Contracts Flashcards
Four types of irrevocable offers
- option contract
- merchant’s firm offer under 2-205
- performance begun following offer for unilateral contract
- detrimental reliance
How can an offer be accepted?
Unilateral contract can only be accepted through performance (becomes irrevocable once performance begins), bilateral contract can be accepted with performance or a promise to perform
Merchants confirmatory memorandum
Applies only when both parties are merchants
Written confirmation of oral agreement
Merchant must object within 10 days or lose SOF defense
Mailbox rule
In a bilateral contract, acceptance is effective upon dispatch
Exceptions: option contract, unilateral contract, offer stipulates that acceptance is valid only upon receipt
Acceptance under UCC
Generally, a buyers order is an offer
Seller can accept by promising to ship the goods or promptly shipping the goods
Frustration of purpose
Purpose of the contract has become valueless by virtue of an intervening event
Commercial impracticability
Unforeseen circumstances that make performance extremely and unreasonably difficult and expensive
Shipping nonconforming goods
Shipping nonconforming goods is both an acceptance of the offer and a breach of the contract
Buyer can accept the whole shipment, reject the whole shipment, or accept any commercially reasonable unit and reject the rest and seek damages
Accommodation exception for nonconforming goods
If seller uses prompt shipment as form of acceptance and notifies the buyer, that goods are being offered as an accommodation, the shipment is viewed as a counteroffer, so buyer can wholly accept or wholly reject the shipment
Acceptance under UCC – Battle of the Forms
An acceptance that contains additional or different terms is effective as an acceptance, unless the acceptance is expressly made conditional on assent to the additional terms
Where both parties are merchants, the additional terms become part of the contract, unless
-they materially alter the terms,
-offer expressly limits acceptance, or
-offeror rejects within a reasonable time
SoF Specially Manufactured Goods Exception
- Goods must be specially manufactured for the buyer
- Seller must have made a substantial beginning on their manufacture or made commitments for their purchase AND
- Goods must not be suitable for sale in the seller’s ordinary course of business
If the exception applies, K may be enforceable without a writing
K =
MA (O + A) + C – D
Express contracts are formed by
Language, oral or written
Implied contracts are formed by
Conduct
Are quasi-contracts contracts?
NO
Bilateral contract
Exchange of a promise for a promise
Each party a promisor and promisee
Unilateral contract
Offeror asks for performance rather than a promise
Offeror/promisor promises to pay promisee on completion
Once the act is completed, a contract is formed
Can ONLY accept by performance, not a return promise
A unilateral contract occurs in only two situations:
(1) when the offeror clearly (unambiguously) indicates that completion of performance is the only manner of acceptance; and (2) where there is an offer to the public, such as a reward offer
Look for: “my offer can be accepted only by …”
Ex: reward for lost dog
Definition of “goods”
Anything movable when identified to the contract
UCC definition of “merchant”
for seller/buyers:
one who regularly deals in goods of the kind sold or who otherwise by their profession holds themselves out as having special knowledge or skills as to the practices or goods involved
for general business practices:
almost anyone
Which law applies for contracts involving goods and nongoods?
determine which aspect is dominant and apply the law governing that aspect to the whole contract
However, if the contract divides payment between goods and services, then Article 2 will apply to the sale portion and the common law will apply to the services portion
For a communication to be an offer, it must
create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms
consider:
-was there an expression of a promise, undertaking or commitment to enter into a k?
-were there certainty and definiteness in the essential terms?
-was there a communication of the above to the offeree?
MUST be objective intent to enter into a contract (reasonable person standard)
Advertisements
Generally not offers, but invitations to deal
Can be offers if there is a quantity term
Exceptions to the general rule that ads are not offers
- ad contains a promise
- terms are certain and definite
- offeree is clearly identified
Offer must be definite and certain in its terms. How to determine?
Whether enough of the essential terms have been provide to make it capable of enforcement?
