Contracts

Question 1

Consideration and the pre-existing duty rule

Answer 1

Does each party suffer a legal detriment?

Under the pre-existing duty rule, a party does not suffer a legal detriment as a result of the agreement because that party was already under a legal obligation to perform. Past consideration is no consideration.

Question 2

Can an advertisement be considered an offer?

Answer 2

Generally, advertisements are considered invitations to deal rather than offers that create a power of acceptance in an offeree.

However, if the advertisement is definite in its terms, leaves nothing to negotiate, and seems objectively reasonable, a court may find the advertisement is an enforceable offer.

Question 3

Unilateral v. bilateral contracts

Answer 3

Unilateral: Offeror makes an offer that calls for performance (acceptance by full performance).

Bilateral: Offeror and offeree exchange mutual promises (acceptance by reciprocal promise).

Question 4

Mailbox rule

Answer 4

When offeror and offeree communicate by mail, an acceptance by the offeree is effective when mailed.

If the offeree rejects the offer or counter-offers, the mailbox rule no longer applies. Communications thereafter are effective only when received by the other party.

The mailbox rule does not apply to acceptance under a valid option contract.

Question 5

What actions can terminate an offer?

Answer 5

• Death of the offeror
• Revocation
• Rejection
• Counteroffer
• Lapse of time

Question 6

Are all contracts assignable and delegable? When is an assignment effective? Can it be revoked?

Answer 6

Generally, all contractual rights may be assigned. Exceptions:

• (1) an assignment that would substantially change the obligor’s duty or risk (for example, personal service contracts where the service is unique);
• (2) an assignment of future rights to arise from future contracts (not future rights in already existing contracts); and
• (3) an assignment prohibited by law (including wage assignments in some states).

For an assignment to be effective, the assignor must manifest an intent to immediately and completely transfer their rights. A writing is usually not required. It is not necessary to use the word “assign”; any accepted words of transfer will suffice. A gratuitous assignment is effective; consideration is not required.

However, gratuitous assignments are revocable. If an assignment was done for consideration or taken as security for or payment of a preexisting debt, it cannot be revoked.

Question 7

Statute of frauds categories

Answer 7

• Marriage
• Year (1)
• Land
• Executor
• Guarantee
• Sale of goods ($500 or more)

Question 8

Upon the offeror’s offer, what options does each party have?

Answer 8

Offeror may revoke or revive (reoffers after rejection) any time before acceptance. When offeree has, despite the absence of an express revocation by offeror, reliable information that offer has been revoked, there is “indirect” revocation of the offer. In unilateral contracts, the offer is irrevocable once the offeree has begun performance but payment is not due until full performance.

Offeree may accept, reject, counteroffer (terminates power of acceptance), or make an inquiry (does not terminate power of acceptance).

Question 9

What happens if a seller ships non-conforming goods?

Answer 9

Under the perfect tender rule, substantial performance does not apply. If seller ships non-conforming goods, it constitutes an acceptance of the offer and an immediate breach of the contract.

However, when seller sends non-conforming goods to buyer and indicates they are for accommodation, seller is deemed to make a counteroffer rather than acceptance.

Question 10

What is an option contract?

Answer 10

An option contract protects an offeree from an offeror’s ability to revoke the contract.

Consideration for the option contract is required.

Note that common law option contract rules apply to the UCC when the option is not being made by a merchant.

Question 11

Merchant’s firm offer rule

Answer 11

A signed writing by a merchant which by its terms gives assurances that it will be held open is not revocable for lack of consideration for the stated period of time not to exceed three months.

Once the 3 months expires, common law rules apply: consideration is required for it to exceed the 3 month period.

A counteroffer/rejection does not terminate a merchant’s firm offer.

Question 12

What is a modification? When can contracts be modified under the common law and UCC?

Answer 12

A modification is a subsequent agreement that alters or changes the parties’ duties and obligations under the terms of their original contract.

Under the common law, new consideration is required for modifications. Note that the pre-existing duty rule still applies.

Under the UCC, modifications are enforceable without consideration as long as the modification was made in good faith.

Question 13

Implied in law v. implied in fact

Answer 13

Implied in law: Quasi-contract provides recovery for a plaintiff when no contract exists, provided that the plaintiff conferred a benefit on the defendant and it would be unjust for the defendant to keep the benefit given the circumstances. For example, doctors supplying emergency services are typical situations where courts will find that quasi-contracts exist.

Implied in fact: An implied in fact contract is an actual contract where there is consideration for the promise. A contract may be implied in fact when conduct (not just words) demonstrates that there is a mutual exchange of promises.

