Contract Law

Question 1

The six major issues to consider when dealing with contracts

Answer 1

1) Applicable Law (Common Law and Statutes, (i.e.) UCC Art. 2 for Sale of Goods)
2) Contract Formation
3) Contract Enforceability
4) Breach of Contract
5) Plainttiff’s Remedies for Defendant’s Breach of Contract
6) Third-Party Interests

Question 2

Definition: Contract

Answer 2

There are 2 main definitions:

1) Restatement (Second): A contract is “a set of promises for which the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” (See Rest. 2d Contracts Chapter 1 § 1.)
2) UCC (sale of goods): A contract is “the total legal obligation which results from the parties’ agreement.” (See UCC § 1-201(11)).

Question 3

Elements of a Contract

Answer 3

The three elements of most valid contracts are (“OAC”):

1. Offer
2. Acceptance
3. Consideration

Question 4

The 5 main types of contracts

Answer 4

Five main types are (“BUIEQ”):

1. Bilateral Contracts
2. Unilateral Contracts
3. Implied-in-Fact Contracts
4. Express Contracts
5. Quasi or Implied-in-Law Contracts

Question 5

Types of Contracts:

Bilateral Contracts Defined

Answer 5

• A contract formed by the exchange of mutual promises (i.e.) a promise for a promise.
• In other words, a contract of two promises; one from each party.

*Most contracts are bilateral contracts

Question 6

Types of Contracts:

Unilateral Contracts Defined

Answer 6

A unilateral contract in one in which the only effective mode of acceptance is by either:
1. the performance of an act by the offeree;
or
2. the nonperformance of an act that the offeree is otherwise entitled to carry out.

• Note that the offer in a unilateral contract can normally be revoked any time before a substantial beginning toward performance by the offeree,
• *Typical example of a unilateral contract: a reward offered to the public.

Question 7

Types of Contracts:

Express Contracts Defined

Answer 7

Express contracts result from words - written or oral.

*Contrast to those contracts formed by conduct

Question 8

Type of Contracts:

Implied-in-Fact Contracts Defined

Answer 8

Implied -in-Fact contracts are formed by conduct, or manifestations of assent other than language.

Example: If a seller ships goods without a customer’s order, the customer is not obligated to ship the goods back to the seller, or to pay for them, unless the customer takes the delivery and proceeds to use to resell the goods.

Question 9

Types of Contracts:

Quasi (Implied-in-Law) Contracts Defined

Answer 9

Quasi-contracts (“QC”) are not really contracts. Instead, QCs describe situations where there may be unjust enrichment.
“Unjust enrichment” may occur when: 1) one party enriches another; and 2) it is unjust for the benefited party to accept those benefits without paying for them.
The measure of recovery under QC is the value of the benefit conferred. The contract price is not the measure of recovery. The contract price is usually the highest possible value under QC.
Many casual arrangements in society can be deemed quasi-contracts when a party knowingly accepts a benefit from another party in circumstances where the benefit cannot be considered a gift.

Example: An exterminator who mistakenly treats wrong house with the owner’s knowledge can sue in court to get paid for the fair value of the benefit conferred by his extermination services if the owner who benefitted refuses to pay.

Question 10

Types of Contract:

Option Contract

Answer 10

An option contract is defined as “a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.” Rest. 2d § 45.
In other words, an option contract is a type of contract that protects an offeree from an offeror’s ability to revoke the contract.
Consideration for an option contract is required, as it is still a form of contract. Normally, an offeree can provide consideration for an option contract by
-paying money for the contract; or
-by rendering other performance; or
-forbearance.

Question 11

Validity-of-Contract Defenses to Prevent Enforcement

Answer 11

The three types of validity-of-contract defenses are as follows:

1. Void Contract: This is a contract that was never valid. A contract with no legal effect from the beginning (i.e.) to commit a crime.
2. Voidable Contract: This is a valid and binding contract; however, either or both parties can choose to annul or to ratify because of some legal grounds that include the following:
   (a) Lack of capacity or free will of a contracting party, or one contracting party’s undue influence over the other (e.g.) contracts with minors (under 18) or mentally ill parties;
   (b) Nondisclosure of one or more material facts;
   (c) Misrepresentation;
   (d) Mutual mistake; or
   (e) A material breach of the terms of the contract.
3. Unenforceable Contract: This is an otherwise valid agreement but may not be enforceable because of other contract defenses such as the Statute of Frauds or statute of limitations.

Question 12

Exception to “Lack of Capacity” Contract Defense

Answer 12

Generally, a contract is voidable by a defendant promissor who is a person without capacity to enter into a contract. EXCEPTION: A person without capacity to contract is legally obligated to pay for necessaries like food, shelter, clothing, and medical care.
Such liability is based on the equitable remedy of quasi-contract, not contract law. The policy behind this is to prevent unjust enrichment (i.e.) it is unjust for the benefited party to accept those benefits without paying for them.
The measure of recovery under quasi-contract is the value of the benefit conferred. The contract price is not the measure of recovery. The contract price is usually the highest possible value under quasi-contract.
EXAMPLE: A mentally incompetent tenant leases an apartment and does not pay rent to the landlord. The landlord cannot enforce the contract; however, the landlord may seek remedy in equity under quasi-contract, and the measure of recovery would be the value of the benefit conferred.

Question 13

Validity of Contract Defense:

Undue Influence vs. Duress

Answer 13

Undue influence is a defense to set aside contracts that have been imposed upon weak and vulnerable persons. An act of persuasion that overcomes the judgment and free will of another can be a factor in determining undue influence.
Undue influence normally results from act(s) of persuasion by a person in a confidential relationship with the alleged victim and said acts help to overcome the free will and judgment of that victim. (Examples include: flattery, insinuations, trickery, and deception; these may amount to undue influence.)
As a defense to validity of a contract, duress differs from undue influence because duress consists of the intentional use of force or threat to coerce another into a grossly unfair transaction.
Typical examples of duress include: blackmail, extortion, Bad faith threats of criminal prosecution, oppressive abuse of process.

