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Contracts - Whether a valid contract was formed

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Question 4: You are an associate with an upstate New York law firm. A senior partner seeks your assistance concerning a matter presented by a new corporate client, Chips, Inc. ("Chips"). Chips manufactures two different computer chips, one designed for laptop computers and one designed for handheld computing devices.

The partner shares with you that on October 28, 1999, Devices Corp. ("Devices") faxed Chips an offer to buy 1,000 chips for handheld computing devices. The offer provided for payment in the sum of $500,000 on delivery, which was to take place by December 15, 1999.

One day later, Chips faxed Devices written confirmation that Chips would provide the 1,000 computer chips as specified, but "would suggest shipment in the year 2000 on or before January 16, 2000 to avoid Y2K problems."

On January 9, 2000, Devices faxed Chips instructions for shipping the computer chips. That same day, Chips forwarded 1,000 computer chips to Devices. On January 10, immediately upon receiving the lot of 1,000 computer chips, Devices overnighted a check to Chips in the amount of $500,000. The following day, on inspecting the shipment, Devices noticed that the chips received were for laptop computers, not handheld devices. That same day, Devices received word that the ultimate purchaser of the handheld devices for which the chips were to be utilized was canceling its order. Devices immediately stopped payment on its $500,000 check, and notified Chips that, because the shipment was non-conforming, it was canceling the order. On that same day, but following receipt of the notice advising that the wrong chips had been delivered, Chips called Devices and said it would cure the problem immediately. Chips then forwarded the correct chips, which were received by Devices on January 15, 2000.

Devices inspected that shipment and found it to conform with the order. Nevertheless, Devices returned the entire shipment to Chips, accompanied by an acknowledgment of receipt form, which included an unequivocal general release of Devices for any and all claims Chips might have against Devices. The receipt form was signed by the supervising clerk in the shipping department of Chips and returned to Devices. When Chips presented the $500,000 check for payment, Devices' bank refused to honor it due to the stop payment order. On January 31, 2000, Chips brought suit against Devices seeking full payment for the chips.

Upon proof of the foregoing facts, Devices moved for summary judgment. The court granted the motion dismissing Chips' claim. The court found that there was a valid contract, but that Chips had breached the contract by initially delivering non-conforming goods and, in any event, Chips' representative had signed a release of all claims. The attorneys previously representing Chips have advised that an appeal is not worth pursuing.

The partner would like you to prepare a memorandum discussing:

1. Whether a valid contract was formed.

2. Whether, assuming a valid contract, Chips' non-conforming delivery afforded Devices the right to cancel.

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Solution Summary

Based on the case scenario, this soltuion repsonds to the three related questions on whether a valid contract was formed; whether, assuming a valid contract, Chips' non-conforming delivery afforded Devices the right to cancel; and whether the general release bars a successful claim by Chips.

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Issue 1

A valid contract was formed between Chips, Inc. and Devices Corp. The issue is whether the two companies entered into a binding contract such that a breach by either party entitles the other to adequate remedies. A valid contract is formed where there is an offer, namely a manifestation to enter into a valid contract by one party, and an acceptance of that offer by the other party, which indicates a commitment to be bound. In addition to a valid offer and acceptance, there must be adequate consideration or a bargained-for legal detriment or, as in New York, a bargained-for legal benefit. Finally, there must be no defenses to formation that would invalidate an otherwise valid contract entered into by the parties, such as the Statute of Frauds. In this case, the transaction involves the sale of goods. For this reason, Article 2 of the UCC is controlling. The computer chips represent goods and Chips was selling them to Devices. Because Article 2 is controlling, the faxed offer must only set out the quantity term, which it did here of 1,000 units and the writing must be signed by the person to be charged. Devices' offer and Chips' acceptance (confirmation) by fax represent signed offers and acceptances under New York law. Chips is a merchant under the facts presented because it is in the business of selling the laptop and handheld computers (it is a manufacturer). The offer by Devices was thus sufficient because the quantity term was set out and Devices manifested an intent to be bound on its offer. The acceptance by Devices was similarly valid because it indicated an intention to be bound and because it was faxed on Devices' paper. The additional terms added by Chips' acceptance became part of the contract as well under the UCC rules relating to contracts between merchants. It is unclear whether Devices is also a merchant, a corporation in the business of buying and selling these types of goods. But whether Devices Corp. was a merchant, the additional term, whether it needed to be considered separately or not, became a part of the contract because no objection was made to its inclusion within ten days by Devices. Given a valid offer and acceptance, there was adequate consideration because there was a bilateral contract and both sides promised to perform, Chips in exchange for $100,000 and Devices agreed to pay for the computer chips sent by Chips. Finally, since this is a sale of goods for over $500, the contract is within the Statute of Frauds. The statute was ...

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