- offeree’s name
- offer’s subject matter
- price
Land sale offers must include
- price
- description of land (some particularity, but a deed description is not required)
Sale of goods offers must include
Quantity term
court will fill in price if needed
Requirements contract
B promises to buy from S all goods B requires
Output contract
S promises to sell to B all goods S produces, B agrees to buy that amount
Good faith assumption for requirements and outputs contracts
It is assumed that the parties will act in good faith; so, there can’t be a tender of or a demand for a quantity “unreasonably disproportionate” to (1) any stated estimate, or (2) (in the absence of a stated estimate) any normal or other- wise comparable prior output or requirements
Employment contracts that don’t specify the duration
Creates an at-will contract
Offers for contracts for services must include
The nature of the work
If a contract does not specify the price
Does not prevent formation EXCEPT in real property contracts
If it is goods, the UCC provides that the price will be a reasonable price at the time of delivery
Methods of termination
- lapse of time
- revocation
- rejection
- death
Termination by lapse of time
Offer terminated of not accepted within time specified by offer or within reasonable time
For the exam, more than a month – raise the issue
Termination by rejection
-express rejection (ex statement by offeree)
-counteroffer (same subject matter as original offer, but differs in terms)
COUNTEROFFERS KILL
–Mere bargaining is not rejection (“will you take x?”)
. = counteroffer
? = mere bargaining
Counteroffers are
Both a rejection and a new offer (conditional acceptance)
Reverses the roles of the parties
Termination by revocation
Offeror’s retraction of offer
Can be done any time before acceptance
Offer may be indirectly revoked if
-offeree receives correct information
-from reliable source
-of offeror’s acts indicating revocation
OFFEREE HAS TO KNOW
Revocations are effective upon
Receipt
NO mailbox rule
Option contract definition
Offeree gives consideration for offeror to not revoke offer for a period of time
Limitations on power to revoke
- option contract
- merchant’s firm offer under Art 2
- detrimental reliance
- beginning performance in response to true unilateral contract offer
Merchant’s firm offer rule
-merchant promises
-in signed writing (letterhead works)
-to keep offer open for time stated or a reasonable time
Enforceable for up to three months
Consideration not needed to keep offer open
Detrimental reliance and revocation
When the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held irrevocable as an option contract for a reasonable length of time
Mere preparation to perform
Does not equal performance
If substantial, could constitute detrimental reliance if foreseeable
The following events terminate an offer by operation of law:
- death or insanity of either party
- destruction of subject matter
- supervening illegality
Effect of death on a formed contract
Not automatically terminated
The obligation goes to the estate of the deceased
Language of the offer controls the manner of
Acceptance
Can the right to accept an offer be assigned?
Only if it is an option contract
Acceptance of an offer for bilateral contract
unless an offer specifically provides that it may be accepted only through performance, it will be construed as an offer to enter into a bilateral contract and may be accepted either by a promise to perform or by the beginning of performance
a unilateral contract cannot be accepted until performance is
completed
starting performance can create an option so that the offer is irrevocable
(offeree is not bound to complete)
Shipping the wrong goods =
Acceptance and breach
unless sent as an accommodation with shipment as acceptance
Does silence equal acceptance?
No
Exception: custom (eel skins)
common law mirror image rule
acceptance must mirror offer terms exactly
Article 2 acceptance
No mirror image rule
“seasonable expression” of acceptance
Under Article 2, if both parties to the contract are merchants, additional terms in the acceptance will be included in the contract unless:
- materially alter the original terms of the offer
- offer expressly limits acceptance to those terms OR
- offeror objects within a reasonable time
For Article 2 acceptance, are disclaimers considered a material change?
Yes
Material change = likely to cause hardship or surprise to offeror
Industry custom is not a material change
Mailbox rule
Acceptance effective when sent
Exceptions to the mailbox rule
- offer stipulates not effective until received
- option contract
- offeree sends a rejection and then an acceptance (then whichever arrives first is effective)
- offeree sends an acceptance and then a rejection, then the acceptance is effective UNLESS the rejection arrives first and the offeror detrimentally relies on it
Two elements of consideration
- bargained-for-exchange
2. legal value (benefit to promisor OR detriment to promise)
Promise for a promise equals consideration?