Question 14

Validity of Contract Defense:

Undue Influence (Four Elements)

Answer 14

Generally, the 4 elements of undue influence include:

1. Susceptibility of the victim. The alleged victim was susceptible to undue persuasion due to mental, psychological, or physical disabilities or conditions.
2. An opportunity for exercising undue influence. Usually, this opportunity arises through a confidential relationship such as husband and wife, trustee and beneficiary, doctor and patient, parent and child, guardian and ward, etc.
3. Evidence of motive or inclination by defendant. Must show that the defendant had a motive or was inclined to exercise undue influence over the alleged victim. EX: Defendants that aggressively pursue a transaction, insulate a relationship from outside supervision; or discourage a weaker party from seeking independent advice.
4. An usual or suspicious transaction. Typical example is a testator that makes abrupt changes in his will after being diagnosed with terminal illness or being declared incompetent, especially when such changes are prompted by a beneficiary who stands to benefit from the testamentary changes.

Question 15

Misrepresentation or Nondisclosure as Defense to Contract Enforcement

Answer 15

A misrepresentation is an assertion not in accord with the facts.
The misrepresentation defense to contract requires (1) a false assertion or active concealment of fact that (2) induces the innocent party to reasonably rely and enter into the contract.
Such contract is voidable by the innocent party.
The innocent party does not have to show fraud to rescind the contract but may have to show fraud to get reformation of the contract.
Test tip: For misrepresentation, check if the remedy requested is under contracts or torts. - Under contracts, the remedy will be rescission or reformation of the contract. - Under torts, the remedy would be money damages or status quo ante (request to return the innocent party to where it was before the contract was made).

Question 16

Mutual Mistake as Defense to Contract Enforcement

Answer 16

A mistake is a belief that is not accord with the facts.
When at the time a contract is made, both parties make a mutual mistake about a material fact, then the contract is voidable.
A mutual mistake may make a contract voidable if
-the mistake was a basic assumption on which the contract was made;
-the mistake pertains to a material fact; AND
-the party seeking to avoid the contract must not bear the risk of the mistake.
A court can reform the contract if expressly requested by a party except to the extent that the rights of third parties will be unfairly affected.

Question 17

Effect of Unilateral Mistake as Defense to Contract Enforecement

Answer 17

Generally, it is difficult for a party to avoid enforcement of a contract because of a unilateral mistake that was made at a time the contract was made.
However, a unilateral mistake may make a contract voidable if
-the mistake was a basic assumption on which the contract was made;
-the mistake pertains to a material fact;
-the party seeking to avoid the contract must not bear the risk of the mistake; AND
-enforcement of the contract would be unconscionable; OR
-the non-mistaken party had reason to know of the mistake or caused the mistake.

Question 18

Mistake vs. Misunderstanding

Answer 18

A mistake is a belief that it is not in accord with the facts at the time a contract is made.
A misunderstanding is when the parties agree to a term in a contract but each party applies a different meaning to the term. (See Restatement 2d § 20.)
Such an issue of misunderstanding goes to contract formation (not enforcement)
-whether the parties actually entered into a valid contract; and
-if so, what the terms of the contract are.
Under a mistake, it is not whether a valid contract exists; the issue is whether a mistaken party can avoid enforcement of the contract. EXAMPLE: A misunderstanding could be about whether the weight of an item in a contract was in kilograms or pounds.

Question 19

Privity of Contract Defined

Answer 19

Privity of contract is a legal doctrine describing individuals who have made a legally enforceable agreement.
The parties to the contract, and not any third-party, can sue each other under the terms of the contracts.

Question 20

Creation of Contract:

How to Analyze

Answer 20

To enforce a contract, it must be determined whether a contract exists.
To determine if a contract exists, 3 basic issues are examined:
-Was there manifestation of assent between the parties?
-Was there consideration or some substitute for consideration?
-Are there any defenses to refute the creation of a contract?

Question 21

Formation of Contract:

Manifestation of Assent (Defined)

Answer 21

For a contract to be enforceable, there must be manifestation of assent between the parties that demonstrates that the parties are mutually bound to the same transaction.
For mutual assent, it is not necessary that the parties agree on all terms, only that they agree on the essential ones.
Objective factors are used to determine mutual assent. A party is objectively held to the apparent intention that was manifested to the other party.

Question 22

Formation of Contract:

Offer (Defined)

Answer 22

The manifestation of an intention to enter into a contract that creates a reasonable expectation in the offeree that his acceptance will create a contract.
An offer creates power of acceptance in the offeree and a corresponding liability for the offeror.
To objectively determine whether a communication constitutes an offer (i.e.) such a reasonable expectation, consider the following factors:
-Was there a communication by the offeror to the offeree containing a promise or commitment to enter into a contract?
-Was there certainty and definiteness in the essential terms?

Question 23

Formation of Contract:

Offer - Essential Terms

Answer 23

An offer must be sufficient and certain in its terms (i.e.) essential terms.
Determine whether enough of the essential terms are present so that a contract including them could objectively be enforced.
What is deemed essential depends on the type of contract in question. Essential terms typically include the following:
-Identity of the offeree
-Subject matter
-Price
-Time of performance (i.e.) payment, delivery, etc.
-Quantity
-Nature of work to be performed
For sale of goods, UCC §2-204(3) liberally provides: “Though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy”

Question 24

Formation of Contract:

Offer - UCC Gap Fillers

Answer 24

UCC Article 2 supplies terms where the parties have left gaps in their agreement so that the parties can make an entire bargain.
UCC §2-311(1): “An agreement for sale which is otherwise sufficiently definite leaves particulars of performance to be specified by one of the parties. Any such specification must be in good faith and within limits set by commercial reasonableness.”

Question 25

Formation of Contract:

Offer - UCC Gap Filler for Open Price Term

Answer 25

Open Price Term (UCC §2-305): Allows parties to create an enforceable contract even without agreeing to the price.
If the price is left open, then the price will be a reasonable price that is “to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency.”

Question 26

Formation of Contract:

Offer - UCC Gap Filler for Delivery Point Not Stated

Answer 26

Delivery Point Not Stated (UCC §2-308): When the contract does not specify the point of delivery, this section states that the place of delivery is the seller’s place of business or if there is none, the seller’s residence.

• This rule applies to generic goods that are not specially identified in the contract.
• However, when the buyer purchases specifically identified goods, like a particular car or particular lot of merchandise in a warehouse, “which to the knowledge of the parties at the time of contracting are in some other place, that place is the place of delivery.”

