Contracts

Question 1

When a debtor breaches an accord agreement, the creditor may sue __________.

Answer 1

either on the original contract or the accord contract

Question 2

If a buyer rejects goods, the buyer may resell the goods as long as ______

Answer 2

the seller is notified and the proceeds are held for the seller’s account

Question 3

What assignments must be in writing to be effective?

Answer 3

(1) wage assignments
(2) assignments of an interest in land
(3) assignments intended as security interests under Article 9 of the uCC

Question 4

An electronics store located in Los Angeles, California, purchases electronics from an electronics corporation located in San Antonio, Texas. On January 19, the electronics store mailed to the corporation an order for $200,000 worth of electronics, specifying that delivery was to be no later than February 25, F.O.B. South Texas Railroad Depot, San Antonio, Texas.

The corporation delivered the electronics to the railroad depot on February 15 and notified the electronics store by fax that its order was scheduled to arrive at the Southern Pacific Railroad Depot in Los Angeles on February 20. On February 17, the corporation learned that the electronics store was insolvent. The corporation demands immediate payment in cash for the electronics.

Is this demand permissible and why/why not?

Answer 4

It is permissible. Under the UCC, if a buyer is insolvent the seller may stop goods in transit and refuse to deliver except for cash.

Question 5

In July of last summer a grape grower contracted with a winery to deliver “500 tons of premium quality pinot chardonnay grapes grown on my ranch.” The price was to be $1,000 per ton and delivery was to be on or before September 15. In August of the same year, the grape grower entered into an identical contract with a vineyard to sell 300 tons of premium quality pinot chardonnay grapes.

The grape grower completed his harvest by September 10 and had 800 tons of premium quality grapes. On September 11, an unexpected rain ruined 400 tons, and the grape grower notified the winery and the vineyard on that day that he would only be able to deliver 250 tons to the winery and 150 tons to the vineyard. On September 14, the vineyard purchased an additional 150 tons of premium quality pinot chardonnay grapes from a different grape farmer, one of several other available sources for premium quality pinot chardonnay grapes. These grapes along with the 150 tons from the grape grower gave the vineyard the 300 tons it needed.

On September 15, what is the winery’s legal position with regard to the grape grower’s failure to deliver the 500 tons of grapes required by his contract?

Answer 5

If the winery has given the grape grower a written notice of termination, the winery will have the right to refuse to accept the 250 tons of grapes but will have no cause of action for damages against the grape grower.

Question 6

If the duration of employment is not specified in an offer, what is implied as to termination?

Answer 6

It is implied that the employment is terminable at the will of either party.

Question 7

Explain the application of promissory estoppel in regard to the enforceability of contracts that violate the Statute of Frauds

Answer 7

Where an oral promise is not enforceable under contract law because of the Statute of Frauds and the promisor should foresee that it will induce the promisee to change position in reliance on the oral promise, promissory estoppel may be used to take the contract out of the Statute of Frauds.

Question 8

Explain the effect of supervening illegality when (1) present at time of offer, (2) present after offer but before acceptance, and (3) after the contract is formed.

Answer 8

(1) the offer is invalid
(2) the offer is revoked
(3) the contract is discharged on grounds of illegality

Question 9

What is a condition precedent?

Answer 9

A condition that must occur before an absolute duty of immediate performance arises in the other party.

Question 10

What is the legal result if a building is destroyed in the middle of construction of a new building?

Answer 10

The builder is not discharged from performance, but may be excused from timely performance as provided under the original contract, as long as the destruction is not the builder’s fault.

Question 11

What is required for an effective anticipatory repudiation

Answer 11

A promisor, by words or conduct, unequivocally indicates that he cannot or will not perform under the K.

Question 12

Several years ago, a lender lent a borrower $1,000, and the parties agreed in writing that the borrower would repay the lender within one year. The borrower failed to repay the lender, but the lender took no action prior to the expiration of the five-year statute of limitations on suits for debt. Some time after that, the lender phoned the borrower and told him, “If you’ll pay me $600 now, I’ll forget all about that unpaid $1,000 debt.” The borrower agreed orally and then sent the lender a signed letter, which stated, “I, the borrower, agree to pay the lender $600.” The borrower never paid the lender the $600 and the lender sued the borrower shortly thereafter.

What is the lender entitled to recover and why?

Answer 12

$600. When a past obligation is not discharged but is unenforceable because the statute of limitations has run, a new promise in writing will be enforceable according to its terms. The existence of the prior obligation acts as a substitute for consideration.

