Contracts

Question 1

HIGH

*COMMON LAW vs. UCC

Answer 1

The gateway issue in all contracts and sales essay questions will be to determine whether the common law or Article 2 of the UCC governs:

1. The common law governs if a contract deals with real estate or services;
2. The UCC governs if a contract deals with goods.

Question 2

HIGH

*MIXED CONTRACTS: PREDOMINATE PURPOSE TEST

Answer 2

For mixed contracts (contracts that have elements of both services and goods,) the predominant purpose of the contract determines whether the common law or UCC governs

If the predominant purpose of the contract involves the purchase or sale of goods, the UCC applies.

If the predominant purpose of the contract involves services or real estate, the common law applies.

Question 3

HIGH

**CONTRACT FORMATION REQUIREMENTS

Answer 3

A traditional, enforceable contract is formed when there is:

1. Mutual assent (an offer + valid acceptance of that offer);
2. Consideration; AND
3. No defenses to formation that would invalidate the otherwise valid contract.

Question 4

HIGH

**THE OFFER

Answer 4

To form an offer, the offeror must:

1. Manifest a willingness to enter into an agreement; AND
   
   1. Objective Test. The offer is governed by an objective test, which means that outward appearances of words and actions are determinative – not subjective hidden intentions (e.g., If a person makes an offer as a practical joke with his fingers crossed behind his back but his outward words and actions demonstrate willingness to enter the agreement, it is a valid offer. The offeror’s subjective intent is irrelevant).
2. Create a power of acceptance in the offeree.)
   
   1. Specific Offeree. Generally, an offer must be directed to a specific offeree. However, there is a limited exception for contest offers and reward offers that promise something to anyone who accomplishes a certain task (e.g., a posted sign that offers a cash reward for finding lost puppy is a valid offer)

Question 5

HIGH

**ADVERTISEMENTS AS OFFERS

Answer 5

An advertisement is usually considered an invitation to deal rather than an offer. This is because an advertisement usually fails to confer a power of acceptance to the other side.

However, advertisements that are very specific and leave nothing open to negotiation may constitute offers.

Question 6

HIGH

**TERMS REQUIRED IN THE OFFER UNDER THE COMMON LAW

Answer 6

Under the common law, all essential terms must be specified in the offer.

Generally, this includes the following four terms:

1. Parties;
2. Subject;
3. Quantity; AND
4. Price.

Question 7

HIGH

**TERMS REQUIRED IN THE OFFER UNDER THE UCC

Answer 7

Under the UCC, the law is more willing to plug the gaps. Unlike the common law, PRICE IS NOT REQUIRED in the offer. Generally, only three terms must be specified in the offer:

1. Parties;
2. Subject; AND
3. Quantity.

Question 8

HIGH

**REQUIREMENTS AND OUTPUT CONTRACTS

Answer 8

Requirements and output contracts are valid under the UCC even though they do not specify an exact quantity.

In a requirement contract, the seller agrees to sell as much as the buyer would require.

In an output contract, the seller agrees to sell his entire production to the buyer.

Question 9

HIGH

**TERMINATING THE OFFER

Answer 9

If a valid offer is terminated at any time before acceptance, the offer is invalidated. It CANNOT be accepted or revived unless a new offer is made.

There are seven main ways that the offer can be terminated:

1. The offeror can revoke the offer by express communication to the offeree at any time before acceptance;
2. The offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract;
3. The offeree rejects the offer;
4. The offeree makes a counteroffer;
5. The offeror dies;
6. A reasonable amount of time passes; OR
7. The subject matter of the offer becomes illegal or is destroyed.

Question 10

MED

*OPTION CONTRACTS

Answer 10

The offeror is normally free to revoke his offer at any time prior to acceptance; however, option contracts are irrevocable. An option contract is an agreement where consideration is given in exchange for a promise to keep an offer open (e.g., “I promise not to revoke this offer for one week if you pay me an additional $100 to keep the offer open.”).

Question 11

MED

*FIRM OFFERS

Answer 11

The offeror is normally free to revoke his offer at any time prior to acceptance; however, firm offers are irrevocable.

Under the UCC, a merchant can make a firm offer to buy or sell goods, which will either last as long as stated in the offer or for a reasonable time period not to exceed 90 days. A firm offer must:

1. Be in writing;
2. Contain an explicit promise not to revoke; AND
3. Be signed by the merchant.

Question 12

MED

*IRREVOCABLE OFFER:
UNILATERAL CONTRACTS

Answer 12

Offeree has started performance. A unilateral offer to contract cannot be revoked by the offeror if the offeree has started performance.

