellco s offer. According to the general rule, a revocation is effective upon receipt. However, an acceptance is effective upon dispatch (by reasonable means). If Buyco had not only decided to accept, but had also mailed its acceptance prior to receipt of Sellco s revocation, then Buyco would have accepted prior to revocation and a valid contract would have been formed. b. Was Sellco s offer irrevocable? If the offeror promises to hold the offer open for a certain period, the promise may render the offer irrevocable if it is a "firm offer" or is supported by consideration or detrimental reliance. 1. Was Sellco s offer a Firm offer"? Sellco stated in its letter that its "offer will be held open for one month." U.C.C provides that when a merchant makes a written, signed offer to buy or sell goods including a promise to hold the offer open, the offer is irrevocable for the period stated, not to exceed three months. Thus, Sellco s written offer to sell the generator (goods) which it stated would be held open for one month will be irrevocable for that period if Sellco signed the letter and Sellco is a "merchant." Most likely, Sellco signed its offer (any mark or stamp of the company will suffice). However, it is doubtful that Sellco is a "merchant" with respect to this transaction. According tothe U.C.C., a "merchant" is one who deals in the kind of goodsinvolved or holds himself out as having special knowledge or skills relating to the goods involved. Sellco does not normally sell generators and has dealt with Buyco s subsidiary regularly, but not with Buyco. Thus, it appears that Sellco did not deal with generators or hold itself out to Buyco as having special knowledge in the area. Because Sellco was not a "merchant", the offer was not a "firm offer". 2. Was Sellco s offer to hold the offer open supported by consideration or detrimental reliance? Sellco s promise to hold its offer open for one month was not supported by consideration. Buyco gave nothing in return but a thank you. However, modern courts

4 4 will allow that an offer may become irrevocable for a reasonable time if the offeree reasonably relies on the offer to his or her detriment and such reliance is reasonably foreseeable by the offeror. Here, Buyco wrote a letter responding to Sellco s offer indicating that it was going to immediately construct facilities to house the generator but would hold off an acceptance for a few weeks in search of a better price. A modern court should rule that Sellco had knowledge of facts (it acknowledged receipt of Buyco s letter) which would lead it to reasonably foresee Buyco s detrimental reliance (construction of housing facilities at cost of $100,000). A modern court could conclude that Sellco s offer was irrevocable for a "couple of weeks" as relied upon by Buyco. 3. Did Buyco accept Sellco s offer? A contract cannot be formed absent acceptance by the offeree. The facts state that Buyco decided to accept the offer then received the revocation. On these facts, Buyco never communicated its acceptance to Sellco. Silence cannot act as an acceptance unless the offer or the previous conduct of the parties permit acceptance by silence. Moreover, Buyco s letter responding to Sellco s offer clearly indicated an unwillingness to be bound--they wanted to shop around for a better price before obligating themselves to Sellco. Buyco has therefore not communicated an intent to be bound, and there has been no acceptance and therefore no contract. 4. Was the contract supported by consideration? A contract must be supported by consideration in order to be valid. Consideration is a bargained for exchange. Had the parties reached mutual assent, their promises must have been supported by consideration in order to be enforceable. Here, consideration was present in the form of money in exchange for goods. However, Because there was no valid acceptance, no contract was formed and Buyco does not have any rights against Sellco.

5 5 GUIDANCE: So how did you do? Most students tend to freeze up when they encounter a contracts essay because they don t know where to start. Here s a tip: Always remember that Contracts is divided into three main areas: Formation, Performance, and Remedies. Anytime you see a contracts problem, you should want to make sure it is properly FORMED. If it is not, it is not valid and no performance is due. If it is properly formed, then look to see if performance is waived or excused. If it is not waived or excused, then PERFORMANCE is due. If one of the parties fails to perform or performs poorly, then he is in breach of contract. If there is a breach of contract, then you would determine what REMEDIES are available to the non-breaching party in order to compensate him for the breach. Sounds simple, right? It can get pretty complicated, but having this general structure in your mind will help when you sit down to confront a fact pattern. At this point in the course, we are only concerned about contract FORMATION, so this is the only issue on which we need to focus for this essay. Otherwise, to identify what general issue is being tested, READ THE CALL OF THE QUESTON FIRST. This should be the very first thing you look for. It is usually at the end of a fact pattern. You decide that this is a Contracts Question. That s an important start, not to be minimized on the FYLSE. Here it is: Does Buyco have an enforceable contract with Sellco? Discuss. Many essay questions provide insight through the names of the parties. In this instance, Buyco and Sellco, provide the clue of a buyer company and seller company, so the issue most likely revolves around a purchase contract. After reading the fact pattern, I notice several facts revolving around negotiations, so I know I need to focus on Formation issues. Since I have memorized my Contracts checklist of

