Contracts

Question 1

Warranty of Fitness for a Particular Purpose

Answer 1

The warranty of fitness for a particular purpose is implied whenever the seller has reason to know that
(i) the buyer has a particular use for the goods, and
(ii) the buyer is relying upon the seller’s skill to select the goods.

Disclaimer
- In writing and conspicuous
- Oral or written statement that indicates there is no implied warranty (e.g., “as is” or “with all faults”).
- Buyer’s inspection of goods or refusal to inspect (if inspection would reveal defect).
- Course of dealing, course of performance, trade usage

Question 2

Implied Warranty of Merchantability

Answer 2

Implied in all contracts for the sale of goods by a merchant—i.e., one who regularly deals in goods of the kind involved in the contract. Goods are merchantable if they are fit for their ordinary purpose and would pass without objection in the trade under the contract description.

May be disclaimed by….
- Oral statement or conspicuous written statement specifically mentioning “merchantability”
- Oral or written statement that indicates there is no implied warranty (e.g., “as is” or “with all faults”).
- Buyer’s inspection of goods or refusal to inspect (if inspection would reveal defect).
- Course of dealing, course of performance, trade usage

Question 3

Course of Performance

Answer 3

A course of performance is a sequence of conduct that is relevant to understanding an agreement between the parties if:
(i) the agreement involved repeated occasions for performance by a party, and
(ii) the other party accepted performance without objection and with knowledge of the course of performance.

Question 4

UCC Parol Evidence Rule

Answer 4

Assumes partial integration unless there is a merger clause; evidence of a prior or contemporaneous agreement cannot be used to contradict the terms of a final written agreement.

Evidence of the parties’ course of performance, course of dealing, or trade usage can be used to explain or supplement contract terms—even when the terms appear unambiguous.

Priority is given to the express terms, followed by course of performance, course of dealing and trade usage.

Question 5

Trade Usage

Answer 5

Trade usage is any practice or method of dealing in the particular business or industry that is observed with such regularity so as to justify an expectation that it will be observed in the instant case (can be a defense to breach/the perfect tender rule).

Question 6

Course of dealing

Answer 6

sequence of conduct concerning previous transactions between the parties that establishes a common basis of understanding for interpreting their conduct

Question 7

Anticipatory Repudiation

Answer 7

When a promisor repudiates a promise BEFORE the time for performance is due.

Repudiation must be clear and unequivocal, may be by conduct or words, and, if a statement, must be made to the promisee or a third-party beneficiary or assignee of the promise.

If this occurs before performance is due, then the nonrepudiating party may:
i) treat the repudiation as a breach and sue immediately,
ii) ignore the repudiation and demand performance, or
iii) suspend its own performance if commercially reasonable.

If the non-breaching party has already fully preformed, they may not sue until the time for performance has pased.

Saying “I won’t preform unless I’m legally obligated to” is not an anticapitory repudation because it is not unequivical. They are legally obligated to preform and therefore they will.

Question 8

Retraction of a Repudiation

Answer 8

Repudiation may be retracted until such time as the promise
(i) acts in reliance on the repudiation,
(ii) signifies acceptance of the repudiation, or
(iii) commences an action for breach of contract.

Question 9

What is the difference between an assignment and a delegation?

Answer 9

An assignment is the transfer of rights under a contract, and a delegation is the transfer of duties and obligations under the contract.

Note: The term assignment is often used in contracts to signify the transfer of both rights and duties.

Question 10

Assignment

Answer 10

Transfer of contractual rights to another.

An assignee takes all of the rights of the assignor as the contract stands at the time of the assignment, but she takes subject to any defenses that could be raised against the assignor.

Delegation is not permitted when:
- Assignment materially increases duty or risk of obligor OR materially reduces obligor’s chance of obtaining performance
- Assignment void under contract (eg, “any assignment of rights under this contract is void”)

Question 11

Delegation

Answer 11

Duties and obligations under a contract can generally be delegated, and the other party to the contract must accept performance by the delegatee or be in breach. Delegation is not permitted when:
(1) a contracting party has a substantial interest in having the delegating party perform (e.g., in a personal-services contract involving taste or a special skill) or
(2) delegation is prohibited by the contract (e.g., “this contract may not be assigned”).