Question 14

Test for mutual assent

Answer 14

In deciding whether or not there is mutual assent, courts use an objective “reasonable person” test, in which the court examines the exchange between the parties that led to the establishment of the contract and then determines what a reasonable person would believe.

Question 15

Predominant purpose test

Answer 15

A court will view the predominant purpose of the contract. Where a contract has a mix of goods and services, relevant criteria for determining whether the UCC will control will include:

• (1) the contract language;
• (2) the nature of the seller’s business;
• (3) the reason for entering the contract; and
• (4) the amounts charged under the contract for the goods and services.

Question 16

Contracts with minors

Answer 16

Until attaining most states’ age of majority of 18, minors may form contracts, but their obligations are voidable. Disaffirmance is accomplished by words or deeds that objectively signify the election to avoid liability. Disaffirmance can occur prior to performance or even afterwards. Until the disaffirmance, the contract is binding. Affirmance may be either express or by conduct, e.g., failing to disaffirm the contract within a reasonable time after reaching majority.

However, when the contract is for necessaries (food, shelter, clothing) the other party has the right in quasi-contract to recover the reasonable value of the goods or services provided. If the contract is for necessaries and the minor can’t pay, the provider can go after the minor’s parents.

Question 17

Unilateral v. mutual mistake

Answer 17

Unilateral Mistake: Contract enforceable unless the non-mistaken party was aware of the other party’s mistake.

Mutual Mistake: Either party may seek rescission of the contract.

Question 18

Substantial performance

Answer 18

If the breach is less serious, the court will treat the party’s performance as “close enough,” meaning that the party has rendered substantial performance of the condition. In these cases, the aggrieved party will not be discharged of his performance obligation. The doctrine of substantial performance applies to contracts for services and, in particular, to construction contracts.

If there is no “time is of the essence” condition to the agreement, being a few days late will not constitute a material breach.

Question 19

Who bears the risk of loss for construction contracts?

Answer 19

Under the common law, for contracts for new construction, the builder bears the risk of loss until completion of the project.

For construction projects involving work on an existing structure, the owner of the structure bears the risk of loss.

The parties can always agree on some other arrangement by contract.

Question 20

UCC buyer’s remedies

Answer 20

When a buyer has contracted to purchase goods under a single delivery contract and the seller delivers nonconforming goods, the buyer has a right to reject the goods and either cancel the contract or sue for damages.

The buyer may recover the difference between the contract price and either the market price or the cost of cover, plus incidental and consequential damages, if any, less the expenses saved as a result of the seller’s breach.

In the alternative, the buyer may keep the goods, or a portion of the goods, and sue for damages under the contract. However, the buyer’s right to reject nonconforming goods is subject to the seller’s right to cure.

Question 21

“Satisfaction” requirement in contracts

Answer 21

Many contracts include an express condition that a party will pay only if “satisfied” with the other party’s performance. Because it is a condition, the promisor is under no duty to pay unless they are satisfied.

If the contract involves personal taste or judgment, a condition of satisfaction is fulfilled only if the promisor is personally satisfied. But note: even if a condition requires personal satisfaction, a promisor’s lack of satisfaction must be honest and in good faith. If the promisor refuses to examine performance or rejects performance in bad faith, the condition will be excused.

Construction contracts often include a condition requiring the satisfaction of the owner’s architect or engineer. The condition will be excused if the third person’s dissatisfaction is not honest and in good faith.

Question 22

Installment contracts

Answer 22

An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted.

The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured.

Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole.

Question 23

Frustration of purpose

Answer 23

Where a contingency occurs that dramatically reduces the value of performance to the receiving party, the doctrine of frustration of purpose may excuse the receiving party from its contractual obligations.

However, if the contingency was foreseeable and the receiving party did not include language in the contract discharging its duties if the contingency occurred, the receiving party will be deemed to have accepted the risk and will be liable under the contract. In other words, it can’t be an excuse if it was foreseeable to the parties when the contract was made.

• For example, if a promoter agrees with concert hall for a concert in the winter in buffalo and no one can get there because of a blizzard, it is not frustration of purpose because a blizzard in buffalo in the winter would be foreseeable at the time the contract was entered into.

Question 24

When may punitive damages be recovered?

Answer 24

Punitive damages may only be recovered in instances of willful breach: breach for the purpose of injuring the other property.

Breaching to increase your profits is not a willful breach.

Question 25

How are damages calculated when there is substantial performance?

Answer 25

Even though the party who has substantially performed is able to enforce the contract, the other party will be able to mitigate by deducting damages suffered due to the first party’s incomplete performance.