A unilateral offer arises from a promise that requests acceptance by an action of the promisee (versus a return promise, which is called a bilateral contract).

Question 13

MED

*IRREVOCABLE OFFER:
DETRIMENTAL RELIANCE

Answer 13

An offer cannot be revoked if the offeree reasonably and detrimentally relies on the offer in a foreseeable manner.

Question 14

HIGH

**ACCEPTANCE

Answer 14

An acceptance is a manifestation of a willingness to enter into the agreement by the offeree (usually must be communicated to the other party - silence generally does not manifest willingness unless there is a past history of silence serving as acceptance).

Question 15

HIGH

**MASTER OF THE OFFER

Answer 15

The offeror is the master of the offer, which means that the offeree MUST accept the offer according to the rules of the offer.

(1) For bilateral contracts, the start of performance manifests acceptance.
(2) For unilateral contracts, the start of performance only makes the offer irrevocable – the offer is only accepted once performance is complete.

[Acceptance is governed by an objective test, which means that outward appearances of words and actions are determinative – not hidden intentions (e.g., a person accepts an offer with his fingers crossed behind his back).

The offer must be specifically directed to the person trying to accept it – cannot accept an offer directed elsewhere (for open-to-all contests and reward offers, the person must know about the contest or reward offer in order to accept it.)]

Question 16

HIGH

**MAILBOX RULE

Answer 16

An ACCEPTANCE that is sent by mail, email, or fax is valid at the moment of dispatch (not when the letter is received), UNLESS:

1. The offeree-sender uses the wrong address or has improper postage;
2. The offeror expressly stipulates that the acceptance is valid upon receipt;
3. An option contract is involved;
4. The offeree-sender sends a termination letter BEFORE the acceptance letter; OR
5. The offeror detrimentally relies on a termination BEFORE he receives the acceptance letter.

Question 17

HIGH

**COUNTER OFFER

Answer 17

A counteroffer operates as both a rejection that terminates the original offer AND as a formation of a new offer.

Question 18

HIGH

**MIRROR IMAGE RULE

Answer 18

Under the common law, the terms in the acceptance MUST match the terms of the offer exactly - otherwise it is not an acceptance, it is a counteroffer (i.e., the terms of the offer and acceptance must mirror each other exactly).

Question 19

HIGH

**UCC Sec. 2-207(1)
Acceptance

Answer 19

Under the UCC, the acceptance does NOT have to mirror the offer (i.e., the acceptance can include different or additional terms from those in the offer).

UCC Sec. 2-207(1) determines whether the purported acceptance (containing new terms) will operate as an acceptance or as a counteroffer. It states:

1. A definite and seasonable expression of acceptance or written confirmation;
2. Which is sent within a reasonable amount of time;
3. Operates as an ACCEPTANCE even though it states terms additional to or different from those offered or agreed upon;
4. UNLESS acceptance is expressly made conditional upon assent to the additional or different terms.

Question 20

HIGH

**UCC Sec. 2-207(2)
Additional Terms

Answer 20

If the purported acceptance is a valid acceptance under UCC Sec. 2-207(1), the next issue is whether the additional or different terms in the acceptance will govern the contract or whether UCC gap fillers will be implemented.

Under UCC Sec. 2-207(2), the ADDITIONAL terms (nonconflicting terms) will govern the contract if BOTH parties are merchants UNLESS:

1. The initial offer expressly limited acceptance to its terms;
2. The additional terms materially alter the deal; OR
3. The offeror objects to the additional terms within a reasonable amount of time.

Question 21

HIGH

**THE KNOCKOUT RULE

Answer 21

Most courts apply the knockout rule with UCC Sec. 2-207(2) to determine whether the new terms control or whether UCC gap fillers must be implemented. Under the knockout rule, a distinction is made between “different” and “additional” terms.

A different term is a term that was not included in the original offer that conflicts with the terms of the original offer (e.g., offeree changes the price term from $5,000 to $4,000 and sends it back to the offeror).

An additional term is a term that was not included in the original offer that does NOT conflict with the original offer (e.g., offeree adds a choice of law provision that was not included in the original offer and sends it back to the offeror).

