Contract Law MEE

Question 1

LAW APPLICABILITY

Answer 1

First the issue is whether Article 2 of the Uniform Commercial Code (UCC) or common law applies.

For contracts dealing with goods, the UCC applies. For contracts dealing with services or real estate, the common law applies. If there is a mixed contract that deals with both goods and services, the predominate purpose of the contract determines whether the UCC or common law applies.

Here, the ___________ [UCC/common law] applies, because ____________ [Identify whether the predominate purpose of the contract deals with goods or services.].

For example: A homeowner entered into two separate contracts with a contractor for the renovation of her kitchen and the remodeling of her bathroom. The homeowner has refused to pay the contractor on both contracts because of dissatisfaction with his work.

HERE, where both goods and non-goods (such as services) are involved, most courts consider the thrust or predominant purpose of the transaction in determining whether Article 2 of the UCC or the common law of contracts governs the contract. While the homeowner did acquire some goods (flooring and bathroom fixtures) under these contracts, the facts make it clear that the homeowner sought high-quality installation services and that the contract price was determined mostly by labor costs. THUS, the construction/service aspects of the contract dominate. Accordingly, the common law of contracts rather than Article 2 of the Uniform Commercial Code applies to the kitchen contract.

Question 2

CONTRACT FORMATION

Answer 2

The main issue is whether a traditional, enforceable contract was formed.

A traditional, enforceable contract is formed when there is: (1) mutual assent between the parties; (2) consideration; and (3) no defenses to formation that would invalidate an otherwise valid contract.

Question 3

MUTUAL ASSENT

Answer 3

Mutual assent is when the present parties constitute a valid offer and acceptance.

Question 4

OFFER

Answer 4

To form a valid offer, the offeror must: (1) manifest an objective willingness to enter into the agreement; (2) create a power of acceptance in the offeree; and (3) specify all necessary terms of the agreement.

Under the common law, all essential terms must be specified in the offer, which includes: parties, subject, quantity, and price. However, under the UCC, the price term is not required in the offer. The only required terms under the UCC are: parties, subject, and quantity.

Here, __________ [Discuss all three elements to determine whether a valid offer was formed.].

Question 5

Termination of the Offer

Answer 5

The next issue is whether the offer was terminated before acceptance.

If a valid offer is terminated at any time before acceptance, the offer is invalidated. It cannot be accepted or revived unless a new offer is made. An offer is terminated if any of the following occur before acceptance: (1) the offeror revokes the offer by express communication to the offeree; (2) the offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract; (3) the offeree expressly rejects the offer; (4) the offeree expressly communicates a counteroffer to the offeror; (5) The offeror dies or otherwise becomes incapacitated; (6) a reasonable amount of time passes; or (7) the subject matter of the offer becomes illegal or is destroyed.

Here, ___________ [Discuss whether the offer was terminated before acceptance. If the offer is terminated before acceptance, mutual assent is destroyed unless another valid offer is at play.].

Question 6

Irrevocable Offers

Answer 6

Generally, the offeror is free to revoke an offer at any time prior to acceptance. However, there are four main types of offers that are irrevocable: (1) option contracts;
(2) UCC firm offers; (3) offeree started performance; and (4) detrimental reliance.

Question 7

Option Contract

Answer 7

An offer is irrevocable if consideration is given in exchange for a promise to keep the offer open.

Here, ________ [Discuss whether consideration was given in exchange for a promise to keep the offer open to determine whether the offer was irrevocable (For example, “I promise not revoke this offer for one week if you pay me an additional
$100 to keep the offer open.”).].

Question 8

UCC Firm Offer

Answer 8

Under the UCC, an offer is irrevocable if a merchant makes a firm offer to buy or sell goods, provided that the offer: (1) is in writing; (2) contains an explicit promise to not revoke the offer; and (3) is signed by the merchant. A firm offer will last either as long as stated in the offer or for a reasonable amount of time not to exceed 90 days.

Here, ______ [Discuss all three elements to determine whether the offer was irrevocable.].

Question 9

Offeree Started Performance

Answer 9

A unilateral offer to contract is irrevocable once the offeree starts performance. A unilateral offer arises from a promise that requests acceptance by performance, as opposed to a bilateral offer, which arises from a promise that requests acceptance by a return promise.

Here, the offer was ________ [unilateral/bilateral], because [Identify whether the promisor requested acceptance by performance or a return promise].