Question 27

Formation of Contract:

Offer - UCC Gap Filler for Delivery Time Not Stated

Answer 27

Delivery Time Not Stated (UCC §2-309): If the contract does not provide for a specific time of delivery, then delivery will be a reasonable time.
Where the contract provides for successive performances but is indefinite in duration, this section also states that the contract is “valid for a reasonable time but unless otherwise agreed many be terminated at any time by either party.”

Question 28

Formation of Contract:

Offer - UCC Gap Filler for Payment Time Not Stated

Answer 28

Payment Time Not Stated (UCC §2-310) (Open time for payment or running of credit; authority to ship under reservation): If the payment term is left open, then, payment is due on delivery, unless otherwise agreed.

• “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.”
• Also, unless otherwise agreed, “where the seller is required or authorized to ship the goods on credit the credit period runs from the time of shipment but post-dating the invoice or delaying its dispatch will correspondingly delay the starting of the credit period.”

Question 29

Formation of Contract:

Offer - Vague and Ambiguous in Terms

Answer 29

Some contracts cannot be fully enforced because of vague or ambiguous terms in the offer.
Vague terms are generally clear but become unclear in a particular application.
Ambiguous terms suggest that two or more different connotations are available.
Depending on the circumstances, courts may not enforce a contract with vague or ambiguous terms.
Despite unclear terms, courts may enforce a contract based on
-prior dealings of the parties;
-party performance; or
-acceptance (i.e.) when offeree is given choice of alternative performances, the offer becomes clear when offeree communicates his/her choice of performance.

Question 30

Formation of Contract:

Offer - Communication

Answer 30

Offeree must have knowledge of the offer in order to have power of acceptance.
Thus, the offer must be communicated to the offeree.
Generally, an advertisement or a price quotation is not considered an offer; rather, they are merely invitations to bargain.
EXCEPTIONS:
-Advertisement can be an offer if it states quantity and indicates who can accept.
-Price quote can be an offer if it is in response to a specific query.

Question 31

Formation of Contract:

Termination of Offers (Four Ways)

Answer 31

An offer cannot be accepted if the offer is terminated. Thus, determine whether the offer was terminated and, if so, in what way.
Four ways to terminate an offer (LaWWD):
-LApse of time- time stated or reasonable time
-Words or conduct of OFFEROR
-Words or conduct of OFEREE
-Death or Incapacity of Offeror or Offeree

EXCEPTIONS:

• Options contracts
• Part performance of offer to enter into unilateral contract

Question 32

Formation of Contract:

Firm Offer Rule

Answer 32

UCC §2-205 firm offer rule states that an offer cannot be revoked for up to 3 months if

1. there is an offer to buy or sell goods;
2. the offer is made by a merchant (i.e.) one who normally deals with goods of this kind; AND
3. there is signed writing promising to keep the offer open.

Question 33

Formation of Contract:

4 Situations Where Power to Revoke an Offer is Very Limited or Not Possible

Answer 33

1. Option Contract
2. Firm offer rule
3. Reasonably foreseeable reliance by offeree
4. Start of performance of unilateral contract

Question 34

Formation of Contract:

Acceptance Defined

Answer 34

Acceptance is the manifestation of an intention to accept the terms of an offer in the manner required or authorized by the offer.
An offer generally can be accepted only by a person who knows about the offer and by the person to whom the offer was made.
Offers generally cannot be assigned.

Question 35

Formation of Contract:

Acceptance - Who May Accept??

Answer 35

Generally, the power of acceptance resides in the person(s) to whom it is reasonably apparent that an offer has been extended.
The offeree’s power of acceptance is generally not assignable to another person. EXCEPTION: The power to accept may be assignable under an option contract absent an express agreement to the contrary. Since a valid option contract provides the offeree a right to accept the offer, this right of acceptance may be transferable under the files governing assignability of all other contract rights.
A general offer, like a reward offer, creates the power of acceptance in a potentially unlimited number of people; however, such a general offer can generally be accepted only by the first person to meet all conditions to the offer.

Question 36

Formation of Contract:

Duration of the Power of Acceptance - Major Difference Between Revocable and Irrevocable Offers

Answer 36

Under revocable offer, the offeree has just a power to accept.
- A revocable offer generally stays open and the offeree has the power of acceptance unless a particular event happens (i.e.) a rejection, a counteroffer, revocation, death , illegal ace, etc.

Under an irrevocable offer, the offeree has a power and a right to accept.
- Offeree’s power and a right to accept can terminate only by:
■ lapse of time;
■ death or destruction of a thing essential to the performance of the contract;
■ supervening illegality; or
■ the non-occurrence of a necessary condition.
- There a re two types of irrevocable offers:
■ Options contracts; and
■ Merchants firm offers under UCC § 4.4.222

Question 37

Formation of Contract:

Five Modes of Acceptance

Answer 37

1. General Rule -by promise- a bilateral contract where the offer indicates exactly how it is to be validly accepted;
2. By performance- as in the case of a unilateral contract;
3. By beginning performance in response to an unambiguous unilateral contract;
   4 . By any manner reasonable under the circumstances when the offer is ambiguous about the acceptable mode of acceptance;
4. Acceptance by silence- very rarely considered a valid form of acceptance except under certain circumstances.

Question 38

Formation of Contract:

Beginning Performance as a Mode of Acceptance

Answer 38

By beginning performance in response to an unambiguous unilateral contract three differing theories prevail:
a . Rest. 2d § 45: Beginning performance is acceptance and indicates the offer is irrevocable for a reasonable period of time (i.e.) duty in the offeror; however, the offeree is not obligated to complete performance.
b. Beginning performance is not acceptance and therefore the offeror may revoke the offer any time up until the point of full performance;
c. Beginning performance turns the agreement into a bilateral contract where both parties are contractually obligated to complete performance.

Question 39

Formation of Contract:

Silence as a Mode of Acceptance

Answer 39

Acceptance by silence- very rarely considered a valid form of acceptance except under these circumstances:

• Previous conduct between the parties indicates silence is a suitable mode of acceptance;
• A silent acceptance of services that suggest an implied-in-fact of contract has been formed; and
• Use of another’s property suggests an implied-in-fact contract exists.