6 6 possible issues, I am able to work through the facts to determine what formation issues need to be discussed as I write this essay. So let s start! With any Contracts essay, first determine whether the UCC or common law applies. Remember, the UCC applies to the sale of goods, the common law applies to every thing else. Note that some students mess up here, finding that the UCC only applies only when both parties are merchants this is not the case. The UCC applies to the sale of goods whether both parties are merchants or not. However, some UCC provisions will apply only if both parties are merchants. After determining whether the UCC or common law applies, if you are dealing with a formation issue, as you are here, always look to see if mutual assent has been achieved. Remember to define the rule first: Mutual assent is achieved through the process of offer and acceptance. Be sure to provide definitions of offer and acceptance as well. Then, work through each part of the negotiation to find the offer and acceptance. Sometimes it s pretty easy to find the offer and acceptance. Other times, it is more difficult. Sometimes, you may find that the first few possible offers may not be valid for whatever reason. Perhaps they do not contain definite terms or are not communicated to an identified offeree. It is your job to work through each possible offer to find where an offer has been made. DO NOT SKIP through a discussion to conclude where an offer was made without working through this process if there is more than one possible offer. Before you discuss acceptance, look to see if the offeror tried to revoke the offer prior to acceptance. If he did, then you ll need to include a discussion of whether the offer was still open at the time it was accepted. If there was no attempt at revocation, there s no need to discuss this issue. However, here, we have a problem that needs to be addressed. When addressing an issue like this, you ll always want to start with the general rule: (An offer is revocable at any time before acceptance.) Then, analyze the facts under the rules. Here, because we have fact that demonstrates letters crossing in the mail, we can t analyze the facts unless we understand the mailbox rule. If you missed this,

7 7 discussion, make sure to go back and review when an acceptance and revocation are effective. We also have to remember that we are dealing with the UCC and we have a special rule that applies to merchants when dealing with revocation issues. We therefore need to analyze whether a firm offer has been made. Because we are keen readers of the facts, we can conclude that both parties are probably not merchants and we should therefore look to see if we could make an argument that consideration or detrimental reliance could be used to hold the offer open. If you missed this discussion, it s either because you didn t identify it is a discussable issue when working your way through your mental contracts issue checklist, or you are not strong on the substantive law in this area. Either way, a review would be worth your time if you found yourself struggling a bit on this discussion! After analyzing whether an offer has been made and whether it is still open for acceptance, you ll need to discuss acceptance. Again, sometimes this is a pretty straightforward issue. Other times, it can get complicated, so just be sure to keep a mental checklist of possible issues that can arise with a possible acceptance and know the applicable rules. After discussing mutual assent, you must discuss CONSIDERATION. A contract cannot be validly formed unless it is supported by consideration, so please be sure to ALWAYS discuss consideration if you find yourself analyzing a contracts formation essay. Here, the consideration is money in exchange for a generator. This issue was fairly straight forward! Hint: When consideration is otherwise lacking, remember to look to see if promissory estoppel may serve as a substitute! Finally, when analyzing a contracts formation essay, don t forget about Defenses to formation. The two biggest ones are the Statute of Frauds and mistake, so keep an eye out for these issues as you read through your fact patterns! There were no defenses at issue here, so they were not included in the discussion. I hope you found this exercise helpful! Good luck writing your first contracts essay!

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