[*If the offer was unilateral]

Thus, once ______ [offeree] started performance, the offer became irrevocable.

[*If the offer was bilateral]

Thus, the offer was freely revocable.

Question 10

Detrimental Reliance

Answer 10

An offer is irrevocable if the offeree reasonably and detrimentally relies on the offer in a foreseeable manner.

Here, ________ [Discuss whether the offeree reasonably and detrimentally relied on the offer in a foreseeable manner to determine whether the offer was irrevocable.].

Question 11

ACCEPTANCE

Answer 11

The next issue we must determine to determine whether mutual assent is present is whether the offer was accepted.

To accept an offer, the offeree must: (1) manifest an objective willingness to enter into the agreement; and (2) accept the offer according to the rules established by the offeror who is master of the offer. For bilateral contracts (which arise from a promise that requests acceptance by a return promise), the offer is accepted once performance is started. For unilateral contracts (which arise from a promise that requests acceptance by performance), the offer is only accepted once performance is complete.

Here, _________ [Discuss both elements to determine whether the offer was accepted. If there is acceptance of a valid offer, mutual assent is present between the parties.].

Question 12

Mailbox Rule

Answer 12

Under the mailbox rule, an acceptance that is sent by mail is generally valid when the letter is sent – not when the letter is received. However, the mailbox does not apply to option contracts or in situations where the offeree sends another communication that terminates or alters the offer first.

Here, ________ [Discuss whether the mailbox rule applies. The mailbox rule is all about timing – if the offeree mails a rejection/counteroffer before mailing the acceptance, the letter that the offeror opens first controls. If the offeree mails the acceptance letter first, it is valid when sent.].

Question 13

Acceptance Contains Different or Additional Terms

Answer 13

The next issue is whether the purported acceptance that contains terms that are not included in the offer is a valid acceptance or a counteroffer. A counteroffer operates as both a rejection that terminates the original offer and as a new offer.

[*If the common law applies]

Mirror Image Rule

Under the common law, the terms in the acceptance must match the terms of the offer exactly – otherwise it is not an acceptance, it is a counteroffer.

Here, _______ [Discuss whether the offer and purported acceptance mirror each other. If the purported acceptance contains any additional or different terms from those in the offer - it is not an acceptance, it is a counteroffer.].

[*If the UCC applies]

UCC 2-207 (“Battle of the Forms”)

Under the UCC, the acceptance does not have to mirror the offer and can include different or additional terms from those in the offer. UCC 2-207(1) determines whether the purported acceptance (containing new terms) will operate as an acceptance or as a counteroffer. It states: (1) A definite and seasonable expression of acceptance or written confirmation; (2) which is sent within a reasonable amount of time; (3) operates as an acceptance even though it states terms additional to or different from those offered or agreed upon; (4) unless acceptance is expressly made conditional upon assent to the additional or different terms.

Here, _________ [Discuss all four elements to determine whether the purported acceptance is a valid acceptance or counteroffer.].

[*If the purported acceptance is a valid acceptance]

The next issue is whether the new terms in the acceptance will govern the contract or whether UCC gap fillers will be implemented.

[*If the purported acceptance contains “additional” terms]

Under UCC 2-207(2), the additional terms will govern the contract if both parties are merchants, unless: (1) the initial offer expressly limited acceptance to its terms; (2) the additional terms materially alter the deal; OR (3) the offeror objects to the additional terms within a reasonable amount of time.

Here,__________ [Discuss whether both parties are merchants, and if so, if any exceptions apply. If either party is not a merchant or an exception applies, UCC gap fillers will be implemented.].

[*If the purported acceptance contains “different” terms]

Most courts apply the knockout rule with UCC 2-207(2) to determine whether the new terms control or whether UCC gap fillers must be implemented. Under the knockout rule, a distinction is made between “different” and “additional” terms. A different term is a term that was not included in the original offer that conflicts with the terms of the original offer. An additional term is a term that was not included in the original offer that does NOT conflict with the terms of the original offer. Under the knockout rule, different terms in the original offer and acceptance knock each other out creating a gap in the contract. UCC gap fillers are then used to plug this gap.

Here, _________ [Discuss whether the new term conflicts with the original offer. If it conflicts, apply the knockout rule and conclude that UCC gap fillers must be implemented to plug the gap.].

In conclusion, mutual assent between the parties [is/is not] present, because [Identify whether there was both a valid offer and acceptance.].