Question 40

Formation of Contract:

Timing and Communication of Acceptance

Answer 40

General Rule: A contract is formed when acceptance is actually communicated to the offeror (i.e.) received by the offeror.

Exception:
■ The Mailbox Rule-The mailbox rule provides that a contract is formed when (1) a properly prepaid and (2) properly addressed letter of acceptance is posted in the mail (i.e.) acceptance effective at the moment of dispatch.

Question 41

Formation of Contract:

Exceptions to Mailbox Rule

Answer 41

Mailbox rule does not apply under these circumstances:
1. The offer stipulates acceptance not effective until received;
2. There is an option contract (i.e.) acceptance effective only on receipt;
3 . The offeree sends rejection and then sends acceptance. Whichever arrives first is effective.
4. The offeree sends acceptance and then rejection; rejection arrives first; and offeror detrimentally relies on the rejection. *If there is no detrimental reliance by offeror, then mailbox rule would apply.

Example 1:
■ Bill receives offer from John to sell goods. On 2/02 , Bill mails acceptance to John. On 2/03, Bill then mails revocation. There is a contract, and the mailbox rule applies since the revocation did not arrive first and there was no detrimental reliance.

Example 2:
■ Bill sends letter of rejection and then a day later sends a letter of acceptance. If the
rejection letter arrives first, then there is no contract. ( Mailbox rule does not apply.)

Question 42

Formation of Contract:

Counteroffer - Common Law

Answer 42

At common law, under the mirror image rule if the acceptance contains different or additional terms, then the response is deemed a rejection and counteroffer, thus terminating the original offer.
Example:
■ Adding an alternative dispute resolution clause in the acceptance is deemed a rejection and a counteroffer.

Also, if the offeree conditionally accepts the offer, then at common law it is deemed a rejection and a counteroffer (i.e.) uses conditional acceptance terms such as “only if,” “so long as,” “provided that,” “on the condition that,” etc.

Distinguish counteroffer from mere bargaining, which does not terminate offer:
Example:
■ Interrogative statements. E.g. , “Will you take $7,500?” Th is is not a counteroffer and does not terminate the original offer.

Question 43

Formation of Contract:

Counteroffer - Sale of Goods (UCC)

Answer 43

For the sale of goods, under certain circumstances UCC § 2-207 al lows for acceptance even when the acceptance contains different or additional terms. In such cases, the UCC generally allows acceptance to be effective unless the offeree expressly requires the
new terms.

Under UCC § 2-207(2), whether the new terms become part of the contract depends on the following:
- No merchant- If one or both parties is not a merchant, then the new terms do not become part of the contract unless the offeror agrees.
- Both merchants-If both are merchants, then ADDITIONAL terms become part of the contract UNLESS
■ new terms materially alter the offer’s original terms;
■ the original offer expressly restricts the form of acceptance to the terms of the offer; or
■ the offeror previously objected to the new terms or the offeror objects within a reasonable time after becoming aware of the new terms.

Question 44

Formation of Contract:

Acceptance-Effect of Later Conduct by Offeror When Form of Acceptance Not Proper

Answer 44

Even though there is an improper response to offer, later conduct by the offeror may imply that a contract exists.

• Under common law, if the parties act as though there is a contract, the conduct is treated as an acceptance of the original offer.
• Under the UCC, if the parties act as though there is a contract, such conduct is treated like a new contract and the terms of the new contract consist of all terms on which the writings agree and any supplementary UCC terms (i.e.) price.

Question 45

Formation of Contract:

Acceptance- Effect of Full Performance by Offeree

Answer 45

An offeree may accept by fully performing IF

1. there is a oral offer;
2. offeree does not communicate a response with words; and
3. offeree’s response is full performance.

Although full performance generally constitutes acceptance under these circumstances, notice of performance may be required to obligate the offeror
to perform.

Whether notice of performance is required depends on

• what the offer itself requires; and
• whether offeree has reason to believe chat offeror will not learn of his acceptance (i.e.) when offeror lives in a different state, then muse give notice of performance.

Question 46

Formation of Contract:

Acceptance - Reward Offers

Answer 46

A general offer, like a reward offer, creates the power of acceptance in a potentially unlimited number of people; however, such a general offer can generally be accepted only by the first person to meet all conditions of the offer.

Doing the act rewarded without knowledge of the reward offer is not acceptance because the offer is effective only upon receipt.

Question 47

Consideration: Definition

Answer 47

Consideration is a legal doctrine chat helps to determine which promises within an agreement are enforceable in court.

In bilateral contracts, there generally muse be valid consideration by both parties for the agreement to be enforceable in court.

Nevertheless, even when there is not valid consideration by both parties, an agreement may be enforceable under the doctrine of promissory estoppel, a substitute for valid consideration.

Question 48

Consideration:

The Two Elements

Answer 48

1. Bargained-for exchange between the parties;

AND

2. Legal value - whether there is a benefit to the promissor or a detriment to the promisee.

Question 49

Consideration:

Bargained-for-Exchange Defined

Answer 49

A promise to perform is bargained for when
1. the promise is sought by the promisor in exchange for his promise (i.e.) the promise induces the detriment;
AND
2. the promise is given by the promisee in exchange for that promise (i.e.) the detriment induces the promise.

Question 50

Consideration:

Two Types of Promises or Situations That Lack the Bargained-for Exchange Element

Answer 50

1. GIFTS. Generally, a promise is not deemed to be bargained-for consideration and, thus unenforceable, if the promise was intended as a gift or a gratuitous promise. An act or a forbearance to act by promisee must be a benefit to the promiser. To be deemed bargained-for consideration, the promiser muse intend to induce a detriment.
2. PAST OR UNSOLICITED ACTIONS. Under common law, if the act or forbearance was performed before the promise was made, then the promise is not bargained-for and thus does not constitute valid
   consideration.
   However, the Rest. 2d §§ 82, 83, and 86 provide two situations where past consideration may be considered bargained-for consideration:
3. A promise made based upon a benefit previously conferred on the promiser; or
4. A promise to pay a debt deemed unenforceable because of bankruptcy or the running of the statute of frauds.