Under the knockout rule, different terms in the original offer and acceptance knock each other out creating a gap in the contract. UCC gap fillers are then used to plug this gap (regardless of whether the parties are merchants).

The knockout rule does not apply to additional terms added by the offeree. UCCSec. 2-207(2) will determine whether the additional terms control or whether UCC gap fillers must be implemented.

Question 22

MED

*CONSIDERATION

Answer 22

To form a traditional, enforceable contract, the agreement must be supported by consideration.

Consideration involves a transfer of legal value in a bargained-for exchange. Consideration is present if:

1. The promisee incurs a legal detriment OR the promisor receives a legal benefit (most courts only focus on whether the promisee incurred a legal detriment irrespective of whether the promisor received a benefit); AND
2. The promise induces the detriment AND the detriment induces the promise (i.e., a “bargained-for exchange”).

Question 23

MED

*EXAMPLES OF NOT CONSIDERATION (6)

Answer 23

Gift promises are NOT consideration (e.g., A promises to give B his truck for free. Here, B incurs no legal detriment and A’s promise to give B his truck is not induced by any action or forbearance from B. This is a gift promise, not bargained-for consideration.).

Conditional gift promises are NOT consideration (e.g., A promises to give B his truck if B will drive 30 minutes away to pick the truck up from A’s house. Here, A’s promise to give B his truck is not induced by B coming to pick the truck up. Thus, A is not bargaining for B to come. This is a conditional gift, not bargained-for consideration.).

A pretense of consideration is NOT consideration (e.g., A and B are cousins. A wishes to give B his truck that is valued at $10,000 as a gift for B’s birthday. Attempting to form an enforceable contract, A “sells” B his truck for $1 solely to meet the consideration requirement. Here, A is not induced to give B his truck for the $1. This is merely a pretense of consideration, not bargained-for consideration.).

Preexisting legal duties are NOT consideration (e.g., A promises to pay B $100 if B refrains from smoking crack-cocaine for 6 months. Here, B already has a preexisting legal duty imposed by law to refrain from smoking crack-cocaine. Thus, B incurs no legal detriment, which means consideration is not present.).

Past consideration is NOT consideration (e.g., A’s truck catches fire as A is demonstrating the truck’s safety features to B. After the fire erupts, B rushes over and extinguishes the flames saving A’s life. Grateful, A promises to pay B $100 for the rescue. Here, B’s detriment (saving A’s life) was not induced by A’s promise. This is past consideration, not bargained-for consideration.).

An illusory promise is NOT consideration (e.g., A promises to buy B’s truck if “he feels like it.” Here, A is not committing to the deal. This is an illusory promise, not bargained-for consideration.).

Question 24

HIGH

**CONTRACT MODIFICATION UNDER THE

COMMON LAW

Answer 24

Under the common law, contract modifications MUST be supported by consideration. The common law follows the preexisting duty rule, which means that a promise to do something that you are already legally obligated to do (by contract or otherwise) is NOT consideration.

Watch out for this Bar Exam trick: Alex rents an apartment from Slumlord for one year at a rent of $1,500 per month. Later that year, Alex (running short on cash) and Slumlord both agree to modify the rent to $1,000 per month. Here, under the common law, Slumlord can sue Alex at the end of the month for the extra $500, because there was no consideration for the modification of the contract (Alex had a preexisting legal duty to pay the full $1,500).

Question 25

HIGH

**CONTRACT MODIFICATION UNDER THE UCC

Answer 25

Under the UCC, there is no consideration requirement to modify a contract. A contract modification is valid if it is made in good faith.

Question 26

MED

*DEFENSES TO CONTRACT FORMATION (6)

Answer 26

1. Incapacity;
2. Mistake;
3. Misrepresentation;
4. Duress and Undue influence;
5. Illegality; AND
6. Unconscionability.

Question 27

HIGH

**TRIGGERING THE STATUTE OF FRAUDS

Answer 27

The following contracts are not valid unless they satisfy the statue of frauds:

1. A contract made in consideration of marriage;
2. A contract promising to guarantee the debt of another (Suretyship);
3. A contract that by its terms cannot be performed within one year from its making;
4. A contract involving the purchase or sale of goods for $500 or more; AND
5. A contract to transfer, receive, or create an interest in real estate.

Question 28

HIGH

**SATISFYING THE STATUTE OF FRAUDS WITH A WRITING

Answer 28

A writing will satisfy the statute of frauds if the writing:

1. Is signed by the party to be charged;
2. Shows that a contract was formed; AND
3. Contains all the requisite terms of the deal.