Yes
Can forbearance constitute consideration?
yes
Is past consideration consideration?
no
Consideration and modifications
Common law – need new consideration to modify (pre-existing duty rule)
Article 2 –no consideration required to modify (just need good faith)
Undisputed debt
Mastercard can make the promise and break the promise to take a lesser amount
Promissory estoppel
Does not require consideration—only the right answer if there is no consideration
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
(ex: bookkeeper who quit her job bc of $2k grandpa promise)
Defendants without capacity can
Disaffirm contract
Forms of incapacity
- minority
- mental incapacity
- intoxication
Retaining benefits after gaining capacity =
Implied affirmation
Incapacitated party still liable for
Necessaries
but only in restitution for reasonable value, not the contract price
Duress can be either ___ or ___
physical or economic
Effect of ambiguity in contract terms
Neither party aware of the ambiguity: no contract unless both intended same meaning
Both parties aware: no contract unless both intended same meaning
One party aware: binding contract based on ignorant party’s reasonable belief of the meaning of the ambiguous words (subjective intent counts here)
If there is a mutual mistake about existing facts, the contract may be voidable by the adversely affected party if:
(ex cubic zirconia v diamond)
- mistake concerns a basic assumption
- mistake has a material effect on the agreed-upon exchange
- party seeking avoidance did not assume the risk of the mistake
Mutual mistake about the existence of the subject matter vs mutual mistake about the value
- subject matter - no contract (Rose the pensive cow)
- value – contract
Unilateral mistake
Only one party is mistaken
Does not prevent formation unless the nonmistaken party knew or should have known about the mistake
Must be material and obvious
Mistaken party must not have borne risk of mistake
Unconscionability
Unfair terms AND oppressive surprise
Tested when contract formed
Common instances of unconscionability
- inconspicuous risk-shifting provisions
- contracts of adhesion
- exculpatory clauses
- limitations on remedies
Statute of Frauds categories
MYLEGS Marriage Year Land sales Executors Goods $500+ Sureties
SOF: marriage
A promise the consideration for which is marriage must be evidenced by a writing. This applies to promises that induce marriage by offering something of value (other than a return promise to marry—for example, “if you marry my son, I will give the two of you a house”)
SOF: year
Contracts impossible to complete in 1 year BY THE TERMS
Part performance does not satisfy the Statute of Frauds in this case. The date runs from the date of the agreement and not from the date of performance
SOF: land sales
Includes
- promises creating an interest in land
- leases for more than a year
- easements for more than a year
- mortgages
- fixtures
- minerals/structures/etc. if severed by the buyer
SOF: executors
Promise by executor to pay estate debts from another source (usu their own funds)
SOF: goods
$500.00 or more
SOF: sureties
A promise to answer for the debt or default of another
Exceptions to SOF
Modifications must be in writing only if the contract as modified falls under SOF
Leases of 1 year or less
Part performance of real estate contracts (starts oral, then part performance (payments, possession, or improvements) (need 2 out of 3))
Full performance for service contracts
Goods accepted or paid for
For custom goods: show a substantial beginning to satisfy the SOF
Merchant’s confirmatory memo
Clauses that prohibit oral modification
- unenforceable in common law contracts
- enforceable in Article 2 contracts
Do judicial admissions satisfy SOF?
Yes
If a party admits in pleadings or testimony that there is an agreement, it’s treated the same as though the party signed a writing
What is an adequate writing to satisfy SOF for Article 2?
Contract must have
- quantity term
- D’s signature
What is an adequate writing to satisfy SOF for common law?
Contracts for services must have
- all material terms (who are the parties what is the contract about?)