Question 13

A landowner entered into a written agreement with a real estate broker whereby the broker would receive a commission of 10% of the sale price if he procured a “ready, willing, and able buyer” for the landowner’s property and if the sale actually proceeded through closing. The broker found a buyer who agreed in writing to buy the property from the landowner for $100,000, the landowner’s asking price. The buyer put up $6,000 as a down payment. The agreement between the landowner and the buyer contained a liquidated damages clause providing that, if the buyer defaulted by failing to tender the balance due of $94,000 at the closing date, damages would be 10% of the purchase price. The landowner included that clause because she was counting on using the proceeds of the sale for a business venture that would likely net her at least $10,000.

The buyer became seriously ill and defaulted. When he recovered, he demanded that the landowner return his $6,000, and the landowner refused. The broker also demanded the $6,000 from the landowner and was refused. The broker and the buyer filed separate suits against the landowner, with the buyer pleading impossibility of performance. The two cases are consolidated into a single case.

How should the court rule as to the disposition of the $6,000 and why?

Answer 13

The landowner keeps the entire $6,000.

The buyer’s illness does not entitle him to an impossibility defense because it is not objectively impossible for him to perform under the K.

The broker is not entitled to anything because he was entitled only to 10% of the sale price, not to 10% of anything the landowner received from the deal. The liquidated damages clause is not considered part of the sale price, but is instead a measure of damages.

The liquidated damages clause is enforceable because it is a reasonable measure of the landowner’s damages as a result of the breach.

Question 14

What is required for a merchant’s firm offer?

Answer 14

(1) made by a merchant
(2) in writing
(3) writing gives assurances that the offer will be held open
(4) up to a maximum period of three months

(5) if the firm offer term is on a form supplied by the offeree, the term must be separately signed off on by the offeror

Question 15

When is forbearance to sue valid consideration?

Answer 15

When there is an actual claim or the party believes in good faith that there is a valid claim.

Question 16

On November 7, a painter agreed with a homeowner to paint his house for $10,000, payment to be made upon completion of the job. On November 14, while the job was still incomplete, the painter told her paint supplier that if he would give her the paint she needed, she would have the homeowner pay to him directly the $3,000 for paint that she owed him. The paint supplier agreed, and the painter sent the homeowner a letter setting forth this agreement. On December 1, the painter had completed the job, but the homeowner refused to pay the paint supplier any money.

In a suit by the paint supplier against the homeowner, what would be the homeowner’s best defense?

Answer 16

The best defense would be that the homeowner is not required to pay the painter under the original contract (for example, if the painter had not done the work properly). An assignee is subject to the same defenses that the obligor has against the assignor.

Question 17

In a breach of contract for the sale of land, can either party request specific performance?

Answer 17

Yes

Question 18

In a breach of contract for the sale of land, can specific performance be awarded even if money damages are requested as an alternative remedy?

Answer 18

Yes, even if the non-breaching party is agreeable to monetary damages in the absence of specific performance, specific performance is the preferred remedy in a land sale contract because all land is unique.

Question 19

Who bears the risk of loss after a land sale contract is signed but before closing?

Answer 19

The buyer - after the contract is signed, the buyer is in equitable ownership of the property and must move forward with the sale at the stated contract price unless the contract provides otherwise.

Question 20

A businesswoman entered into a written contract with a general contractor to build a studio and broadcast transmitter for $3 million by July 1. Among his tasks, the contractor was to install underground cables and fiberoptic lines necessary to broadcast.

When digging the deep trench necessary to lay the conduit containing the fiberoptic lines, the contractor encountered a stretch of extremely soggy soil. This was an indication that an offshoot of the nearby city’s aquifer underlay the property. This was not indicated on any of the geological survey maps available in the office of the county recorder of deeds. The contractor told the businesswoman that it would cost an additional $50,000 to lay the conduit through that stretch of soil. The businesswoman had already launched an advertising campaign indicating that the station would begin broadcasting on July 4, which was rapidly approaching. Therefore, when the contractor threatened to quit the job without the additional $50,000, the businesswoman reluctantly agreed orally to the contractor’s demand as long as he promised that all of the work would be completed by the middle of June. The contractor agreed, proceeded to lay the conduit, and completed building the studio and transmitter by June 15. The businesswoman paid the contractor $3 million, but when the contractor demanded $50,000 more, she refused to pay it. The contractor sues the businesswoman for the $50,000.

Who will prevail?

Answer 20

The contractor. This modification is supported by consideration on both sides. The businesswoman agreed to pay an additional $50,000, and the contractor agreed to finish the job two weeks early.

Under the modern view, it may also be enforceable without consideration considering the unexpected nature of the soil.

Question 21

A jogger found a stray dog in the park. She took the dog home with her and placed an ad in the paper to try to find the dog’s owner. Soon thereafter, the owner of the dog contacted the jogger. He came to the jogger’s home and identified the dog as his. He offered to pay the jogger a $200 reward at the end of the week. The jogger thanked the dog owner but turned down the reward.