A promise to preform contractual duties is enforceable against the delegatee if:
(1) the delegatee has received consideration or
(2) there is a consideration substitute that makes the promise enforceable.

The delegator is not released from liability unless the other party to the contract expressly or impliedly agrees to a novation.

Any delegation of performance under a contract for the sale of goods may be treated as creating reasonable grounds for insecurity, allowing the other party to demand assurances from the delegatee.

Question 12

Novation

Answer 12

An agreement between the parties to a contract to discharge one of the parties and create a new contract with another party to be responsible for the discharged party’s obligations.

Question 13

Contract Modification

Answer 13

Common law: modifications require new consideration unless it is fair & equitable due to unanticipated circumstances.
UCC: modifications require only good faith

Parties may include a contract provision preventing oral modification. However, a party may be estopped from enforcing this provision when his own conduct caused the other party to rely to his detriment.

A modification is subject to the statute of frauds when the modification results in a contract for the sale of goods worth $500 or more. The SOF will not prevent the enforcement of an oral modification when:
(1) the promisor should have reasonably expected to—and did—induce action or forbearance on the modification and
(2) injustice can be avoided only by enforcing the modification.

Question 14

Offeror’s Revocation

Answer 14

The offer was revocable, and
(1) Offeror communicates revocation directly to offeree (if a revocation is sent by mail, it is valid upon receipt by the offeree, not upon mailing),
(2) a reasonable time has passed (lapse), or
(3) Offeree learns information from reliable source that reasonably indicates offer was revoked (eg, house sold to another buyer).

Question 15

Constructive Revocation of an Offer

Answer 15

If the offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, then the offer is automatically revoked. Once an offer is revoked, it can no longer be accepted and no contract can be formed.

Question 16

Termination of offer before acceptance

Answer 16

Offeror’s revocation
- Offeror communicates revocation directly to offeree
- Offeree learns information from reliable source that reasonably indicates offer was revoked (eg, house sold to another buyer)

Offeree’s rejection
- Offeree communicates rejection directly to offeror
- Offeree’s counteroffer serves as rejection & new offer (unless the offeree has paid consideration for an option contract, in which case they can make counteroffers without terminating the original offer). Mere indecision and inquiries (e.g., requests for clarification) do not constitute counteroffers

Lapse
- Time period specified in offer expires
- After reasonable time if no time period specified in offer

By law
- Either party dies or is adjudicated insane
- Subject matter of offer is destroyed or becomes illegal

Question 17

Merchant’s Firm Offer

Answer 17

(i) The offeror is a merchant;
(ii) There is an assurance that the offer is to remain open; and
(iii) The assurance is contained in a signed writing from the offeror.

An offer will terminate by lapse if it is not accepted by the time stated in the offer. If no time is stated, then the offer will lapse after a reasonable period of time. The period of irrevocability cannot exceed three months unless the offeree gives consideration.

Reasonableness of period is determined by
- the nature of the contract—e.g., offers for goods subject to rapid price fluctuations must be accepted sooner
- the purpose and course of dealing between the contracting parties—i.e., the sequence of conduct in previous transactions between the parties—and
- trade usage—i.e., the practice or method of dealing in the parties’ industry.

Question 18

Excuses to non-performance of a condition

Answer 18

Waiver: Party waives condition by words or conduct
Wrongful interference: Party wrongfully prevents or interferes with condition’s occurrence
Estoppel: Party indicates condition will not be enforced, AND Other party reasonably & detrimentally relies on belief that condition has been waived
Disproportionate forfeiture: Party substantially performed & will be significantly harmed if condition is enforced

Question 19

Recovery for Breach of an Illegal Contract

Answer 19

A contract to perform an illegal act (e.g., fraud) is void and unenforceable.

Restitution damages may be recoverable if the claimant conferred a benefit on the other party and:
- was justifiably ignorant of the facts that made the contract illegal
- was less culpable than the other party (i.e., was not in pari delicto) or
- withdrew before the contract’s illegal purpose was achieved and did not engage in serious misconduct (e.g., shockingly immoral, unethical, or unjust behavior).

Question 20

Intended Beneficiary v. Incidental Beneficiary

Answer 20

Intended
- Some contractual intent to benefit a third-party
- Creditor or Gratuitous
- Can enforce the contract

Incidental
- benefits from a contract even though there is no contractual intent to benefit that person
- No rights to enforce the contract.

