Contract & Sales (MBE/MEE) Flashcards
UCC vs. Common-Law
- UCC: All contracts involving sale of goods
- Common-law: Contracts involving services
- Mixed contract: When a contract includes both goods and services, whichever one predominates will determine the governing law.
Merchants
- A person who regularly deals in the type of goods involved in the transaction;
- A person who by his occupation holds himself out as having knowledge or skill peculiar to practices/goods involved in transaction; and
- In some instances, any businessperson when the transaction is of a commercial nature
Binding Contract
Requires manifestation of mutual assent (offer and acceptance), consideration, and lack of valid defenses
Offer
- Objective manifestation of a willingness by offeror to enter into agreement that creates power of acceptance in offeree
- Intent: Must express present intent to be legally bound by K
- Terms: Must be certain and definite
Common Law Offer Terms
All essential terms:
* Parties
* Subject Matter
* Price
* Quantity
Note: If parties intended to create a K, court may supply missing terms
UCC Offer Terms
- Only essential term is quantity (exception: Requirements or outputs K)
- UCC “fills the gap” if other terms are missing
- K formed if both parties intend to K and reasonably certain basis for giving remedy
Invitation to Deal
- Advertisements are only an invitation to recieve offers
- May qualify as an offer if sufficiently specific and limit who can accept or if associated with a stated reward
Termination of Offers
- Lapse of time: Specified termination date or reasonable period of time
- Death/Mental Incapacity: Offer terminates, even if offerree accepts without knowing, unless it is an Option K because consideration was paid to keep it open
- Destruction/illegality: Offer terminated
- Revocation
- Rejection by offerree: Offerree clearly conveys to offeror he no longer intends to accept offer. Effective upon receipt.
- Counteroffer: Acts as rejection of original offer and creates new offer. “Mere suggestion” or “mere inquiry” about changing terms is not a counteroffer.
Revocation of Offer
- Offer can be revoked at any time prior to acceptance.
- Not effective until communicated (revocation sent by mail not effective until received)
- General offer (large number of people): Revocable only by notice given at least same level of publicity as offer (effective even if potentail offeree acts in reliance on offer)
Limitations on Revocation of Offer
- Common-Law Option K: Offereree must give consideration for option to be enforeceable
- UCC Firm Offer Rule
- Promissory Estoppel: If offerree reasonably and detrimentally relies on offer, offer may become irrevocable for a reasonable period of time. If offerree accepts offer, valid contract is formed. If offeror then breaches contract, offeree is entitled to expectation damages.
- Partial Performance: For all Ks, offeree must have knowledge of offer when performance begins.
UCC Firm Offer Rule
Offer irrevocable (for reasonable time but no more than 3 months), if:
* (i) offer is a merchant (or any busuness person), and
* (ii) assurances (in authenticated writing) are made that offer will remain open
* Note: No consideration required
Unilateral Contract
- Offer: Act requested
- Partial performance: Offeror cannot revoke once offeree has begun performance
- Acceptance: Promise to do something by one party in return for an act of other party
- Notice of Acceptance: Offeree not required to give notice after completing performance unless (i) offeror wouldn’t learn of performance with reasonable certainty and promptedness, or (ii) offer requires notice. If notice required but not provided, offeror’s duty is discharged unless: (a) offerree exercises reasonable diligence to give notice, or (b) offeror learns of performance within reasonable time.*
Bilateral Contract
- Offer: Return promise requested
- Partial performance: Commencement of performance operates as promise to render complete performance
- Acceptance: Exchange of promises that render both enforceable. Starting to perform is not enough but makes offer irrevocable for reasonable period of time to complete performance. Offeree must be aware of offer before acting.
- Notice of Acceptance: Offeree must give notice of acceptance. Under UCC, if performance is made by beginning perfromance, notice is required within a reasonable time.