- D’s signature
Parol evidence rule
Excludes evidence of
-prior or contemporaneous agreements
-contradicting final writing
Requires the existence of a final writing (not applicable for oral agreements)
Exceptions to parol evidence rule
- partially integrated writing
- defense against formation (not contradicting the writing)
- explain a vague or ambiguous term
- correct clerical error
Course of dealing
Parties’ conduct in prior contracts
Can help define terms in current contract
Course of performance
Parties’ conduct in current contract
Trade usage
Industry norms that parties are aware of
Express warranty
Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model creates an express warranty if the statement, description, sample, or model is part of the basis of the bargain
Implied warranty of merchantability
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. To be merchantable, goods must at least be “fit for the ordinary purpose for which such goods are used.”
Implied warranty of fitness for a particular purpose
- buyer comes in with special purpose
- seller knows of special purpose
- seller picks out goods fit for buyer’s special purpose
Sellers can only disclaim ___ warranties, not ____ warranties
Implied, express
Two ways sellers can disclaim all implied warranties
Magic words: “as is” “with all faults”
Conspicuous disclaimer- reasonably obvious to a reasonable person
Limitations on damages clauses
Seller can limit damages available for breach of any warranty
As long as the limitation is not unconscionable
Limiting remedies for personal injury for consumer goods = unconscionable
Risk allocation rules
- If the agreement allocates risk, that controls
- If there is no common carrier, and if seller is a merchant, the risk of loss passes to the buyer only when they take physical possession. If seller is not a merchant, risk of loss passes to the buyer upon tender of delivery
- If there is a common carrier, risk of loss shifts to buyer when seller completes delivery obligation (NOT when actual delivery occurs)
Shipment contract definition and risk of loss
-seller delivers goods to common carrier
-arranges for delivery, and
-notifies buyer
Risk of loss passes to buyer on delivery to carrier
(look for the term “FOB” [location]) location is sellers city = shipment contract
Destination contract definition and risk of loss
Seller must delivery goods to buyer’s location
Risk of loss passes to buyer when goods arrive at the location
(look for the term “FOB” [location]) location is buyers city = destination contract
Common law performance
Substantial performance (meets contract’s essential purpose) is enough material breach is not substantial performance
Perfect tender rule (UCC Art 2)
Seller’s delivery must be perfect- right goods, right place, right time
Or buyer has right to reject all goods
Installment contracts
Requires delivery of goods in separate installments over a specified period
Conditions definition
Language that limits obligations created by contract language
Conditions are not promises
Express conditions must be
Perfectly satisfied
Satisfaction condition
Satisfaction measured by a reasonable person standard unless
-contract deals with art or personal taste
Express condition precedent
Performance not due until the event occurs
Condition subsequent
Events after performance that could terminate duty to pay
Conditions may be excused by
Action or inaction of person protected by condition
Person protected has to cooperate in good faith with the condition or they lose the protection of the condition
Waiver of condition
Voluntary giving up the condition’s protection
Anticipatory repudiation
Early statement of nonperformance
Can repudiations be retracted?
Repudiations can be retracted if not relied upon
Failure to give adequate assurance (Art 2)
- party may ask in writing for assurance other party will perform
- assurance not received = anticipatory repudiation
- have to have reasonable grounds to suspect they won’t perform
- only entitled to adequate assurance, cannot use it to rewrite contract or demand certain assurance
Recission
Party’s mutual agreement to cancel contract
Each party must have some performance remaining, cant rescission if completely done
Modification agreement
Replaces existing contract with a new one immediately
Accord and satisfaction
Agreement to accept a difference performance to satisfy existing duty
Need to show accord is satisfied before old obligation is excused
(sort of like a condition, look for “if … then”)
Without satisfaction, the old obligation is NOT excused
Difference between modification and accord and satisfaction
Modification: old obligation excused immediately
Accord and satisfaction: old obligation excused later (after accord)
Novation
Agreement to substitute a new party for an existing one
Delegation
One party finds replacement party to perform
Original party’s obligation not excused
Impossibility/impracticability as excuse
Later unforeseen event makes party’s performance impossible
Can be death or incapacity of an essential person
Typically not impossible for buyers to pay (ex estate can pay if they die)
If performance is made illegal by subsequent govt regulation
Performance excused (impossibility)
Destruction of contract’s subject matter
Excuses performance (impossibility)
Is increase in cost of performance an excuse?