At the end of the week, however, the jogger changed her mind, so she called the dog owner and told him that she would like the reward after all. He refused to pay her, and she sues him for breach of contract.

What will the jogger recover?

Answer 21

Nothing, because there was no consideration to support a contract.

Note here that while the jogger rejected the “offer” of $200, the owner’s communication was not an offer because it was not expressing a promise to enter into a contract (therefore, an answer suggesting that the jogger takes nothing because she rejected the offer is incorrect).

Question 22

A nephew asked his uncle, who like him was a farmer, to guarantee a loan to buy a new tractor. The local bank had already refused to extend credit to the nephew alone to buy the tractor. The uncle was inclined to refuse, but then decided that he could benefit from his own use of the tractor, so he told his nephew that he would guarantee the loan if he could use the new tractor without cost for 10 days during his harvest season. The nephew agreed to his uncle’s proposal. The uncle went to the bank and told the loan officer that he was willing to guarantee the proposed loan to his nephew. This prompted the loan officer to agree to extend the requested credit to the nephew. Although the loan officer did not make the uncle sign any papers, the uncle provided consideration and the bank issued the nephew a loan commitment statement. That evening, the uncle had a change of heart. The next day, he telephoned the loan officer and told him to forget about his guaranteeing any loan to his nephew. Despite the uncle’s phone call, the loan officer did not stop the check from being issued, and the nephew received the money to purchase the tractor. He drove the tractor over to the uncle’s farm and delivered it for the uncle’s 10-day use, as promised. The uncle told his nephew that he did not want to use the tractor and that he was not guaranteeing his loan. Within six months, it became clear that the nephew could not make good on the loan.

Does the statute of frauds apply to the uncle’s agreement?

Answer 22

No. The SOF does not apply to suretyship agreements where the main purpose of the promisor is to secure an advantage or pecuniary benefit for himself.

Question 23

The father of a girl whose horse crashed through a neighbor’s fence told the neighbor that he would have the fence repaired immediately at his cost. The father hired a local contractor to do the work. The contractor did a poor job and did not fix the fence properly.

Assuming that there was an enforceable agreement between the father and the neighbor, would the neighbor have an action against the contractor?

Answer 23

Yes, because the neighbor was a creditor beneficiary of the contract between the contractor and the father.

Question 24

When is a third-party beneficiary a “creditor” beneficiary?

Answer 24

When the promisee’s primary intent in contracting is to discharge an obligation to the third party.

Question 25

What is the measure of damages when a buyer accepts nonconforming goods?

Answer 25

The difference between the value of goods as delivered and what the value of the goods would be if the seller had delivered conforming goods, plus consequential and incidental damages.

Question 26

What is a misunderstanding and what is its effect on contract formation?

Answer 26

A misunderstanding arises when there is an ambiguous term in a contract.

Typically, a misunderstanding results in no contract because there is no meeting of the minds. No contract is formed if neither party was aware of the ambiguity. If both parties were aware of the ambiguity, no contract is formed unless both parties intended the same meaning. If one party was aware of the ambiguity, a contract is formed and is enforced according to the intention of the party who was unaware of the ambiguity.

Question 27

If a monetary claim is uncertain or is subject to a bona fide dispute, an accord and satisfaction may be accomplished by

Answer 27

a good faith tender and acceptance of a check when that check conspicuously states that the check is tendered in full satisfaction of the debt.

Question 28

In a shipment contract, the risk of loss generally passes to the _______ when the goods are delivered to the carrier.

What is the result if the buyer has a right to reject the goods?

Answer 28

buyer; if the buyer has a right to reject the goods (i.e. if the seller shipped nonconforming goods), the risk of loss does not pass to the buyer when the goods are delivered to the carrier; instead, the risk does not pass to the buyer until the defects are cured or the buyer accepts the goods.

Question 29

What are a party’s options after receiving an anticipatory repudiation from the other contracting party?

Answer 29

(1) suspend performance and wait to sue until the performance date
(2) sue immediately

Question 30

A buyer agreed to buy a limited edition guitar from a seller for $12,000 and a contract memorializing the agreement was signed by both parties. The next day, after the seller received an offer of $20,000 for the guitar, he called the buyer and said that he could not sell the guitar to him for $12,000. The buyer did not respond. On the delivery date, the buyer fails to tender $12,000 and the seller does not deliver the guitar.

Can either party sue for breach of contract on the delivery date?

Answer 30

The buyer can sue for breach of contract because the seller anticipatorily repudiated the contract, thus excusing the buyer’s duty to pay $12,000 on the delivery date.