Question 14

CONSIDERATION

Answer 14

The next issue we must determine to determine whether a traditional, enforceable contract was formed is whether the agreement is supported by consideration.

Consideration involves a transfer of legal value in a bargained-for exchange. Consideration is present if: (1) the promisee incurs a legal detriment or the promisor receives a legal benefit; AND (2) the promise induces the detriment and the detriment induces the promise.

Here, _________ [Discuss both elements to determine whether the agreement is supported by consideration. Watch out for gift promises, conditional gifts, pretenses of consideration, illusory promises, and past consideration.]

In conclusion, the agreement [was/was not] supported by consideration, because [Identify whether both elements were met.].

Question 15

CONTRACT MODIFICATION

Answer 15

The issue is whether the contract modification was valid.

[*If the common law applies]

Preexisting Duty Rule

Under the common law, a contract modification must be supported by consideration. The preexisting duty rule stipulates that a promise to do something of which the party is already legally obligated to do, by contract or otherwise, is not consideration.

Here, the contract modification [was/was not] supported by consideration, because _________ [Identify whether the contract modification was supported by consideration. Remember, a promise to do something of which the party is already legally obligated to do is not consideration.].

In conclusion, the contract modification [was/was not] valid, because the contract modification was supported by consideration.].

[*If the UCC applies]

Good Faith Requirement

Under the UCC, a contract modification is valid if it is made in good faith.

Here, the contract modification [was/was not] made in good faith, because that suggest whether the contract modification was made in good faith.].

In conclusion, the contract modification [was/was not] valid, because ______ [Identify whether the contract modification was made in good faith.].

Question 16

Common Law Doctrine of Substantial Performance

Answer 16

Under the common law doctrine of substantial performance, a party that breaches a contract is nonetheless entitled to the other party’s performance if the breaching party has not “materially breached” the contract, but instead has “substantially performed.” If one party’s performance is a constructive condition of the other party’s duty, only “substantial performance” is required of the first party before that party can recover under the contract.
Courts consider several factors in determining whether there has been a “material breach” by one party that excuses the injured party’s performance: (1) the extent to which the injured party will be deprived of a benefit he or she reasonably expected; (2) the extent to which the injured party can be adequately compensated for the part of the benefit of which he or she will be deprived; (3) the extent to which the party failing to perform will suffer forfeiture; (4) the likelihood that the party failing to perform will cure that failure; and (5) the extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing.
Some courts have held that when a party’s breach is “willful,” that party’s performance CANNOT be substantial, regardless of the impact of denying that party the right to enforce the obligations of the other. Put simply, the willful transgressor must accept the penalty of his transgression.

HOWEVER, other cases have held that even a conscious and intentional departure from the contract specifications will not necessarily defeat recovery, but may be considered as one of the several factors involved in deciding whether there has been full performance.

Question 17

General Rule of Damages for a Breach of a Construction Contract

Answer 17

The general rule of damages for a breach of a construction contract is that the injured party may recover the reasonable cost of replacement or completion.

When, HOWEVER, there has been substantial performance of the contract and the cost of replacement or completion would be disproportionately high compared to the economic benefit it confers, courts have instead measured damages by the difference between the value of the property if construction had been properly completed and the value as constructed. In such a case, the measure of damages is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing.

Question 18

EXAMPLE: Contract for the Sale of the Computer

Answer 18

Article 2 of the Uniform Commercial Code applies to “transactions in goods.” “Goods” includes all things movable at the time of their identification to the contract for sale, so the computer constitutes goods. Accordingly, the sale of the computer is a “transaction in goods” governed by UCC Article 2.

NOTE: The computer system likely included some pre-loaded software. This should not prevent UCC Article 2 from applying, as acquiring the goods (the computer system) appears to be the predominant purpose of the contract. MOREOVER, some cases consider software to be included in the concept of goods.

Question 19

Implied Warranty For A Particular Purpose

Answer 19

Under UCC § 2-315, when a seller of goods has reason to know both the buyer’s particular purpose for the goods and that the buyer is relying on the seller’s skill or judgment to select goods appropriate for that purpose, the contract contains an implied warranty that the goods are fit for that purpose unless the warranty is excluded or modified as provided in UCC § 2-316.