Question 51

Consideration:

Monetary Value Not Necessary for a Bargained-for Exchange

Answer 51

Beware: The benefit to the promisor does not need to have monetary value to be deemed bargained-for consideration.

As long as the promisee is not already obligated legally to perform or to not perform a particular ace, the promisor’s peace of mind or joy may be sufficient to constitute bargained-for consideration, e.g., a promise to give promisee $100 if he stops calling him “old man.”

Question 52

Consideration: Adequacy of Consideration

Answer 52

Generally, courts will not evaluate the adequacy of consideration that is bargained for between the parties.

However, if the consideration is only token or a sham ( never actually paid or intended to be paid), courts may determine there was no valid consideration and thus a gift was made.

A court may also look into the adequacy of consideration and the relative values involved if a contract is deemed to be unconscionable.

Question 53

Consideration:

Legal Value - Whether There is a Benefit to the Promisor or a Detriment to the Promisee

Answer 53

Once the bargained-for element of consideration is established, courts will generally look to determine if there is a benefit to the promisor or a detriment to the promisee.

Legal detriment to the promisee can be established when the promisee performs an act that he/she is not legally obligated to perform or refrains from acting when he/she has a legal right to act.

Conversely, legal benefit to the promisor can be established when the forbearance or performance of the promisee bestows a benefit on the promisor provided that promisor was not entitled to expect or demand such forbearance or performance.

Question 54

Consideration: Pre-Existing Legal Duty Rule

Answer 54

Under common law, a promise to act that promiser already has a pre-existing legal duty to perform is not valid consideration because there is no new consideration for the promise.
Exception:
■ An addition to or change in performance. For example, a performer promises to perform for $10,000 but later demands $15,000 when asked to perform an extra hour. The extra hour of performance is new
consideration here.
■ An unforeseen difficulty so severe as to merit excusing the performance. For example, a fighter’s opponent does not show up to the fight but agrees to fight a different opponent for $1,000 extra. Given the unforeseen difficulty, the fighter is al lowed to demand extra money despite his pre-existing duty to fight.

Under the UCC, there is no pre-existing duty rule . New consideration is not required for modification of a current contract so long as the modification is done in good faith. See UCC § 2-209(1 ).

Question 55

Statute of Frauds:

A Multi-Faceted Defense to the Enforcement of Contract

Answer 55

Traditionally, most oral agreements are enforceable in court.

However, certain agreements are required by statute to be written and signed by both parties in order to be enforceable in court.

If there is no written evidence of such an agreement, then it may not be enforceable in court.

Question 56

The 5 Types of Contracts that Fall Within the Stature of Frauds

Answer 56

1. Contracts involving interests in land;
2. Contracts that cannot by their terms be performed within one year from the day after the date of formation (The One-Year Rule)
3. Collateral or secondary contracts (Suretyship Promises) such as promises to answer for the debt or duty of another and promises by the administrator or
   executor of an estate to pay a debt of the estate personally- that is, out of his or her own pocket
4. Promises made in consideration of marriage (i.e.) prenuptial agreements; but not promises to marry (i.e.) engagements
5. Under the Uniform Commercial Code (UCC), contracts for the sale of goods priced at $500 or more.

Question 57

Statutes of Frauds:

Contracts Involving Interests in Land

Answer 57

Land is real property and includes all physical objects that are permanently attached to the soil.
Example:
If Dan orally agrees to sell land to Bob but later decides not to sell, under most circumstances Bob will not be able to enforce the contract.

Question 58

Statute of Frauds:

The One-Year Rule

Answer 58

If a contract cannot be performed on its own merits within one year from the day after the contract is formed , then it must be in writing to be enforceable .
Note: The performance muse be able to be possible within one year; it does not have to be likely.

Example:
■ A college wants to hire John to teach two semesters (August 2-June 2). lf the agreement is made in March, then the agreement muse be written to be enforceable. lf the agreement is made June 1 or after, then it would not need to be in writing.

Question 59

Statute of Frauds:

Collateral (Secondary) Promises

Answer 59

Collateral or secondary promises are ones that are ancillary (subsidiary) to a principal transaction or primary contractual relationship.

A collateral promise is one made by a third party co assume the debts or obligations of a primary party to a contract if the primary party does not perform.

Question 60

Statute of Frauds:

Collateral Promises - Primary Obligation

Answer 60

If the obligation to pay results from direct contact with the principal (the debtor) , then the contract does not have to be in writing to be enforceable.
Example:
■ Placing an order by phone for a pizza parlor to deliver pizza- the buyer (principal) must pay and can not cite the Statute of Frauds to prevent enforcement of the agreement.

Question 61

Statute of Frauds:

Collateral Promises - Secondary Obligation

Answer 61

Is a promise to pay the debt of another (the debtor) if the primary (the debtor) faiIs to pay.

Such a collateral promise does have to be in writing in order to be enforceable.
Example:
■ Son borrows $500 and father promises to pay if son does not pay. Such a collateral promise is not enforceable unless the agreement is in writing and signed by the father.

Question 62

Statute of Frauds:

Collateral Promises - Main Purpose Exception

Answer 62

An oral promise to answer the debt of another is covered by the Statute of Frauds unless the promisor’s main purpose in incurring the secondary obligation is to secure a personal benefit.

Such an oral promise does not need to be in writing.
Example:
■ Smith contracts with X to have widgets made for Smith. Smith promises ABC Supply (X’s supplier) payment if they keep delivering goods to X. Such a promise benefits Smith and thus does nor need to be written.

Question 63

Statute of Frauds:

Promises in Consideration of Marriage

Answer 63

Agreements made in consideration of marriage (prenuptial agreements) that define each partner’s ownership rights in the other partner’s property must
be in writing to be enforceable.
Example:
■ Jessica promises Luke that if he marries her daughter Sally, then Jessica will give them the extra condo she owns. To be enforceable, such an agreement would need to be in writing to satisfy the statute of frauds.

Question 64

Statute of Frauds:

Contracts for the Sale of Goods

Answer 64

UCC § 2-201(1) contains statute of frauds provisions that require a promise for the sale of goods of $500 or more to be written and to be signed by the party to be charged.

The writing needs to state only subject matter and quantity terms.

Remember, goods under the UCC include all tangible, movable things that are identifiable at the time a contract of sale is made.