In contractor cases in which there has been substantial performance, the measure of damages is typically the diminishment in value.

Question 26

When will liquidated damages provisions be upheld?

Answer 26

For a liquidated damages provision to be upheld by a court, two conditions must be met. The first is that the damages that are anticipated by a possible breach must be uncertain or difficult to prove. The second is that the amount chosen for the provision must be a reasonable estimate of losses to be expected from a breach.

Upholding the provision is at the discretion of the court, it is binding on the parties but not on the court. Courts generally will only enforce liquidated damages when there are no easily recognizable legal damages.

Question 27

Statute of frauds part performance exception

Answer 27

The doctrine of part performance may be used to enforce an otherwise invalid oral contract for sale of land. To satisfy this doctrine, a showing of at least two of the following three facts must be made:

• (a) payment of all or part of the purchase price;
• (b) taking of possession; and
• (c) making substantial improvements.

This exception only protects the rights of the buyer, not the seller.

The part performance exception does not apply to other types of contracts; full performance is required for the contract to be enforceable. However, the performing party may be able to recover for the reasonable value of the services actually rendered.

Question 28

Are oral modifications of written contracts enforceable?

Answer 28

An oral modification supported by consideration is enforceable, unless it involves one of the six situations covered by the Statute of Frauds.

Question 29

When is specific performance available as a remedy?

Answer 29

If the legal remedy (money damages) is inadequate, the nonbreaching party may seek specific performance, which is an order from the court to the breaching party to perform.

Specific performance is always available for land sale contracts, because all land is unique. It is also available for goods that are rare or unique at the time performance is due.

It is not available for contracts for services, even if the services are rare or unique. However, a party may enjoin a breaching employee from working for a competitor during the term of the contract if the services are rare or unique (actors, athletes, etc.).

Question 30

What is an express warranty? What is the remedy for breach?

Answer 30

An express warranty is any affirmation of fact or promise made by the seller to the buyer, any description of the goods, or any sample or model that becomes part of the basis for the bargain. It must have come at a time that the buyer could have relied on it (cannot be after formation), but the buyer need not prove actual reliance. Rather, the seller can assert lack of reliance as a defense.

The remedy for breach of an express warranty is the difference in value between the goods as delivered and the goods as warranted, plus incidental and consequential damages

Question 31

What happens when contract language is ambiguous? Is extrinsic evidence allowed to interpret ambiguities?

Answer 31

If a contract includes a term with at least two possible meanings, the result depends on the parties’ awareness of the ambiguity:

• (a) Neither party aware: no contract formed unless both parties intended the same meaning;
• (b) Both parties aware: no contract unless both parties intended the same meaning;
• (c) One party aware: binding contract based on what the ignorant party reasonably believed to be the meaning of the ambiguity.

If there is a dispute as to meaning, parol evidence can be received to aid the factfinder in reaching a correct interpretation of the agreement. However, if the meaning is plain, parol evidence is inadmissible.

Question 32

When is rescission available as a remedy?

Answer 32

• Mutual mistake
• Unilateral mistake if the other party knew or should have known of the mistake; or if the hardship on the mistaken party is so extreme as to outweigh the other party’s expectations under the contract
• Misrepresentation of fact or law by either party as to a material factor in negotiations that was relied upon
• Other grounds such as duress, undue influence, illegality, lack of capacity, and failure of consideration

Question 33

Misrepresentation as a defense to contract enforcement

Answer 33

A contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material. A misrepresentation is material if:

• (a) it would induce a reasonable person to agree; or
• (b) the maker knows that for some special reason it is likely to induce this particular person to agree, even if a reasonable person would not.

Question 34

What happens under the UCC when a buyer accepts goods? How does a buyer accept?

Answer 34

A buyer’s right to reject under the perfect tender doctrine is cut off by acceptance. Under Article 2, a buyer accepts when:

• (a) After a reasonable opportunity to inspect the goods, the buyer indicates to the seller that the goods conform or that they will take the goods in spite of nonconformity;
• (b) They fail to reject within a reasonable time after tender of delivery or fail to notify seller of their rejection; or
• (c) They do any act inconsistent with seller’s ownership.

Question 35

UCC buyer’s right to revoke

Answer 35

The buyer may revoke their acceptance if the goods have a defect that substantially impairs their value to the buyer and:

• (a) They accepted the goods on the reasonable belief that the defect would be cured and it has not been cured, or
• (b) They accepted the goods because of the difficulty of discovering the defects or because the seller provided assurance that the goods conformed to the contract.