Acceptance
Objective manifestation by offeree to be bound by terms of offer
Means of Acceptance
- Unless offeror specifies, offeree can accept in any reasonable manner/means
- Silence: Not acceptance unless: (i) offeree has reason to believe offer could be accepted by silence or (ii) previous dealings make it reasonable to believe offeree must notify offeror if he doesn’t intend to accept
- Shipment of Goods: Buyer’s request that goods beb shipped is inviting acceptance either by seller’s promise to ship or by prompt shipment of goods
Mailbox Rule
- Applies only to acceptance; almost exclusively applies to bilateral Ks
- Acceptance: Effective when sent (not upon receipt), unless offer provides otherwise
- Rejection following acceptance: Mailbox rule applies
- Acceptance following rejection: Mailbox rule doesn’t apply; first one receieved will prevail
- Revocation: Effective upon reciept
- Options and other irrevocable offers: Mailbox rule doesn’t apply; acceptance must be receieved by offeror by certain date or before offer expires
Common-Law Acceptance
Mirror Image Rule:
* Acceptance must mirror terms of offer, so any change/addition to terms acts as rejection and new counteroffer
* Conditional acceptance terminates offer and acts as new offer from oroginal offeree
UCC Acceptance: 1+ Parties Not Merchants
- “Definite and seasonable” acceptance from offeree with changes or additions will be a valid acceptance
- However, contract will not include changes or additions unless offeror agrees to them
- Exception: Acceptance expressly conditioned on assent to new/different terms is a counteroffer
UCC Acceptance: Both Parties Merchants
Additional Terms: Automatically included in K unless:
* (i) Term materially alters original K (i.e., would result in surprise/hardship)
* (ii) Offer expressly limits acceptance to terms of offer; or
* (iii) Ojector objects to new terms with a reasonable time after notice of new terms is receieved
Different terms (“knock-out rule):
* Different terms in offer/acceptance nullify each other, and court uses UCC’s gap-filling provisions to patch holes in K
UCC Acceptance based on Conduct
If offer and purported acceptance differ to much to create a K but parties perform anyway, UCC allows for a contract to be recognized with the following terms:
* Any terms actually agreed upon in parties’ writings, and
* Any supplementary terms filled in by UCC
Consideration
- To constitute sufficient consideration, must be (i) bargained-for in exchange for the promise, (ii) promise must induce the detriment, and (iii) detriment must induce the promise
- Consideration can be return promise to do or refrain from doing something, or performance of or refraining from doing some act
- Adequacy of Consideration: Benefit to promisor need not have economic value
Consideration of Gifts
- Test: Whether offeree could reasonably believe intent of offeror was to induce action
- Promissory Estoppel: If promisor/donor knows that promise to make a gift will induce substantial reliance by promisee and failure to enforce it would cause substantial injustice
Pre-Existing Duty Rule
- Common-Law: Does not qualify as consideration unless promisor gives something in addition to what is owed, or varies pre-existing duty
- Exception for Third Party: Party’s promise to perform an act the party is contractually obligated to perform for another is sufficient consideration
Past Consideration
- Legal detriment incurred in past does not constitute consideration because it was not bargained for in exchange for a legal detriment.
- Modern trend towards enforcing past promises under the material benefit rule
Moral Consideration
- Under modern trend, a promise not supported by consideration may be enforceable if it is made in recognition of a material benefit previously received by promisor from promisee.
- Does not apply if promisee conferred benefit as a gift
- Court may reduce amount owed under promise if it is disproportionate to benefit conferred by promisee.
Consideration: Promise to Surrender Claim or Defense
Promise to surrender claim or defense constitutes consideration so long as:
* Claim or defense is valid or subject to good faith dispute, OR
* Surrendering party honestly believes that claim or defense may be valid
Common-Law Modification: Generally
Must be supported by consideration, and agreements to modify K are enforeceable if:
* Recission of existing K and entering into of new K
* Unanticipated difficulties arise and modification is fair and equitable, or
* New obligations arise on both sides
Statute of Frauds: If modified contract falls within SOF, it must be in writing unless an exception applies.
Provisions Prohibiting Oral Modifications: Not enforceable if promise otherwise wouldn’t fall within SOF. Just look to see whether new modification should be in SOF.
Note: If an original K is rescinded and parties enter into new agreement, agreement to “modify” a conctract is enforceable without new consideration
UCC Modification
- Requires only good faith
- No consideration is necessary
- Statute of Frauds: If modified K falls within SOF, it must be in writing unless an exception applies
- Provisions prohibiting modifications: Valid, even if modification wouldn’t fall within SOF
Accord and Satisfaction
- Accord: One party agrees to accept a different performance from other party to satisfy other party’s existing duty
- Satisfaction: Performance of accord agreement discharges both original K and accord K.
- Original K not discharged until satisfaction is complete, so, if no satisfaction after accord, can sue under either the accord or the original K.