Question 29

HIGH

**SATISFYING THE STATUTE OF FRAUDS WITH PERFORMANCE OF A SERVICES CONTRACT

Answer 29

Full performance of a services contract by either side satisfies the statute of frauds.

Question 30

HIGH

**SATISFYING THE STATUTE OF FRAUDS WITH PERFORMANCE OF A REAL ESTATE CONTRACT (3)

Answer 30

Part performance of a real estate contract can satisfy the statute of frauds if any two of the following three are met:

1. Buyer takes possession of the property;
2. Buyer makes payment in full or part; AND/OR
3. Buyer makes substantial improvements to the land.

Question 31

HIGH

**SATISFYING THE STATUTE OF FRAUDS WITH PERFORMANCE OF A GOODS CONTRACT (3)

Answer 31

Part performance on a goods contract satisfies the statute of frauds, BUT ONLY for the quantity received and accepted.

___________________________

1. Admission in Court. Under UCC § 2-201(3)(b), the statute of frauds is satisfied if the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract for sale was made (the contract is not enforceable under this provision beyond the quantity of goods admitted).
2. Written Confirmation between Merchants. Under UCC § 2-201(2), the statute of frauds is satisfied if:
   
   1. After an oral agreement between merchants;
   2. Either party sends a signed, written confirmation of the oral contract (must be signed by the sender); AND
   3. The written confirmation is received by the other merchant to the oral agreement; UNLESS
   4. The party receiving the written confirmation gives a written notice of objection within10 days after receipt of the written confirmation.
3. Specially Manufactured Goods. Under UCC § 2-201(3)(a), the statute of frauds is satisfied when a seller makes a “substantial beginning” toward manufacture of custom goods that are to be specially made for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business under circumstances that reasonably indicate that the goods are for the buyer.

Question 32

MED

*PAROL EVIDENCE RULE (PER)

Answer 32

When the parties to a contract express their agreement in a writing with the intent that it embody the final expression of their bargain, the writing is an integration. If the writing is not an integration (e.g., non-final expressions such as tentative drafts), the PER does not apply. Otherwise, an integration may be complete or partial:

If the writing completely expresses all of the terms of the parties’ agreement, then it is a complete integration. All other expressions or statements, written or oral, made prior to the writing, as well as any oral expressions made contemporaneously with the writing, are inadmissible.

If the writing sets forth the parties’ agreement about some terms, but not all the terms, then it is a partial integration. Other expressions or statements, written or oral, made prior to the writing, as well as any oral expressions made contemporaneously with the writing, are admissible to supplement the writing so long as the evidence does not contradict the terms of the writing.

Question 33

MED

*MERGER CLAUSES

Answer 33

A merger clause recites that the agreement is the complete agreement between the parties. This is usually strong evidence that the writing is a complete integration for parol evidence purposes.

Question 34

MED

*EXCEPTIONS TO THE PAROL EVIDENCE RULE (PER) [4]

Answer 34

The PER does NOT apply if any of the following exceptions exist:

1. Defenses. Extrinsic evidence may be offered to establish a defense to the formation or enforcement of a contract (e.g., incapacity, mistake, duress, lack of consideration, etc.).
2. Separate Deals. Extrinsic evidence may be offered if it represents a distinct and separate contract.
3. Condition Precedents. Extrinsic evidence may be offered if a party asserts that there was an oral agreement that the written contract would not become effective until a condition occurred.
4. Ambiguity and Interpretation. Extrinsic evidence may be offered for the purpose of interpreting or clarifying an ambiguity in the agreement.

NOTE. The PER does NOT apply to agreements made between the parties AFTER the execution of the writing. Agreements made after the execution of the writing would be analyzed as contract modifications, and do NOT trigger the PER.

Question 35

MED

*IMPLIED OBLIGATION OF GOOD FAITH AND FAIR DEALING

Answer 35

All contracts contain an implied obligation which requires the parties to a contract to act in good faith and deal fairly with one another without:

1. Breaking their word;
2. Using deceptive means to avoid obligations; OR
3. Denying what the other party obviously understood.

Question 36

HIGH

**PERFORMANCE UNDER THE COMMON LAW

Answer 36

Under the common law, substantial performance is required, which means that performance will be satisfied so long as there is NOT a material breach of the contract.

If there is a material breach, the non-breaching party’s performance is excused.