Generally no
Has to be an extreme and unreasonable increase
Frustration of purpose as excuse
-BOTH parties understood the central purpose
-performance excused if contract’s essential purpose undermined
(apt for thanksgiving parade)
Breach definition
Failure to perform absolute duty
Common law breach
-has the breaching party materially breached or substantially performed?
-if BP has substantially performed, the nonbreaching party cannot avoid performance (they must perform and then pursue remedies for breach)
(ex reding pipe case)
Elements of material breach
- no performance or substantial performance
- no benefit of bargain to nonbreaching party
- contract ended
- counter-performance discharged
To determine substantial performance, court looks to:
- benefit received by nonbreaching party
- part performance by breaching party
- hardship to breaching party
Failure to perform a contract within the stated time is generally not a breach unless
-time is of the essence (courts look to all circumstances)
Perfect tender rule
If goods don’t conform, buyer may
- reject entire shipment,
- accept entire shipment, OR
- reject in part, accept in part
Acceptance of goods Art 2
Buyer accepts goods if they:
- indicate goods conform to contract
- indicate they’ll keep nonconforming good
- fail to reject within reasonable time
- fail to notify seller of rejection
- act inconsistent with seller’s ownership
When can acceptance of goods be revoked?
- there is a defect that substantially impairs their value to the buyer AND
- they accepted the goods on a reasonable belief that the defect would be cured OR
- accepted because it was difficult to discover the defect or because the seller assured the goods conformed
Seller has a right to ____ nonconforming goods within time for performance
Cure
Installment contracts and nonconformity of goods
- buyer can reject installment if nonconformity substantially impairs value of installment
- contract breached if nonconformity substantially impairs entire contract’s value and seller cannot cure
Anticipatory repudiation – effect on nonbreaching party
Injured party has immediate right to damages, creates obligation to mitigate, and discharges remaining duties of performance
Requirements for specific performance as a remedy
- money damages inadequate
- feasible to enforce
- usually for land (all land is unique)
- available for goods if rare/unique (like art or antiques), or buyer unable to buy anywhere else
- NOT available for service contracts
Seller can get Art 2 reclamation if
- buyer insolvent at time of receipt AND
- seller demands reclamation within 10 days of receipt and the buyer still has possession at the time of demand
Exception to the reclamation rule
Seller can reclaim goods beyond the 10-day limit if
- buyer misrepresents solvency
- in writing
- within 3 months before delivery
Expectation damages
Default $ damages
Put the injured party in the position they’d be in had the contract been performed
(ex value of a perfect hand)
Reliance damages
- available if expectation damages are uncertain
- return non-breaking party to precontract status quo
Restitution damages
Measured by value of the benefit conferred
Incidental damages
Costs incident to breach
ALWAYS recoverable
Does not matter if foreseeable or not
Consequential damages
Recoverable if foreseeable at time of formation
“be chatty up front”
Liquidated damages clauses upheld if
-damages difficult to estimate at contract formation
-amount reasonable forecast of damages/bears reasonable relationship to damages
Otherwise it is an invalid penalty clause
Typically single lump sum amount is invalid
If a liquidated damages clause is struck down as an invalid penalty clause
Can still get expectation damages, even if you don’t get the amount in the clause
Can do reliance damages if damages uncertain
Art 2 Buyer’s damages: Cover damages
Cover price minus original contract price
Art 2 Buyer’s damages: Market damages
Market price of similar goods – original contract price
Art 2 Buyer’s damages: Loss in value
Value as promised minus value as delivered
Are consequential damages available under the UCC?
Nope
Lost profits must be ____ to be recoverable
Foreseeable at time of formation
Buyers damages under Art 2 when seller in breach
- cover damages
- market damages
- loss in value
Sellers damages damages under Art 2 when buyer in breach
- resale damages
- market damages
- can’t resell, then full contract price
- lost volume seller rule
Art 2 Seller’s damages: resale damages
Contract price minus resale price
must sell new goods in good faith
Art 2 Seller’s damages: market damages
Contract price minus market price
Art 2 Seller’s damages: If the seller can’t resell the goods,
Full contract price available
Often the case for custom goods
Art 2 Seller’s damages: Lost volume seller rule
- unlimited supply/inventory
- lost profits measure of damages
Avoidable damages
Damages that could have been avoided are not recoverable
Don’t forget to subtract these out!