Question 65

Stature of Frauds:

Contracts for the Sale of Goods - Exceptions

Answer 65

Exceptions to the rule: When oral agreements for the sale of goods for $500 or more do not need to be in writing:

• Specially manufactured goods. UCC § 2-201 (3)(a)
• Admissions in pleadings, testimony, or in court that confirm that a contract for the sale of goods for $500 or more was made. UCC § 2-201 (3 )(b)
• If partial payment or delivery has been made, then the oral agreement is enforceable to the extent of payment or goods received. UCC § 2-201 (3 )( c)
• A confirmatory memorandum that serves as written confirmation of an oral agreement between merchants unless there is written notice of objection within ten (10) days after the written confirmation is received. UCC § 2-201 (2)

Question 66

Statute of Frauds:

Specific Performance

Answer 66

The Statute of Frauds does not act as a bar to the enforcement of a contract in these situations:
■ In agreements relating to the transfer of interests in land, a court may grant specific performance to the extent that justice requires if there has been reasonable and foreseeable reliance on an oral promise. Restatement 2d § 139. Usually, a court must see at least two of the following factors: partial or full payment, possession, and/or valuable improvements .
■ Under the UCC § 2-201 (3)(c), specific performance of an oral contract for the sale of goods is enforceable to the extent that a seller accepts payment or a buyer accepts delivery of goods .
■ Full performance of the contract according to its precise terms.

Question 67

Stature of Frauds:

Promissory Estoppel

Answer 67

Where it would be inequitable co allow the Statute of Frauds co prevent the enforcement of valid agreement, a court may use the doctrine of promissory estoppel to remove the contract from the Statute of Frauds.
Example:
■ If a promisor makes a promise on which the promisee justifiably relies to his/ her detriment, a court may use promissory estoppel to prevent the promisor from denying that a contract exists.

Question 68

Stature of Frauds:

Sufficiency of Writing

Answer 68

Generally, the Statute of Frauds and the UCC require either a written contract or a memorandum (written evidence of an oral contract) signed by the party against the party sought to be charged.

The writing must contain the essential terms of the oral or implied agreement.

Essential terms usually include identity of the parties; subject matter; terms and conditions; recital of consideration; and signature of the party sought to be charged.

UCC § 2-201 requires only three elements for the writing to be sufficient:

• quantity;
• signature of the party sought to be charged; and
• a writing “sufficient to indicate” that there is a contract between the parties.

The signature can be anywhere in the document and can be electronic.

Question 69

Statute of Frauds:

Aggregation of Documents Rule

Answer 69

The aggregation of documents rule applies under common law and the UCC.

The rule: Different writings may be aggregated together to meet the requirements of the Statute of Frauds provided their interrelationship is reasonably apparent from the face of the documents.

Question 70

Statute of Frauds:

“My Legs” Mnemonic

Answer 70

To help remember when the Statute of Frauds applies, remember MY LEGS:
M- Marriage contracts (prenuptial)
Y- Year contracts-contracts that cannot be performed within one year by their own terms
L- Land contracts
E - Estoppel or reasonable reliance exception
G - Guaranty or surety contracts-where one party guarantees the debt of another
S - Sale of goods contracts for $500 or more

Question 71

Third-Party Beneficiary Contracts Defined

Answer 71

Third -party beneficiary contracts are contracts where one of the two parties to the contract makes an enforceable promise that benefits someone who
is not a party to the contract.

Most contracts benefit a third party directly or indirectly.

When the third party is objectively considered to be an intended beneficiary of the contract, then the third party can compel enforcement of the contract.

Question 72

Requirements and Outputs Contract Defined

Answer 72

Requirements contract- a contract where:
■ a buyer promises to purchase al l of his requirements of a particular produce from the seller; and
■ the seller agrees to sell that amount to the buyer.

Outputs contract- a contract where:
■ a seller agrees to sell his entire output of a particular produce to the buyer; and
■ the buyer agrees to buy that amount from the seller.

Trigger words for such contracts include “all ,” “only,” “solely,” and “exclusively.”

Restriction: UCC § 2-306(1 )-“Except chat no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.”

Question 73

Parol Evidence Rule: Definition

Answer 73

■ The parol evidence rule prevents a party to a written contract from contradicting or adding to the terms of the contract by seeking the admission of evidence extrinsic (outside) to the contract .
■ For the parol evidence rule to apply, the contract in question must first be a final integrated writing which means the fact-fin der must determine that the contract was the final agreement between the parties (versus a mere draft).

Question 74

Parol Evidence Rule: Partial Integration

Answer 74

■ A final integrated agreement is either a partial or complete integration.
■ Partial integration: This is when the contract contains some, but not all, of the terms to which the parties have agreed.
- This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms , but not as to others.
- If partial integration is determined, then the terms that do not contradict the writing, but merely add to it, are not excluded.

Question 75

Parol Evidence Rule: Complete Integration

Answer 75

■ Complete integration: This is when the writing contains all of the terms to which the parties agreed.

• One method to ensure or to check for complete integrations to verify whether there is a merger clause that recites that the contract is in fact the whole agreement between the parties.
• Note that many modern courts have determined merger clauses to be only a rebuttable presumption.

Question 76

Parol Evidence Rule: Exceptions

Answer 76

Extrinsic evidence can be admitted for the following purposes:
- To aid in the interpretation of existing terms .
- To resolve an ambiguity in the contract.
- In light of all the circumstances surrounding the formation of the contract, to show that the contract is actually ambiguous and thus requires the use of extrinsic evidence to determine its actual meaning.
- To show that an unambiguous term in the contract is in fact a mistaken use of a prior valid agreement. Such a claim must be proven by clear and convincing evidence, and not by the preponderance of the evidence.
- To show fraud, duress, mistake, unconscionability, or illegal purpose on the part of one
or both parties.
- To show that consideration under the contract has not been paid.
- To identify the parties, especially if the parties have changed names.
- To imply or incorporate a term of the contract.

Question 77

Breach of Contract: Definition

Answer 77

If one party fails to uphold his end of the bargain, there is a breach of contract.

A breach occurs when:

• a party to the contract does something against the intent of the contract; or
• one party to a contract makes it impossible for other parties to perform their duties under the contract; or
• a party absolutely refuses to perform the contract.