If the breach is not material, the non-breaching party’s performance is not excused.

Question 37

MED

*PERFORMANCE UNDER THE UCC

Answer 37

Under the UCC, perfect tender is required, which means that a seller must deliver perfectly conforming goods in accordance with the terms of the contract. The smallest nonconformity is a breach that allows the buyer to reject all or a portion of the goods. If the seller fails to tender perfect goods, the buyer must give the seller a chance to cure the nonconformity if:

1. The time for performance under the contract has not yet expired; OR
2. The seller has reasonable grounds to believe that the buyer would accept a replacement for the nonconformity.

Question 38

MED

*PERFORMANCE OF INSTALLMENT CONTRACTS UNDER THE UCC

Answer 38

Installment contracts (agreement for delivery in separate lots) do NOT have to satisfy perfect tender. The buyer can reject a specific installment delivery when there is a substantial impairment in the installment that cannot be cured.

Question 39

MED

*REVOCATION OF ACCEPTANCE OF NONCONFORMING GOODS UNDER THE UCC

Answer 39

If a buyer fails to reject nonconforming goods after having had a reasonable opportunity to inspect the goods, the buyer is deemed to have accepted the goods.

The buyer may revoke his acceptance if:

1. The nonconformity substantially impairs the value of the goods;
2. The revocation occurs within a reasonable time after the buyer discovers or should have discovered the ground for nonconformity and before any substantial change in condition of the goods which was not caused by their own defects; AND
3. The buyer accepted the goods: (a) on the reasonable assumption that the nonconformity would be cured and it has not been seasonably cured; or (b) without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.

Question 40

HIGH

**ANTICIPATORY REPUDIATION UNDER THE COMMON LAW

Answer 40

Under the common law, anticipatory repudiation occurs when a promisor clearly and unequivocally repudiates a promise before the time for performance is due (by words or conduct). When an anticipatory repudiation occurs, the non-repudiating party may:

1. Treat the repudiation as a breach and sue immediately for damages (however, if the date of performance has not passed and the only performance left is payment, the non-repudiating party must wait until performance is due and the actual breach occurs before filing suit); OR
2. Ignore the repudiation, urge performance, and see what happens (however, if the repudiation is ignored, then continued performance by the non-repudiating party must be suspended if the performance would increase the damages of the repudiating party).

Question 41

HIGH

**RETRACTION OF ANTICIPATORY REPUDIATION UNDER THE COMMON LAW

Answer 41

Under the common law, repudiation may be retracted until the promisee:

1. Acts in reliance on the repudiation;
2. Signifies acceptance of the repudiation; OR
3. Commences an action for breach of contract.

Question 42

HIGH

**ANTICIPATORY REPUDIATION UNDER THE UCC

Answer 42

Under the UCC, anticipatory repudiation occurs when: (a) the buyer or seller makes an unequivocal refusal to perform; or (b) reasonable grounds for insecurity arise regarding either party’s ability or willingness to perform, and the repudiating party fails to provide adequate assurances within a reasonable time [not to exceed 30 days] upon the non- repudiating party’s demand for such assurances.

When an anticipatory repudiation occurs, the non-repudiating party may:

1. Treat the repudiation as a breach and sue immediately for damages (however, if the date of performance has not passed and the only performance left is payment, the non- repudiating party must wait until performance is due and the actual breach occurs before filing suit); OR
2. Ignore the repudiation, urge performance, and see what happens (however, if the repudiation is ignored, then continued performance by the non-repudiating party must be suspended if the performance would increase the damages of the repudiating party).

Question 43

HIGH

**RETRACTION OF ANTICIPATORY REPUDIATION UNDER THE UCC

Answer 43

Under the UCC, anticipatory repudiation may be retracted until the non-repudiating party cancels the contract or materially changes his position.

Question 44

HIGH

**EXPECTATION DAMAGES

Answer 44

The goal of expectation damages is to put the non-breaching party in the same economic position that it would be in if the contract had been performed as promised.

Expectation damages are measured by comparing the value of the performance without the breach to the value of the performance with the breach.

Question 45

HIGH

**DUTY TO MITIGATE DAMAGES

Answer 45

The plaintiff has a duty to take reasonable steps to mitigate (reduce) his losses. If the plaintiff fails to do so, the court will reduce the total damages by the amount that could have been avoided had the plaintiff taken reasonable steps to mitigate his losses.