Question 21

When do the rights of an intended beneficiary vest?

Answer 21

The rights of an intended beneficiary vest when the beneficiary:
i) Materially changes position in justifiable reliance on the rights created;
ii) Manifests assent to the contract at one party’s request; or
iii) Files a lawsuit to enforce the contract.

Question 22

Types of Contracts that fall within the Statute of Frauds

Answer 22

Mr. Sour

Marriage - a contract made upon the consideration of marriage;
Suretyship - a contract to answer for the debt or duty of another;
One year - a contract that cannot be performed within one year from its making;
UCC - under the UCC, a contract for the sale of goods for a price of $500 or more; and
Real Property contract - a contract for the sale of an interest in real property.

Question 23

New promise to pay debt

Answer 23

A new promise to pay a debt after the statute of limitations has run is enforceable without any new consideration. When the new promise is an express promise, most jurisdictions require that the new promise be in writing and signed by the debtor to be enforceable.

Question 24

Ways of satisfying the Statute of Frauds

Answer 24

A writing (i) signed by the party against whom enforcement is sought; and (ii) containing the essential elements of the deal.

Payment for the goods has been made and accepted.

Question 25

Elements of Mutual Mistake

Answer 25

The contract is voidable by the adversely affected party if:
(i) Mistake of fact existing at the time the contract was formed;
(ii) The mistake relates to a basic assumption of the contract;
(iii) The mistake has a material impact on the transaction; and
(iv) The adversely affected party did not assume the risk of the mistake.

Question 26

Assuming the Risk of Mistake

Answer 26

If, at the time the contract is formed, the party is aware that he/she has limited knowledge of the facts and accepts this knowledge as sufficient.

Question 27

Elements of Unilateral Mistake

Answer 27

Contract is voidable by the mistaken party if, at the time the contract is formed:
(i) the mistake relates to a basic assumption of the contract
(ii) the mistake materially affects the agreed-upon exchange of performances and
(iii) the adversely affected party did not assume the risk of mistake.
AND
(i) the mistake makes enforcement of contract unconscionable, OR
(i) the nonmistaken party caused, or knew or should have known of, the mistake.

Question 28

Exceptions to the Parol Evidence Rule

Answer 28

Evidence of prior or contemporaneous oral or written agreement is admissible to establish:
- whether writing is integrated and, if so, completely or partially
- meaning of ambiguous term
- defense to formation or enforcement (eg, fraud, duress, mistake)
- ground for granting or denying remedy (eg, rescission, reformation)
- subsequent contract modifications
- condition precedent to effectiveness

Question 29

Elements of a Valid Contract

Answer 29

(i) Mutual Assent (offer and acceptance)
(ii) Consideration
(iii) No valid defenses to formation (SoF, capacity, illegality, mistake, fraud, etc.)

Question 30

Availability of reformation as a remedy

Answer 30

Misrepresentation
i) One party makes untrue assertion of fact that is fraudulent or material, and
ii) Adversely affected party justifiably relies on that misrepresentation

Mutual mistake
i) Both parties are mistaken as to contract’s contents or legal effect

Unilateral mistake (from fraudulent misrepresentation)
i) One party is mistaken because other party intentionally misrepresented contract’s content or legal effect, and
ii) Adversely affected party justifiably relies on that misrepresentation

Question 31

Consideration

Answer 31

Consideration is evidenced by a bargained-for exchange in legal position between the parties.

Most courts conclude that consideration exists if there is a detriment to the promisee, irrespective of the benefit to the promisor. Georgia allows for either a legal detriment to the promisee or a benefit to the promisor, it does not require both.

Question 32

Past Consideration

Answer 32

Under the common law, past consideration is typically not adequate consideration because it could not have been bargained for, nor could it have been done in reliance upon a promise.

Note: there is a modern trend toward enforcing such promises under the material benefit rule. Not in Georgia.

Question 33

Material Benefit Rule

Answer 33

Modern Trend: When a party performs an unrequested service for another party that constitutes a material benefit, MBR permits the performing party to enforce a promise of payment made by the other party after the service is rendered, even though, at common law, such a promise would be unenforceable due to lack of consideration.

Question 34

When a preexisting duty is at issue, what two options does a promisor have to create valid consideration?