Here, both conditions for the creation of this warranty are satisfied on the facts of this problem. FIRST the _______ explained _________ the purpose for which the __________ would be used. SECOND, when the __________ said, “I know nothing about _________. I really need you to pick the right system,” the ________ made it clear that ______ was relying on the _______ expertise to select the right computer.

Because both conditions for creation of the implied warranty of fitness are satisfied, the contract contains that warranty unless it was successfully excluded or modified under UCC § 2-316.

Question 20

Implied Warranty of Fitness

Answer 20

Under UCC § 2-316(2), the implied warranty of fitness may be excluded by language that is sufficient for that purpose, so long as it is in writing and is “conspicuous.” A writing is “conspicuous” if it is “so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.”

UCC § 2-316(3) presents an alternative method to disclaim the implied warranty of fitness for a particular purpose. It provides that, unless the circumstances indicate otherwise, all implied warranties are disclaimed by expressions like “as is,” “with all faults,” or “other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is NO implied warranty.” While the text of § 2-316(3) does not state that those expressions also must be presented conspicuously, cases have so held. It is unlikely that a court would hold that the 12th paragraph of terms and conditions would satisfy the alternative requirements of UCC § 2-316(3).

NOTE: There is NO requirement that the seller be a merchant in order for the implied warranty of fitness for a particular purpose to be created.

Question 21

Acceptance + Revocation of Acceptance (Limited Circumstances)

Answer 21

Acceptance occurs under UCC § 2-606(1) when the buyer (a) after reasonable opportunity to inspect the goods, signifies to the seller that the goods conform to the contract or that the buyer will retain them despite nonconformity, (b) after reasonable opportunity to inspect the goods, fails to reject them within a reasonable time, or (c) does any act inconsistent with the seller’s ownership of the goods.

A buyer who has accepted goods may revoke that acceptance under limited circumstances. There are three basic requirements. FIRST, revocation must occur “within a reasonable time after the buyer discovers or should have discovered the ground for it.” SECOND, the goods must fail to conform to the contract and that nonconformity must “substantially impair” the value of the goods to the buyer. FINALLY, if the buyer accepted the goods without discovery of their nonconformity, the acceptance must have been “reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.”

Question 22

Buyer’s Damages

Answer 22

Under UCC § 2-711, when a buyer rightfully rejects goods or justifiably revokes their acceptance, in addition to recovering the purchase price, the buyer is entitled to damages under UCC § 2-713.
Under that section, the buyer is entitled to the difference between the contract price of the goods for which he contracted and their market price.

Under UCC § 2-713, the father would also be entitled to incidental and consequential damages.

NOTE:
(1) UCC § 2-713 provides that the market price of goods is to be determined at the time that the buyer learned of the breach and, in these circumstances, at the place of arrival. For example if there are NO facts indicating any fluctuation over time in the market price of a ________ (GOOD) that satisfies the contract requirements or any difference in market price from one location to another; ACCORDINGLY, the analysis is based on the consultant’s statement about the cost of a computer system meeting the son’s needs.

Geographical market should be taken into account and at what time the price in that market should be used has demonstrated good knowledge of the law.

(2) Under UCC § 2-712, a buyer who rightfully rejects goods or justifiably revokes acceptance of them may also “cover” by buying goods in substitution for those due from the seller and recover damages based on the difference between the cover price and the contract price. possibility is unnecessary.

Question 23

Expectation Damages

Answer 23

These damages are intended to put the injured party in the same position as if the contract had been performed. For example the “Cost of Restoration.”

HOWEVER, where an award might be wasteful, such as when the cost to _______ would greatly exceed the difference in value, damages may be measured by the difference in value.

Question 24

Contract Damages (Foreseeability Requirements)

Answer 24

Contract damages must be foreseeable to be recoverable. Damages are foreseeable if a reasonable person in the position of the breaching party would have known at the time the contract was made that the damages were likely to occur as a result of the breach.

Question 25

Mitigation Damages

Answer 25

Mitigation requires the injured party to take reasonable steps to reduce the damages.

Question 26

EXAMPLE: Shopping Carts

Answer 26

BECAUSE the shopping carts are goods, the situation presented by these facts is governed by Article 2 of the Uniform Commercial Code. UCC § 2-204 provides that a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

The conversation between the grocer and the supplier clearly shows an agreement pursuant to which the supplier would sell, and the grocer would buy, 100 shopping carts at $125 each.

THUS, UCC § 2-204 is satisfied and there is a contract for the supplier to sell, and the grocer to buy, 100 shopping carts.