Illusory Promises
Not legally binding because it is vague or promisor can choose whether to honor it
Requirements and Output Contracts
- Requirements: Buyer agrees to buy all that he requires
- Output: Seller agrees to sell all she manufactures
- Consideration because promisor suffers legal detriment
- Quantities may not be unreasonably disproportionate to estimates
Promises Binding without Consideration
- Pay a debt barred by SoL: New promise to pay debt after SoL has run is enforceable without new consideration
- Perform voidable duty: New promise to perform voidable duty is enforceable if it doesn’t suffer from infirmity rendering it voidable
- Material benefit rule
- Promissory estoppel
Material Benefit Rule
When a party performs an unrequested service for another party, modern trend permits performing party to enforce promise of payment for material benefits received to extent necessary to prevent injustice
Promissory Estoppel
A promise is binding without consideration if:
* (i) Promisor should reasonably expect it to induce action on part of promisee or a third person,
* (ii) Promise does induce such action, and
* (iii) Injustice can only be avoided by enforcement of promise
Defenses to Formation
No “meeting of minds” due to:
* **Mistake **
* Misunderstanding
* Misrepresentation or fraud
* Undue influence
* Duress
* Lack of capacity
Mutual Mistake
Both parties mistaken as to essential element. K generally voidable by party adversely affected if:
* (i) Mistake existed when K was formed
* (ii) Mistake relates to basic assumption of K,
* (iii) mistake has material impact on transaction, and
* (iv) Adversely affected party did not assume risk of mistake
Note: Neither party can avoid K if reformation available to cure mistake. Court can reform writing to except to extent rights of third parties who relied on K would be unfairly affected.
Reformation
A written K that fails to accurately express parties’ initial intent due to a mistake of both parties may be reformed to correct such a mistake when:
* Parties had a prior agreement;
* Parties put that prior agreement into writing; and
* Parties’ mistake caused a difference between prior agreement and written agreement
Unilateral Mistake
One party is mistaken as to essential element of K. Mistaken party can void K if:
* (i) he did not bear risk of mistake, either:
* (ii) (a) mistake would make enforcement of K unconscionable, or (b) non-mistaken party caused the mistake, had duty to disclose or failed to disclose mistake, or knew or sohuld have known other party was mistaken, and
* (iii) absence of serious prejudice to other party
Misunderstanding
- Both parties believe they are agreeing to same material terms, but they agree to different terms
- Waiver: One party can choose to enforce K according to other party’s understanding
- Subjective determination of misunderstanding
Misunderstanding: Neither party knows/has reason to know
No K if material term involved
Misunderstanding: One party/knows has reason to know
K formed based upon meaning of material term as understood by unknowing party
Misunderstanding: Both parties know terms ambiguous at time of K
No K unless both parties intended same meaning
Fraudulent Misrepresentation
Requires proof that:
* (i) Misrepresentation is fraudulent: (a) knowing or reckless false assertion of fact (b) with intent to mislead,
* (ii) misrepresentation induced assent to K, and
* (iii) Justifiable reliance on misrepresentation bya dversely affected party
Note: The misrepresentation can be affirmative (a lie) or through non-disclosure (omission), and misrepresentation does NOT have to be material
Also, not a misrepresentation if following a misrepresentation but before avoidance, misrepresenting party cures the facts such that they are in accordance with the contract
Fraud in the Factum
- Fraudulent misrepresentation prevents party from knowing character/essential term of transaction
- No K is formed and apparent K is void unless reasonable diligence would have revealed K’s true terms
Fraud in the Inducement
- Fraudulent misrepresentation is used to induce another to enter into a K
- K voidable by adversely affected party if she justifiably relied on the misrepresentation
Nonfraudulent misrepresentation
- Untrue assertion of a fact, but innocent or negligent
- Renders K voidable by adversely affected party who justifiably relied on material misrepresentation and was induced to assent because of it
Undue Influence
Unfair persasion of a party to assent to a K:
* (i) Relationship between dominant party and dependent party due to lack of expertise or experience, or diminished mental capacity, and
* (ii) Persuasion of one party seriously impairs free/competent judgement of other party
Note: Restitution available
Third-party undue influence
Victim may void K unless nonvictim party to K gave value or materially relied on K in good faith and without knowledge of undue influence
Duress
Requires: (i) Improper threat that (ii) deprives party of meaningful choice
* Improper Threat: Threats of criminal/civil action (made in bad faith) or to breach K in violation of good faith
* Deprivation of Meaningful Choice: Person has no reasonable alternative such that threat induced assent
Note: Void if duress through physical compulsion, voidable in other instances.
Capacity to K: Infancy
Voidable by infant (under 18) but not by adult (except for reasonable value of necessaries)
Note: Disaffirmance must be effectuated either before individual reaches age of majority or within a reasonable time thereafter.