Duty to mitigate limited to similar/comparable subject matter
(ex big country big man)
Entrustment
Merchant who ordinarily deals in goods of kind sells entrusted goods to BFP
Owner has no rights against BFP
Owner has rights against merchant for conversion
Intended third party beneficiary scenario
Two parties contract to benefit third party
Intended third party beneficiary can enforce the contract directly even though they never made it
Intended beneficiary
- named in contract
- can enforce contract
Who is the promisor and promisee in a third-party beneficiary contract?
Promisor: party who promises to perform for the third party
Promisee: party who secures the promise
Promisor in third-party beneficiary contract has defenses against whom?
Promisor has the same defenses against TPB and promise
Do incidental beneficiaries have rights to enforce TPB contract?
NO
Who can enforce rights against promisor in TPB contract?
Either promise or beneficiary
Rule for recission/modification of TPB contracts
Contract can be rescinded/modified until beneficiary’s rights have vested
Vesting in a TPB contract
- beneficiary’s rights vest when they learn of the contract or rely on it
- promisor and promisee can’t cancel contract after vesting unless beneficiary consents or contract provides otherwise
Assignment
-two parties contract
-one party (assignor) assigns rights to third party (assignee)
-assignee can enforce rights against party who owes duty (obligor)
Assignee is NOT an original party to the contract
Valid assignment requirements
- language of present transfer (“I assign” not “I promise to assign”)
- no consideration needed (gift assignments are ok)
Restrictions on assignments
- language of prohibition = assignments not permitted (assignee without knowledge can still collect)
- language of invalidation = assignments null and void (assignee can NOT collect)
Assignments ___ substantially change the duties of the obligor
cannot
pay different person = not substantial, different person performs = maybe substantial
Assignee ____ recover from obligor directly
Can
Who does obligor have defenses against?
Obligor has same defenses against assignee as against assignor
Gift assignments
- easily revocable
- last gratuitous assignee wins
- later gift assignment revokes the previous gift assignment
- best to be at the back of the line!
____ assignee for consideration wins over all subsequent assignees AND previous gift assignees
First
Later assignee for consideration will prevail if
Doesn’t know of earlier assignment and is the first to get a payment from or a judgment against the obligor
Delegation
Party to contract delegates duty to third party
Generally, obligor can delegate duties without obligee’s consent
Can contract to prohibit delegations = no delegations allowed
If the person has special skills, cannot delegate, even to another person w/ special skills (if both parties agree it is a novation)
In contract clauses, no assignment also means
No delegations
Delegating party is ____ liable to the obligee
ALWAYS
A delegate who gets consideration is
Liable
no consideration = generally not liable, bc gift promises are not enforceable
Delegations for consideration create
Intended third party beneficiary obligations
Course of performance –course of dealing—trade custom(in order of importance)
thats it, thats the card
In order to accept an offer, you have to ___ of the offer to begin with
know
Gap fillers only for
UCC contracts
Mailbox rule only applies to
acceptance
Mailbox rule: if you write address incorrectly
The acceptance is effective on receipt
Court can never gap fill the ____ term under the UCC
Quantity
Battle of the forms- effect of acceptance + new term
Material: knocked out, contract under terms of original offer
Nonmaterial: becomes part of contract unless offeror timely objects
Material alterations for battle of the forms are those that affect
Money, liability, or remedies
Battle of the forms: If the offeree makes acceptance CONDITIONAL on assent to an additional term, then it is a
Counteroffer
Three ways for TPB contract to vest
- TPB learns + assents
- TPB learns + relies
- TPB learns + sues
Evidence of a condition precedent is an exception to the
parol evidence rule