Question 78

Breach of Contract: Minor Breach

Answer 78

Not all breaches of contract necessarily render a contract unenforceable. This analysis hinges on who the parties are and whether the breach is minor or material.

A minor (immaterial) breach is a trivial or technical breach chat does not substantially affect the underlying purpose of the contract.

The effect of a minor breach is to provide a remedy to the aggrieved party; however, the nonbreaching party is NOT RELIEVED of his duty of performance under the contract.

If the breach is minor, there is the option to:

• ignore or excuse the breach and continue as if nothing happened;
• al low the breaching party an opportunity to fix the breach;
• refuse payment until the breach is fixed; or
• fix the breach oneself and deduct the cost from payment.

Question 79

Breach of Contract: Material Breach

Answer 79

A material breach substantially affects the underlying purpose of the contract, thus preventing the non breaching party substantial benefit of his bargain.

The effect of a minor breach is more severe and can result in:

• effective termination of the contract;
• relief of further performance of the non-breaching party; and
• the non-breaching party’s right to all remedies under the contract and under law.

Criteria used to determine the materiality of a breach include, inter alia:

• amount of benefit received by the non-breaching party;
• the extent of pare performance by the breaching party;
• extent of hardship to the non-breaching party;
• negligent or willful behavior of the breaching party;
• adequacy of available remedies to make the non-breaching party whole again.

Question 80

Remedies: Definition

Answer 80

When a breach of contract is established, various remedies are available to the non-breaching party.

Types of remedies available include:

• damages (compensatory, exemplary, liquidation , nominal , or punitive);
• specific performance (an equitable remedy usually available when the subject of the contract is unique or rare); and
• injunction.

Question 81

Remedies: Issues to Consider When Considering Monetary Damages

Answer 81

• Measure of damages
• UCC damage rules for the sale of goods
• Additions and limitations
• Any contract provision pertaining to damages (i.e.) liquidated damages

Question 82

Remedies: Compensatory (Actual) Damages

Answer 82

Compensatory (or actual) damages are paid to compensate the non-breaching party for loss, injury, or harm suffered by another’s breach of duty.

Measure: To put the aggrieved party in the position they would be in but for the contractual breach (protection of the non-breaching party’s expectation interest).

Damages must be reasonably certain; a court will not award damages that are too speculative in nature.
Example:
■ P contracts to paint D’s home for $2,000. D pays P $2,000 but P doesn’t paint. D has to pay another painter $2,300 to do the job. Here, D can get
$2,300 in damages from P.

Question 83

Remedies: Reliance Damages

Answer 83

Reliance damages are the measure of compensation given to a person who suffered an economic harm for acting in reliance on a party who breached the contract.

Reliance damages are measured by a party’s reliance interest for the foreseeable amount. Reliance damages aim to put the aggrieved party in a position had the contract not been made in the first place.

Where the reliance measure of damages would be unfair, restitution damages may be in order.

“Damages differ from restitution in chat damages is measured by the plaintiff’s loss; restitution is measured by the defendant’s unjust gain.” (Dobbs’ Hornbook on Remedies, 2d (Hornbook Series), by Dan B. Dobbs,
section 3.1, p278, 1993)

Question 84

Remedies: Special Damages

Answer 84

Special damages compensate the non-breaching party for the quantifiable monetary losses suffered by the non-breaching party.

Special damages are sometimes divided into direct losses, and consequential or economic losses. Direct losses include the costs needed to remedy problems and put things right.

Examples of special damages may include extra costs, repair, or replacement of damaged property, lost earnings (both historical and future), loss of irreplaceable items, additional domestic costs. etc.

Special damages can be applied in both personal and commercial situations.
Example: A factory bums down because of the negligence of a contractor.
■ The factory owner would be entitled to the direct costs required to rebuild the factory and replace the damaged machinery.
■ The factory owner may also be entitled to any consequential losses. These are the lost profits that the claimant could have been expected to make in the period while the factory was closed and rebuilt.

Question 85

Remedies: Punitive Damages

Answer 85

Punitive (or exemplary) damages are often awarded where compensatory damages are deemed inadequate.

Punitive damages do not seek to compensate the plaintiff; rather, they seek to reform behavior or deter the defendant and similar persons or businesses from acting in a way that damaged the plaintiff.

Punitive damages can be in excess of compensatory damages. There generally is no set limit or absolutely impermissible ratio of punitive damages to compensatory damages, though punitive damages with extraordinarily high ratios have been reversed by appellate courts.

Punitive damages cannot generally be awarded in contract disputes.
- The main exceptions are insurance bad-faith cases where the insurer’s breach of contract is alleged to be so egregious as to amount to a breach of the “implied covenant of good faith and fair dealing,” and can therefore be deemed to be a tort cause of action eligible for punitive damages in excess of the value of the insurance policy.

Question 86

Remedies: Restitution

Answer 86

When a court orders restitution , it orders the defendant to give up his gains to the claimant.

When a court orders compensation, it orders the defendant to compensate the claimant for the claimant’s loss.

The law of restitution is the law of gains-based recovery. It is to be contrasted with the law of compensation, which is the law of loss-based recovery.

Question 87

Remedies: Statutory Damages

Answer 87

Statutory damages are pre-established damages for cases where calculating a correct sum is deemed difficult (often seen in copyright and trademark cases).

Question 88

Remedies: Equitable Remedies Defined

Answer 88

Sometimes legal remedies (i.e., monetary damages) are not sufficient to address harm caused by the breach of contract and to make the claimant
whole again.

Thus, some courts have the discretion to grant equitable remedies, which are always directed at a particular person, and his knowledge, state of mind,
and motives may be relevant to whether an equitable remedy should be granted or not.

The principal equitable remedies that are available include the following:

• injunction
• specific performance
• rescission
• declaratory relief
• reformation
• estoppels
• account of profits

Question 89

Breach of Contract: Equitable Remedies - Injunction

Answer 89

An injunction is an equitable remedy in the form of a court order where a party is required to do, or to refrain from doing, certain acts.

The party that fails to adhere to an injunction may face civil or criminal penalties and may have to pay damages or accept sanctions for not following the court’s order.