Capacity to K: Mental Illness
- K is void for one who is adjudicated mentally incompetent
- K is voidable if there has been no adjudication
Capacity to K: Guardianship
K is void for individuals under guardianship (except for reasonable value of necessaries)
Capacity to K
K is voidable by intoxicated party if she was unable to understand nature/consequences of K and other party knew of intoxication
Defenses to Enforcement
- Illegality
- Unconscionability
- Public policy
Defenses to Enforcement: Unconscionability
K is unconsionable when so unfair to one party that no reasonable person in position of parties would agree to it
* Procedural: Bargaining process leading to the formation of the contract is unfair
* Substantive: Actual terms of the contract are significantly unfair
* Remedies: Court may refuse to enforce entire K, strike unconscionable portion of K, or limit unconscionable terms.
Defenses to Enforcement: Public Policy
K may be unenforceable if it violates a significant public policy
Defenses to Enforcement: Illegality
- K is unenforceable if consideration/performance under K is illegal
- K is void if it contempaltes illegal conduct
- Duty to perform is discharged if K becomes illegal after formation
- If one party is justifiably ignorant of facts making K illegal or lacks illegal purpose he can recover (assuming other party’s guilt)
Illegality Defense: Licensing Statutes
When a party does not have a required license, the enforceability of the contract depends on whether the purpose behind the requirement is (1) economic, in which case the contract is enforceable, or (2) regulatory, in which case it is unenforceable if the public policy beyond the requirement clearly outweights the interest in enforcement
Exceptions to Illegality Defense: Ignorance of Illegality
- Promisee may recover if promisee is justifiably ignorant of facts making K illegal and promisor had knowledge of illegality
- If both parties are excusably ignorant, promisee may have restitution claim
Exceptions to Illegality Defense: Lack of Illegal Purpose
Party who has substantially performed may recover if:
* K does not involve illegal consideration/performance: Party is unaware of other party’s illegal purpose
* Party knows of other party’s illegal use: unless party furthered illegal use or use involves grave social harm
Exceptions to Illegality Defense: Divisble Ks
If K can be easily divided into legal and illegal parts, a party may recover on the legal part(s)
Exceptions to Illegality Defense: Restitution
- When partis are not equally at fault, less guilty party may recover under restitution
- Withdrawal: Party who withdraws from illegal K before improper purpose has been achieved may recover under restitution when party has not engaged in serious misconduct
Implict-in-fact Contract
Conduct, not words, indicates assent or agreement
Quasi-contract (implied-in-law)
If there is no enforceable contract, court may award restitution damages if:
* Plaintiff conferred measurable benefit on defendant;
* Plaintiff acted without gratuitous intent; and
* Unfair to let defendant retain the benefit.
Express Warranty
- Any promise, assurance, affirmation, description, or sample that is part of the basis of bargain, unless it is merely the seller’s opinion
- Disclaimers: Disclaimers that unreasonably negate or limit express warranties are inoperative
Implied Warranty of Merchantability
- Implied whenever seller is a merchant
- Goods must be fit for their ordinary purpose
- Disclaimer: Oral or written disclaimer using term “merchantability”; writing must be conspicous
Implied Warranty of Fitness for a Particular Purpose
- Implied whenever (i) seller has reason to know buyer has particular use for goods, and (ii) buyer is relying on seller’s skills to select goods
- Disclaimer: Warranty can be disclaimed by general language but must be conspicuous writing, no oral waiver
Disclaimer of all implied warranties
- Language makes plain there is no implied warranty (e.g., sold “as is”
- Buyer’s inspection of goods
- Excluded/modified by course of dealing, course of perofrmance, or trade usage
Discharge of Contract Obligations
- Impracticability
- Frustration of Purpose
- Recission
- Release
- Destruction/damage to identified goods
Discharge: Impracticability
Elements:
* (i) Unforeseeable event has occured;
* (ii) Non-occurrrence of event was basic assumption on which K was made; and
* (iii) Party seeking discharge is not at fault and did not assume risk of event happening
Note: Usually arises after K formation, but a fact makning K performance impractical can exist when K is made if party has no reason to know of fact
Discharge: Partial Impracticability
- Temporary impracticability only suspends duty but is discharged if performance is materially more burdensome after impracticability ends (e.g., would need to hire someone else to fill in for you and would be more burdensome to have to hire both)
- If seller is able to deliver some goods, must be apportioned among all buyers with whom seller has contracted. Buyer may refuse to accept and may cancel K.
Discharge: Frustration of Purpose
- Unexpected event arises that destroy party’s purpose for entering K, even if performance of K is not rendered impossible
- Nonoccurrence of event must have been (i) a basic assumption at time of K, (ii) must be so severe it is not within assumed risks inherent under K, and (iii) party seeking discharge was not at fault.