Revocation must occur within a reasonable time after discovering the defects and before any substantial change in the goods occurs that is not caused by a defect present at the time the seller relinquished possession.

Question 36

Perfect tender rule

Answer 36

Substantial performance does not apply under the UCC. Under the perfect tender rule, if the goods or their delivery fail to conform to the contract in any way, the buyer generally may reject all, accept all, or accept any commercial units and reject the rest. In all instances, the buyer may sue for any damages suffered.

Question 37

When has a party repudiated? What are the non-repudiating party’s options?

Answer 37

A party has anticipatorily repudiated a contract when, before performance is due, the party:

• (a) makes an unequivocal and definite statement that he will commit a total breach, or
• (b) engages in any conduct that renders that party unable to perform its duties.

A repudiation must show a party’s intent to commit a total breach. Mere expression of doubt as to his willingness to perform is not enough to constitute a repudiation. It cannot come from a third party, it must come directly from the repudiating party.

After repudiation, the non-repudiating party may:

• (a) suspend performance;
• (b) terminate the contract and sue for breach; or
• (c) continue to treat the contract as valid and wait for the time of performance before bringing suit.

Question 38

When does a party’s right to retract a repudiation terminate?

Answer 38

The general rule is that the repudiating party has the right to retract its repudiation at any time before performance is due. The right of retracting terminates when the non-repudiating party:

• (a) gives notice that it chooses to treat the contract as rescinded or terminated;
• (b) treats the anticipatory repudiation as a breach by bringing suit; or
• (c) materially changes its position in reliance on the repudiation.

Question 39

Promissory estoppel

Answer 39

Consideration is not necessary if the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice if:

• (1) the promisor should reasonably expect to induce action or forbearance; and
• (2) such action or forbearance is in fact induced.

If the elements are met, some jurisdictions will award expectation damages. Courts following the second restatement will limit the remedy “as justice requires.”

Question 40

Impossibility v. impracticability

Answer 40

The occurrence of an unanticipated or extraordinary event may make contractual duties impossible or impracticable to perform. Where the nonoccurrence of the event was a basic assumption of the parties and neither party expressly or impliedly assumed the risk of the event occurring, contractual duties may be discharged.

To be discharged by impossibility, it must be objectively impossible for anyone to perform. Subjective impossibility will not suffice.

To be discharged for impracticability, the party to perform must have encountered extreme and unreasonable difficulty or expense. Events sufficient for discharge include shortage of raw materials, war, labor strikes, embargos, unforeseen shutdown of a major supplier, or catastrophic crop failure. Mere increase in costs is insufficient.

Question 41

UCC SoF writing requirements

Answer 41

Under the UCC, a writing to satisfy the statute of frauds must include the quantity of goods, the signature of the party to be charged, and sufficient information to indicate that a contract was formed.

The quantity of a requirements contract is ascertainable by reference to extrinsic evidence. If a buyer/seller has been in business for many years, their history of requirements will be sufficient evidence to supply the quantity of a requirements contract.

Question 42

Incidental v. consequential damages

Answer 42

Incidental damages are most commonly associated with contracts for the sale of goods and typically include expenses reasonably incurred by a buyer in inspection, receipt, transportation, care, and custody of goods rightfully rejected and other expenses reasonably incident to the seller’s breach, and by the seller in storing, shipping, returning, and reselling the goods as a result of the buyer’s breach.

Consequential damages are special damages and reflect losses over and above standard expectation damages. They arise because of the nonbreaching party’s particular circumstances, and most often consist of lost profits. These damages may be recovered only if, at the time the contract was made, a reasonable person would have foreseen the damages as a probable result of the breach. The breaching party must have known or had reason to know of the special circumstances giving rise to the damages. In contracts for the sale of goods, only a buyer may recover consequential damages.

Question 43

Parol evidence rule

Answer 43

Under the parol evidence rule, where the parties to a contract express their agreement in a writing with the intent that it embody the final expression of their bargain, any expression made prior to the writing and any oral expression contemporaneous with the writing is inadmissible to vary the terms of the writing.

However, where it is asserted that there was an oral agreement that the written contract would not become effective until the occurrence of a condition, evidence of the oral agreement may be offered and received.

Question 44

Framework for questions dealing with third party beneficiaries and their rights

Answer 44

First, at the time the contract was made, did the promisor promise the promisee to render some performance to a third party? If no, this is not a TPB situation.

If yes, is the third party (a) specifically identified, (b) to receive performance directly from the promisor, or (c) in some relationship with the promisee to indicate an intent to benefit? If no, the TPB cannot enforce the contract.