Question 27

Within Scope of Enforceability (Writing + Signed) (UCC § 2-201)

Answer 27

UCC § 2-201(1) provides that except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense UNLESS there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought.

In order for the document to be sufficient to make the contract enforceable against the supplier under UCC § 2-201(1), HOWEVER, the document must be “signed” by the supplier.

“‘Signed’ includes using any symbol executed or adopted with present intention to adopt or accept a writing.” Comment 37 to UCC § 1-201 states that “in appropriate cases [the symbol] may be found in a billhead or letterhead.” ACCORDINGLY, some cases have held that a document on company letterhead can constitute a signed writing as long as the requisite intent is present.

Although the writing referred to in UCC § 2-201(1) need not contain detailed information about the contract, the contract is not enforceable beyond the quantity of goods shown in such writing.

Question 28

Exceptions to the rule in UCC § 2-201 Statute of Frauds

Answer 28

One of the exceptions to the rule in UCC § 2-201(1) discussed above is found in UCC § 2-201(2). Under that provision, which applies only “between merchants,” “if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party UNLESS written notice of objection to its contents is given within 10 days after it is received.”

NOTE: There are other exceptions to the UCC § 2-201 statute of frauds that are not at issue on these facts, but that might be discussed by some examinees.

• One of those exceptions applies if the goods are specially manufactured for the buyer and are not suitable for sale to others. HERE, there is NO indication that the shopping carts were specially manufactured.
• Another exception applies if the party against whom enforcement is sought admits in pleading, testimony, or otherwise in court that a contract was made. HERE, there is NO indication of such admission by the supplier.
• FINALLY, there is an exception that applies with respect to goods for which payment has been made or accepted or that have been received and accepted, but HERE NO payment has been made and NO shopping carts were accepted.

Some examinees may also note that the Uniform Electronic Transactions Act (UETA) and/or the federal Electronic Signatures in Global and National Commerce Act (E-SIGN) allow the writing requirement of UCC § 2-201 to be satisfied by an electronic communication. This is true, but it does not change the answer or the analysis, as there is NO electronic communication that would satisfy the requirements of UCC § 2-201.

Question 29

Scope + Enforceability (UCC)

Answer 29

Article 2 of the Uniform Commercial Code applies to transactions in goods. “Goods” are “things moveable” at the time of identification to the contract

Here, __________

Under UCC Article 2, a contract may be formed in any manner sufficient to show agreement.

Here, __________

HOWEVER, a contract for the sale of goods for a price of $500 or more is not enforceable against a party UNLESS there is a writing signed by that party sufficient to indicate that a contract for sale has been made (or an exception to this rule applies)

Here, __________

The writing need not contain all the terms of the contract, but the contract is not enforceable against the party beyond the quantity of the goods shown in writing. This rule is generally interpreted as indicating that a writing does not suffice UNLESS it contains a quantity term.

Here, __________

In conclusion, __________

Question 30

Repudiation (UCC)

• General Rule
• Retraction

Answer 30

UCC § 2-610 provides that if “either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other” the aggrieved party may for a reasonable time await performance by the repudiating party or resort to any remedy for breach.

Although Article 2 does not define “repudiation,” a comment to UCC § 2-610 states that repudiation “centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.”

Here, ____________

A repudiating party may, under some circumstances, retract its repudiation. But the power to retract a repudiation terminates when the aggrieved party has done any of the following: (1) cancelled, (2) materially changed his position, or (3) otherwise indicated that he considers the repudiation to be final.

Here, ____________

In conclusion, ____________

Question 31

Seller’s Remedies Analysis

Answer 31

The purpose of remedies under the UCC is to put the aggrieved party “in as good a position as if the other party had fully performed.” This is another way of stating the “expectation” principle of contract remedies.

Here, ____________

Under UCC Article 2, when a buyer breaches or repudiates, the seller has several remedies, including the remedy of reselling the goods.

If the resale is made in good faith and in a commercially reasonable manner, the seller can recover the difference between the contract price and the resale price plus incidental and consequential damages.

If the resale is by private sale (as opposed to, say, by a public auction), this remedy is available only if the seller gives the buyer reasonable notification of the seller’s intention to resell.

Here, ___________

The seller is also entitled to recover “incidental damages,” which include “any commercially reasonable charges or expenses incurred in connection with return or resale of the goods.”

Here, ___________