Note: Can arise at time of K if a party has no reason to know a fact exists
Discharge: Recission
- Cancelling of K so as to restore parties to positions before K was made
- Grounds for recission must have existed at time K was made
- Recission possible by mutual agreement of parties, unless third-party beneficiary rights have already vested
Discharge: Release
Writing that manifests intent to discharge another party from existing duty
* Common Law: Release must be supported by consideration
* UCC: Written waiver or renunciation signed/delivered by aggrieved party is enough
Discharge: Destruction/damage to identified goods
- Destruction: Goods identified when K made are destroyed by no fault of either party before risk of loss passes to buyer; K is avoided, both parties are discharged, neither party is in breach
- Goods damages but not destroyed: K avoided or buyer can choose to take goods at reduced price, without any other claim against seller
- Risk of loss: If risk of loss has passed to buyer, K is not avoided and seller may demand performance by buyer
Intended Third-Party Beneficiary
- One to whom promisee wishes to satisfy an obligation or otherwise benefit by promised performance
- Has right to bring an action on K if rights vest
- Promisor can raise any defense against third-party that he had against original promisee
Incidental Third-Party Beneficiary
- One who benefits from a K even though there is no contractual intent to benefit that person
- No right to enforce K
Vesting of intended beneficiary’s rights
Rights of intended beneficiary vest when beneficiary:
1. Detrimentally relies on rights created;
2. Manifests assent to K at one of party’s requests; or
3. Files lawsuit to enforce K
Assignment of Rights
- Not allowed when they (i) materially increase the duty or risk of the obligor, or (ii) materially reudce obligor’s chance of obtaining performance
- Need present intent to transfer right immediately
- Assignment for consideration is irrevocable
- Assignee takes all rights of assignor as K stands at time of assignment, subject to any defenses that could be raised against assignor
Delegation of Duties
- Allowed unless other party to K has substantial interest in a specific indvidual’s performance
- When obligations are delegated, delegator is not released from liability, so delegator is still liable if delegatee does not perform (unless novation occurs)
- Delagate’s acceptance of delegation constitutes promise to perform delegated duties; promise is enforceable with consideration
- UCC: Delegation may be treated as creating reasonable grounds for insecurity
Prohibition on Assignment
Does not affect assignment of rights, but bars delegation of duties (unless circumstances indicate otherwise)
Novation
Delegator is only released from liability if other party to K agrees to release delegator as a party to K and substitute a new one
Statute of Frauds: Requirements
(1) Be in writing: Need not be formal contract, can use multiple writings to meet requirements, can be created after promises are made
* Sale of $500+ goods: Writing need not contain all K terms, but K not enforceable against party beyond Q shown in K
(2) Be signed by party to be charged
(3) Contain essential elements of the deal
Statute of Frauds: Types of Contracts
- Marriage: Agreement in consideration of marriage
- Suretyship: K to answer for debt/duty of another; unless main purpose of surety is surety’s own economic advantage
- One year: K that cannot be performed within one year after K is made
- UCC: When K for sale of goods is at least $500, memo must indicate K has been made, identify parties, contain a quantity term, and be signed by party to be charged
- Real Property K: Applies to Ks for s
Statute of Frauds Exception: Ks That Cannot be Performed within One Year
If full performance has occured by either party, court will enforce it
Statute of Frauds Exception: UCC Sale of Goods for $500+
- If full performance has occured by party seeking to enforce K, K will be fully enforceable
- If part performance has occured, K will be enforceable to extent money has been paid
- No writing required if K involves specially manufactured goods for buyer
Statute of Frauds Exception: UCC Letter of Confirmation
A K is enforceble against the receiving party if:
* (i) Both parties are merchants
* (ii) Party sends a confirmatory letter/memo that meets SoF to to other party; and
* (iii) Other party knowingly receieves memo and does not object in writing within 10 days
Statute of Frauds Exception: Sale of Land
K will be enforced if at least 2/3 acts have occurred:
* Purchase pays part or all of the purchase price
* Purchaser takes possession of the land; or
* Purchaser substantially improves the property
Statute of Frauds Exception: Estoppel
If a party reasonably and detrimentaly relies on a promise, a court may enforce the K against the other party
Parol Evidence Rule
- Prevents introduction of prior extrinsic evidence that contradicts terms of written K
- Applies when a writing is integrated: parties intended writing to be their final agreement
- Intent of the parties: Determines if there is total, partial, or no integration
Parol Evidence Rule: Total vs. Partial Integration
Total Integration: Complete expression of all terms of parties’ agreement
* Parties cannot introduce extrinsic evidence of prior/contemporaneous understandings or negotiations
Partial Integration: If writing sets forth only some terms
* Parties permitted to introduce supplementary extrinsic evidence of other terms that are consistent with writing (not contradictory)