If yes, have the TPB’s rights vested by (a) assenting to the contract, (b) bringing suit to enforce it, or (c) materially changing position in justifiable reliance? If no, the promisor and promisee are free to change the terms of the contract. Note that merely being informed of the agreement does not cause rights to vest; it must be coupled with justifiable reliance.

If yes, the TPB can enforce the contract against the promisor, subject to the defenses it has against the promisee, unless the promisor made an absolute promise to perform.

Question 45

What is the effect of a valid accord? What about a satisfaction?

Answer 45

A valid accord, taken alone, does not discharge the prior contract. It merely suspends the right to enforce it in accordance with the terms of the accord contract.

The performance of the accord agreement, which is called satisfaction, discharges not only the accord agreement but the original contract as well.

An accord and satisfaction generally may be accomplished by tender and acceptance of a check marked “payment in full” where there is a bona fide dispute as to the amount owed.

Question 46

Common law materiality factors

Answer 46

Under the common law, the materiality factors are used to determine the degree of breach:

• (i) amount of benefit not received,
• (ii) the extent of damages (if only monetary, more likely partial),
• (iii) forfeiture suffered by the breaching party,
• (iv) likelihood of cure by the breaching party, and
• (v) lack of good faith and fair dealing of the breaching party.

Question 47

What are the requirements for a valid novation? What is the effect of a novation?

Answer 47

A novation occurs where a new contract substitutes a new party to receive benefits and assume duties that had originally belonged to one of the original parties under the terms of the old contract. A novation discharges the old contract. A novation will be found when there is:

• (1) a previous valid contract;
• (2) an agreement among all parties, including the new party to the new contract;
• (3) the immediate extinguishment of contractual duties as between the original contracting parties; and
• (4) a valid and enforceable new contract.

Question 48

What is the default rule for when an agreement under the UCC does not specify whether it is a shipment or destination contract? Are there any exceptions?

Answer 48

The UCC presumes a contract is a shipment contract in the absence of a contrary agreement. In a shipment contract, the seller must ship the goods by carrier but is not required to tender them at a particular destination. (A “ship to” address does not make a contract a destination contract.) In a shipment contract, the risk of loss generally passes to the buyer when the goods are delivered to the carrier.

There is an exception, however, if the buyer has a right to reject the goods. In that case, the risk of loss does not pass to the buyer until the defects are cured or the buyer accepts the goods.

Question 49

What is the implied warranty of merchantability and how is it disclaimed?

Answer 49

Implied in every contract for sale by a merchant who deals in goods of the kind sold, there is a warranty that the goods are merchantable, which means that the goods must at least be fit for the ordinary purpose for which such goods are used.

The warranty can be disclaimed specifically, which requires that the disclaimer mentions “merchantability” and, if in writing, that it is conspicuous. The warranty can be disclaimed generally by use of the words “as is” or similar language.

To be effective, a disclaimer must be part of the offer and acceptance process or must be agreed to by the buyer as a modification. It will not be effective merely for being included in delivery materials afterward.

Question 50

What is the implied warranty of fitness for a particular purpose and how is it disclaimed?

Answer 50

A warranty will be implied in a contract for the sale of goods whenever any seller, merchant or not, has reason to know the particular purpose for which the goods are to be used and that the buyer is relying on the seller’s skill and judgment to select suitable goods; and the buyer in fact relies on the seller’s skill or judgment.

The implied warranty of fitness can be specifically disclaimed only by a conspicuous writing. It can also be disclaimed generally by using “as is” or similar language.

To be effective, a disclaimer must be part of the offer and acceptance process or must be agreed to by the buyer as a modification. It will not be effective merely for being included in delivery materials afterward.

Question 51

Are there any implied warranties by builders in contracts to construct new houses?

Answer 51

Although the common law held that contracts of sale and deeds of real property carry no implied warranties of quality or fitness for the purpose intended, most courts now find an implied warranty of fitness or quality extends to the sale of any new house by the builder. The warranty implied is that the new house is designed and constructed in a reasonably workmanlike manner and suitable for human habitation. Some courts go further and extend the warranty to a subsequent purchaser.

Question 52

What are the rights of a party partially performing a divisible contract? When is a contract divisible?

Answer 52

If a party performs one of the units of a divisible contract, it is entitled to the agreed-on equivalent for that unit even if it fails to perform the other units. A court may find a contract divisible when:

• (1) the performance of each party is divided into two or more parts under the contract;
• (2) the number of parts due from each party is the same; and
• (3) the performance of each part by one party is agreed on as the equivalent of the corresponding part from the other party.