In some cases, breaches of injunctions are considered serious criminal offenses that merit arrest and possible prison sentences.

Question 90

Breach of Contract: Equitable Remedies - Specific Performance

Answer 90

When the legal remedy (damages) is deemed inadequate because the subject matter of the contract is unique or rare, then the court may order an equitable remedy called specific performance.

Specific performance requires the breaching party to perform his underlying obligation under the contract.

This remedy is typically available for land sale contracts and for goods that are rare or unique at the time performance is due.

Specific performance is not available for services contracts even if the underlying services are unique or rare. This policy is because of the commonly held tenet that to do so would constitute involuntary servitude under the Thirteenth Amendment of the U.S. Constitution.

Question 91

Breach of Contract: Equitable Remedies - Rescission

Answer 91

Rescission (to rescind or set aside a contract) is the unmaking of a contract between the parties.

Rescission is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract (the “status quo ante”).

This is an equitable remedy and is discretionary.

Restrictions: The court may decline to rescind a contract if:
■ one party has affirmed the contract by his action;
■ a third party has acquired some rights; or
■ there has been substantial performance in implementing the contract.

Question 92

Breach of Contract: Equitable Remedies - Reformation

Answer 92

Reformation is the equitable remedy where a court can order a change in a written document to reflect what it ought to have said in the first place.

Question 93

Breach of Contract: Equitable Remedies - Declaratory Judgment

Answer 93

Declaratory judgment is a judge’s determination of the parties’ rights under a contract or a statute, often requested in a lawsuit over a contract.

In theory, an early resolution of legal rights will resolve some or all of the other issues in the matter.

Question 94

Breach of Contract: Three Main Defenses

Answer 94

1. Impossibility - when an unexpected event happens that makes performance by a party objectively impossible (e.g.) death or illness
2. Commercial Impracticability - when an unexpected event happens that makes performance extremely more burdensome for a party than originally expected (e.g.) contractor agrees to install a swimming pool and discovers the land is full of granite.
3. Frustration of Purpose - when an unexpected event happens that renders practically worthless the value of the party’s bargain (the intended purpose) (e.g.) a party rents a room in a hotel at a high price exclusively to watch an inauguration and then the event is canceled.

Question 95

Breach of Contract: Impossibility Defense

Answer 95

The impossibility defense to breach of contract requires
1 . an unexpected event that makes performance by a party objectively impossible;
2. the non-occurrence of the event causing the impossibility was a mutually shared basic assumption on which the contract was formed;
3. the party asserting the defense did not cause the event causing the impossibility;
AND
4. the party asserting the defense did not implicitly or explicitly assume the risk of occurrence of the event causing the impossibility of performance.

Generally death after contracting does not automatically excuse contractual obligations since one may recover from decedent’s estate.

Exception:
■ Death of a party to the contract who is a “special person” with a special
talent or skill.

See Restatement 2d § 261; UCC §§ 2-613, 2-6 15.

Question 96

Breach of Contract: Commercial Impracticability Defense

Answer 96

The commercial impracticability defense requires
1. an unexpected event that makes performance commercially impracticable;
2. the non-occurrence of the event causing the impracticability was a mutually shared basic assumption on which the contract was formed;
3. the party asserting the defense did not cause the event causing the impracticability;
AND
4. the party asserting the defense did not implicitly or explicitly assume the risk of occurrence of the event causing the impracticability of performance.

See Restatement 2d § 261; UCC § 2-615.

Question 97

Breach of Contract: Frustration of Purpose Defense

Answer 97

When one party has a special purpose for entering into a contract of which the other side is aware; and

that purpose is frustrated by a subsequent, unforeseeable event, the risk of which was not assumed by the party whose purpose has been frustrated;

then the parties are relieved of their prospective performance until the frustrating event has ceased to exist.

See Restatement 2d § 265.

Question 98

Breach of Contract: Impossibility vs. Commercial Impracticability vs. Frustration of Purpose Defenses

Answer 98

Note that the elements for the impossibility and commercial impracticability defenses are similar, as they usually require the occurrence of an event that
makes the performance by the other party unnecessary.

With the frustration of purpose defense, performance of the promised duty is possible and is no more burdensome for the non-performing party.

The impossibility and impracticability defenses are usually a seller’s defenses .

The frustration of purpose defense is usually a buyer’s defense.

Courts are more likely to recognize the impossibility defense than a commercial impracticability defense.

Question 99

Third Party Interests - Assignment vs. Delegation

Answer 99

Contracts sometimes end up being performed by another party that was not a party to the contract.

In the realm of contracts, assignment is a transfer of contractual rights or benefits from an assignor, the original holder of such rights, to a third party called an assignee.

Delegation is a transfer of contractual duties from a delegator, the original party obligated to perform a contractual duty, to a third party called the delegee. However, the delegator normally remains accountable for the outcome of the delegated work, unless original contracting parties agreed otherwise.

Question 100

Assignment - When Required to Be in Writing

Answer 100

Examples of situations where an assignment must be in writing:

1. Assignment of wages (Statutes regulate the extent to which an assignment may be made);
2. Assignment of any interest in real property;
3. Assignment of choses of action worth over $5,000;
4. Assignment as collateral for a loan or debt.

Question 101

Discharge by Agreement of the Original Contracting Parties

Answer 101

There are three main ways chat the original contracting parties can modify or terminate their contractual obligations:
■ Recission - When all contractual parties agree to terminate their contractual relationship without further performance. Such a mutual rescission discharges
the contractual obligations of all the parties.
■ Novation- The contractual parties plus a third party agree to discharge one of the original contractual parties and create a new contract with a third party who becomes responsible for the performance of the discharged party.
■ Accord and Satisfaction-
- The accord is a new agreement between the parties to allow a new form
of consideration (performance) chat varies from what was originally
agreed to .
- The satisfaction is the actual performance of the new form of consideration or performance which discharges the original contractual obligation.

Question 102

Novation

Answer 102

Novation replaces an original contractual party with a new third party.

Four elements of a valid novation:
■ There must be a previously valid contract;
■ All parties (the original plus the third party) must agree to the novation;
■ The discharged party’s duties provided for in the contract must be discharged immediately; and
■ A new enforceable contract must be agreed to between all the parties.