Parol Evidence Rule: Common-Law vs. Restatement vs. UCC
- Common-Law (“Four corners” rule: Can only look to writing itself for intent of integration
- Restatement: If extrinsic term would naturally be omitted, term can be introduced so long as it isn’t contradictory
- UCC: Assumes written K is only a partial integration and allows almost any outside terms, unless there is a merger clause
Parol Evidence Rule: Inapplicability
- Raising a defense to formation or enforcement
- Providing condition precedent to existence of K
- Interpreting/clarifying ambiguity in K
- Subsequent agreement
- Collateral deal
- UCC: Supplementing even apparently unambiguous terms by evidence of trade usage or course of dealing (priority, highest to lowest: express terms, course of performance, course of dealing, trade usage)
Express Condition
- Condition must be complied with fully unlesss excused
- Substantial performance will not suffice
- Enforceable even when failure to meet condition results in denial of compensation
Implied Condition
- Conditions which court may find exist because nature of K suggests parties intended condition
- Requires only substantial performance
- UCC: Implies duty of cooperation
Condition Precedent vs. Subsequent
- Condition Precedent: Condition precedes obligation to perform
- Condition Subsequent: Condition excuses duty to perform after particular event occurs
Satisfaction of Conditions
- Examined against objective, reasonable person standard
- Aesthetic Taste: Subjective standard, but party must use good faith when assessing satisfaction
Suspension/Excuse of Conditions: Waiver
- Party whose duty is subject to condition can waive nonmaterial condition by words or conduct
- Conditions material to party’s primary purpose may be reinstated by the party
- Nonmaterial condition may be reinstated if: (i) waiving party communicates retraction of waiver before condition is due; and (ii) other party has not suffered detrimental reliance
Suspension/Excuse of Conditions: Wrongful Interference
If party whose duty is subject to a condition wrongfully prevents/interferes with occurence of that condition, condition is excused and interfering party has duty to perform
Suspension/Excuse of Conditions: Election
Party who chooses to continue with a K after a condition is broken waives condition
Suspension/Excuse of Conditions: Estoppel
Once a party waives a condition, he can be estopped from using condition as a defense if other party reasonably relied on waiver
Suspension/Excuse of Conditions: Forfeiture
Court may excuse nonmaterial condition if non-occurence would cause disporportionate failure
Common Law: Substantial Performance
- A party must substantially perform his part of the K
- A party who substantially performs may recover on the K even though that party has not rendered full performance
- A party who has not substantially performed generally cannot recover damages based on the K, but may be able to recover through restitution
- A party who fails to substantially perform is in material breach
- Willfull breach is more likely to be treated as a material breach (i.e. substantial performance is less likely to be found)
UCC: Perfect Tender
- Parties must strictly perform all duties under the K, or they will be in breach
- Seller: Must transfer ownership and tender goods conforming to warranty obligations
- Buyer: may inspect goods, upon acceptance, has an obligation to pay. Rejection of conforming tender amounts to breach.
- If either tender/goods are nonconforming, buyer has right to accept or reject all or part of the goods, subject to the seller’s right to cure
- A party who fails to strictly perform is in material breach
UCC: Right to cure
If a buyer rejects goods as nonconforming, seller has right to cure defective tender if (i) time of performance has not elapsed or (ii) seller had reasonable grounds to believe buyer would accept despite nonconformity
Method of tender: Seller’s place of business
Seller must place goods at disposition of buyer and give buyer notice, if necessary
UCC: Shipment of Non-Conforming Goods
- UCC allows seller to accept offer to buy goods for prompt or immediate shipment of goods that conform to offer
- But shipment of nonconforming goods serves as both rejection and counteroff if seller (a) made no prior promise to ship conforming goods and (b) notifies buyer that nonconforming shipment is merely an accomodation
Method of tender: Shipment contract (e.g., FOB seller’s place of business)
- Seller must deliver goods to a carrier and make a K for shipment
- When K is silent, shipment K is presumed when K requires shipment by third-party carrier
- Risk of loss for unidentified goods: Passes to buyer when seller gives possession of goods to carrier and makes proper K for shipment
Method of Tender: Destination contract (e.g., FOB buyer’s place of buiness)
- Seller must deliver goods to palce specified in K and tender them there by holding them at buyer’s obligation
- Risk of loss for unidentified goods: Passes to buyer when seller tenders goods at place specified in K
Common Law: Divisible/Installment Contracts
- Various units of performance divisible into distinct parts
- Recovery limited to amount promise for segment of K performed
- Damages recoverable for breach of other segments
Note: Construction contracts are not usually divisible contracts
UCC: Divisible/Installment Contracts
- Goods delivered in multiple shipments, each to be separately accepted
- Perfect-tender rule does not apply
- Buyer can only reject shipment if nonconformity substantially impairs the value to the buyer and cannot be cured