Question 31

A building contractor entered into a contract with the local college to remodel a residence hall during the summer. As specified by the contract, the work had to be completed before the fall semester began at the beginning of September. Because the contractor received a great deal of other maintenance business from the college, his price of $400,000 was significantly lower than other contractors and he was not going to demand payment until the work was completed.

By the end of the first week in August, the contractor had completed 75% of the project and had expended $350,000 in labor and materials. At that time, however, a labor dispute between the contractor and his employees prompted most of the workers to walk off the job. Because prospects for a quick settlement of the dispute were doubtful, the contractor informed the college that he would not be able to meet the completion deadline. A week later, the college obtained another contractor who was able to finish the project by the end of August. The college paid him $150,000, which included a substantial amount of overtime for his workers. The increase in value of the residence hall due to the remodeling was $425,000. The original contractor, who had not been paid, files suit against the college, which files a counterclaim against him.

What should the contractor recover from the college?

Answer 31

$250,000 (the contract price minus the amount the college paid the other contractor to complete the work)

Restitution damages are measured by the benefit conferred on the non-breaching party, capped by the original contract price. Here, the value of the benefit conferred exceeds the contract price, so the restitution damages are limited by the contract price.

Question 32

How do a third-party beneficiary’s rights vest?

Answer 32

(1) manifestation of assent to the promise in a manner invited or requested by the parties
(2) bringing suit to enforce the promise
(3) detrimentally relying on the promise

Question 33

A park board in a large suburb announced that it was accepting bids for renovation work on its recreation center. A builder advertised for sub-bids for the electrical work, and a local electrician submitted to the builder by electronic bidding service a sub-bid of $130,000. However, due to the bidding service’s negligence, the sub-bid that the builder received from the electrician read $30,000 instead of $130,000. Because this was the lowest sub-bid that the builder received for the electrical work, and $60,000 less than the next lowest sub-bid, the builder awarded the subcontract to the electrician. Based in part on the electrician’s sub-bid, the builder came up with a bid for the job that beat out all of the competition and won the job.

What is the legal effect of the error being made by the bidding service rather than the electrician?

Answer 33

None. Where there is a mistake in the transmission of an offer by an intermediary, the offer as transmitted is operative unless the other party knew or should have known of the mistake.

Question 34

What is the prevailing view of modification for contracts other than for the sale of goods?

Answer 34

A promise modifying a duty under an executory contract is binding if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made.

Question 35

How can an option contract be terminated?

Answer 35

Only by expiration of the time stated in the option contract. An option contract is irrevocable AND cannot be rejected by the offeree.

Question 36

What are usually the material terms in a contract?

Answer 36

(1) identity of the offeree
(2) subject matter
(3) price

Question 37

An employer and prospective employee negotiate and agree on all aspects of the employment except salary. The employee sends a signed letter confirming the terms to which the parties have orally agreed while acknowledging that the salary has yet to be set.

Do the parties have an enforceable contract?

Answer 37

No, because the parties have not agreed to an essential term (salary), so the agreement is too indefinite to be enforced.

Question 38

What is the principle of reasonable expectations in contract law?

Answer 38

This rule applies to insurance contracts. It states that parties should not be bound by terms that they would not expect to find in a contract unless those terms were called to their attention.

Question 39

What is the “objective theory” of contracts?

Answer 39

A party to a contract is bound by a contract term even if that party is not subjectively aware of the term.

Question 40

On December 2, an employer called a job applicant who had interviewed and offered her a position paying $65,000. The employer told the applicant that she could accept the offer by showing up for work on January 2 and that the term of employment would be one year from the date she started.

The applicant showed up for and began work on January 2.

Why doesn’t the statute of frauds apply to this contract?

Answer 40

Because the employer indicated that the applicant could accept by performance on January 2. The contract was formed on January 2 and lasted for one year. This contract will be completed one year from the date it was formed, so the statute of frauds does not apply.

Question 41

Can a merchant waive the implied warranty of merchantability?

Answer 41

Yes, as long as the disclaimer is part of the offer and the buyer accepts the offer knowing of the disclaimer.

Question 42

An owner and a builder executed a contract providing that the builder was to construct a residence on a specified lot according to plans and specifications. The total contract price was $800,000. No date was included in the contract for completion of the home. After the builder completed 60% of the residence, a flash flood from a nearby river partially eroded the lot but left the construction undamaged. The builder determined that it would cost an additional $1.7 million to repair the lot so that the residence can be constructed according to the plans. Without the additional lot repair work, the residence cannot be constructed at all.

Which of the following states the probable legal consequences of the lot erosion?

Answer 42

The builder is discharged from his duties under the contract because of impracticability.

Impracticability due to excessive and unreasonable difficulty or expense is a defense to breach of contract for nonperformance.