- Buyer may cancel K only if nonconforming tender substantially impairs the value of the entire K
Implied Duty of Good Faith and Fair Dealing
- Imposed on each party in any contract (Common Law or UCC)
- “Good faith”: Honesty in fact and observance of reasonable commercial standards of fair dealing
Common Law: Breach of Contract
Material breach: Nonbreaching party does not receive substantial benefit of bargain
* Allows nonbreaching party to withold any promised performance and to pursue remedies for breach, including damages
Minor breach: Breaching party has not substantially performed
* Nonbreaching party entitled to pursue remedies for nonmaterial breach (damages) but must perform under K
UCC: Breach of Contract
- Seller msut strictly perform all obligations under K or be in breach
- Material breach only applies to installment Ks or when parties stipulate in K
Common Law: Anticipatory Repudiation
- Repudiation must be clear and unequivocal through words or acts
- Nonbreaching party’s options: (i) treat repudiation as breach, (ii) ignore repudiation and demand performance, but suspend any performance if it would increase damages for other party, (iii) if date of performance has passed and only performance left is payment, must wait for actual breach before filing suit
- Retraction of repudiation: Can be retracted until (i) promisee acts in reliance on repudiation, (ii) accepts repudiation, or (iii) commences action for breach of K
- Does not apply to unilateral Ks
UCC: Anticipatory Repudiation
- Occurs when there is an (i) unequivocal refusal of buyer or seller to perform, or (ii) when reasonable grounds for insecurity arise and other party fails to provide adequate assurances within reasonable time (not to exceed 30 days)
- Retraction of Repudiation: Permitted if other party has not called K or materially changed position
UCC: Demanding Assurances
- A party can demand assurances (must be in writing) if reasonable grounds for insecurity about other party’s ability to perform (may suspend performance until provided)
- Failure to provide adequate assurances within reasonable time (limited to 30 days) treated as repudiation
Expectation Damages
- Intended to put nonbreaching party in same position as if K had been performed
- Must be calculated with reasonable certainty
- Calculated by comparing value of performance without the breach (i.e., contract price for performance) with value of performance with breach (i.e., FMV of performance)
- Expectation damages: loss in value + other loss - cost avoided - loss avoided
Economic Waste
- Applies to construction contracts
- When cost to fix or complete construction is clearly disproportional to any economic benefit gained, court can award damages equal to diminution in market price of property
- Willful breach: If only completion of K will give nonbreaching party benefit of bargain, can award damages to fix or complete construction even if it causes economic waste
Direct Damages
Necessary and usual result of defendant’s wrongful act (i.e., loss of value)
Common Law: Consequential Damages
Damages that result from breach, but arise out of special circumstances unique to plaintiff. In order to recover consequential damages, must prove:
* (i) Foreseeability: Damages must be natural and probable consequences of the breach or contemplated by the parties at time K was formed;
* (ii) Causation: Plaintiff must show that damages were caused by defendant’s breach; and
* (iii) Certainty: Plaintiff must prove the dollar amount with reasonable certainty.
Note: Consequential damages can be limited or excluded by parties’ agreement.
UCC: Consequential Damages
- Only buyers can seek consequential damages; sellers permitted to seek consequential damages based on common law
- Limitation of consequential damages for personal injury in case of consumer goods is prima facie unconscionable
- Limitation of damages when loss is commercial is not prima facie unconscionable
Incidental Damages
Compensation for commercially reasonable expenses incurred as a result of other party’s breach
Liquidated Damages
Damages stipulated as reasonable estimate of actual damages to be recovered in event of breach. Enforceable if:
* (i) Parties intended to agree in advance to damages,
* (ii) Stipulated amount was reasonable at time of K, bearing some relation to damages that might be sustained, and
* (iii) Actual damages would be uncertain and difficult to prove
Mitigating Damages
- Nonbreaching party has duty to avoid or mitigate its damages by taking reasonable steps that do not involve undue risk, expense, or inconvenience to seek replacements/substitutes for goods and/or services
- Failure to mitigate reduces damages that may be recovered by nnonbreaching party
Restitutionary Damages
- Restores to a party the benefit conferred on the other party
- Measured by increase in the defendant’s wealth from having received that benefit
Restitution: Recovery by Nonbreaching Party
- Nonbreaching party may recover for any benefit conferred on breaching party by way of part performance or reliance
- Nonbreaching party may not recover restitution if he has fully performed and only remaining performance by other party is payment of money
- Restitution is permitted in cases where nonbreaching party has partially performed a below-market-price contract, otherwise breaching party would profit from its breach. Damages are benefit conferred upon breaching party as measured by amount breaching party would have to pay to secure same performance by third party.
Restitution: Recovery by Breaching Party
- If P has not substantially performed, P cannot recover under K, but may be able to recover restitution for benefit conferred less D’s damages for breach
- P cannot recover if P’s breach was willful or if K provides nonbreaching party may retain value of breaching party’s performance as liquidated damages
Reliance Damages
- Reasonable out-of-pocket expenses incurred by nonbreaching party
- Recoverable if nonbreaching party incurs expenses in reasonable reliance upon promsie that other party would perform
- Party cannot recover both reliance and expectation damages
Specific Performance
Equitable remedy possible when damages are inadequate. Opposing party can raise equitable defenses of laches or unclean hands. Factors considered:
* Difficulty of proving damages with reasonable certainty;
* Hardship to D;
* Balance of equities;
* Wishes and understanding of parties;
* Practicality of enforcement; and
* Mutuality of agreement
Note: Specific performance is likely to be granted when a good or service is considered rare or unique (doesn’t necessarily have to be one of a kind).
Gifts to Intended Beneficiary: Specific perfomrmance may be granted in a suit between parties to a K that gives a gift to an intended beneficiary because nonbreaching party’s remedy at law (i.e., money damages) is inadequate.
UCC Buyer’s Remedies: Failure to Tender Goods
- Cancel K: If breach of installment K goes to the entire K
- Recovery of payments: Upon cancelation, buyer entitled to recover payments made for tender; on rejection or revoked acceptance, also gets security interest in goods in buyer’s possession
- Damages: Market price minus K price plus incidental and consequential damages
- Cover: Buyer may purchase similar goods elsewhere and recover replacement price minus K price
- Specific performance: For unique goods
- Replevin: Buyer can obtain undelivered goods from seller if at least partial payment is made or buyer is unable to effect cover
UCC Buyer’s Remedies: Nonconforming Tender
- Rejection: Buyer can reject goods if he gives notice to seller within reasonable time and before acceptance, and is then entitled to return of any payments made or to seek remedies
- Acceptance: Buyer accepts goods by (i) expressly stating acceptance, (ii) using goods, or (iii) failing to reject goods. To recover damages, buy must give seller timely notice of breach. Damages are difference between value of nonconforming goods and value of conforming tender.
- Right to cure: Seller has right to cure defective tender if (i) time of performance has not elapsed or (ii) seller had reasonable grounds to believe buyer would accept despite nonconformity
UCC Seller’s Remedies
- Right to price: Seller may recover full price if (i) buyer accepted goods; (ii) conforming goods are destroyed or lost after risk has shifted to buyer; or (iii) seller cannot reasonably sell identified goods
- Right to reclaim goods: From insolvent buyer if he maeks demand within 10 days after buyer receives goods
- Stoppage of goods in transit: Permitted if buyer breaches or is insolvent
- Wrongful rejection by buyer: Seller can collect damages, resell goods, or recover price
Lost Volume Seller
- A seller of goods who resells goods to a different buyer after original buyer breached. Goods sold to second buyer would have been sold to them even if original buyer had not breached K.
- If buyer wrongfully rejects goods by seller, seller can recover lost profits.
Risk of Loss: Identified Goods
Seller is excused if goods are totally destroyed through no fault of seller prior to risk of loss being shifted to buyer
Identified Goods
Goods are identified to the contract under the UCC when the seller ships, marks, or otherwise designates them as goods to which the contract refers
Risk of Loss: Effect of a Breach of Contract
- Seller’s Breach: Risk of loss remains on seller until buyer accepts or there is a cure
- Buyer’s Breach: If buyer breaches/repudiates after goods have been identified but before risk of loss shifts, risk immediately shifts to buyer
Statute of Limitations on Breach of Sales Contract or Warranty
- Four years after cause of action accrues (i.e., when breach occurs)
- Parties may reduce limitations period to no less than one year, but they may not extend it
Specific Terms Left to Later Date
- Parties to contract for sale of goods may agree that one party has right to decide specific term regarding performance at later date
- When party fails to seasonably make the specification, and that specification would “materially affect” the other party’s performance, the injured party may be excused from his own performance and treat the failure to select as a breach
Principle of Reasonable Expectations
- Parties should not be bound by terms that they would not expect to find in a K unless those terms were called to their attention
Duty to Use Best Efforts
- Requires all parties to use best efforts to carry out intent of K to prevent it from being ullusory when scope of party’s performance is omitted/unclear
Objective Theory of Contracts
- Requires party to be bound by K term even if that party is not subjectively aware of it