Answer 34

The promisor can:
1. Give something in addition to what is already owed
2. Vary the preexisting duty in some way

Question 35

Accord and Satisfaction

Answer 35

An accord is created when the parties to a contract agree to give and accept something different in satisfaction of their existing contractual obligations. Since an accord is a new contract, it must be supported by consideration.

Where the new consideration is worth less than what was agreed to in the original contract, it will be sufficient only if:
(1) there is a good-faith dispute as to the amount owed, or
(2) the new consideration is of a different type than what was owed under the original contract (e.g., goods in lieu of cash).

A “satisfaction” is the performance of the accord agreement; it will discharge both the original contract and the accord contract.

When a party fails to preform under an accord, the non breaching party can sue under the accord or the original contract.

Question 36

Auction contracts

Answer 36

Each lot of goods is sold in separate sale

Type of auction
- Reserve (default type) - auctioneer may withdraw goods prior to completion of sale
- No-reserve (special announcement required) - goods cannot be withdrawn after auctioneer calls for bids unless no bid is received within reasonable time

When a seller bids, the winning bidder can avoid sale, or pay price of last good-faith bid, if auctioneer:
- knowingly accepts bid by or on behalf of seller or
- procures seller’s bid to drive up price of goods

Exceptions - seller can bid:
- at forced sale or
- if seller gives notice reserving right to bid

Completion of sale
- When auctioneer announces end of sale (eg, by fall of hammer)
- If bid is made contemporaneously with end-of-sale announcement, auctioneer has discretion to continue bidding

A bidder has the right to withdraw a bid until the auctioneer announces the completion of the sale.

Question 37

Expectation Damages

Answer 37

Expectation Damages = loss in value + other loss - cost avoided - loss avoided

Question 38

Consequential Damages

Answer 38

Consequential damages arise out of special circumstances unique to the parties to the contract, rather than arising necessarily from the transaction itself.

To be recoverable, consequential damages must have been reasonably foreseeable to the breaching party when the contract was entered.

Question 39

Compensatory damages

Answer 39

expectation damages – the difference between the value of performance without the breach (i.e., what was promised) and with the breach (i.e., what was received)
consequential damages – damages that do not flow directly and immediately from the other party’s breach but are the foreseeable consequence of the breach (i.e., not too speculative) and
incidental damages – commercially reasonable expenses incurred due to the other party’s breach.

Question 40

Seller’s Response to Buyer’s Offer by Shipping Goods

Answer 40

Shipment of conforming goods = acceptance
Shipment of nonconforming goods = acceptance and breach
Shipping nonconforming goods with notice that they are being offered only as an accommodation = rejection and counteroffer

Question 41

Promissory estoppel and charitable subscriptions

Answer 41

A charitable subscription—i.e., a written promise to contribute money or property to a charitable institution—is enforceable on promissory-estoppel grounds without proof of detrimental reliance or substantial injustice. All that is needed is proof that the promisor reasonably expected to induce reliance on the promise.

Question 42

Revocability of an Assignment

Answer 42

Only gratuitous assingments (where there is not consideration) are revocable.

Revocable unless:
(i) the obligor (i.e., the party obligated to perform) has already performed,
(ii) a document symbolizing the assigned right has been delivered to the assignee,
(iii) a written assignment signed by the assignor has been delivered to the assignee, or
(iv) the assignee (i.e., the party receiving assigned rights) has detrimentally relied on the assignment.

Question 43

Objective theory of contracts

Answer 43

A party’s intent is determined by outward objective facts—not a party’s subjective intent.

This means that a party’s intent is determined by what a reasonable person in the other party’s position would believe considering the circumstances. So if the other party knew or should have known that the party lacked the intent to contract, then no contract was formed.

Question 44

Requirements for Excuse of Impracticability

Answer 44

(i) An unforeseeable event has occurred;
(ii) Nonoccurrence of the event was a basic assumption on which the contract was made; and
(iii) The party seeking discharge is not at fault.

Examples
- in a personal services contract, when the party who is to perform the contract—or a person whose existence is required for that performance—dies or becomes incapacitated
- destruction of thing needed for performance or the subject matter of the contract
- prohibition or law

Question 45

Ways to discharge contractual obligations

Answer 45

FIRM SCAN

Full performance of contractual obligations
Impossibility, impracticability, or frustration of purpose
Release (in writing only)
Mutual rescission
Substituted contract
Contract or covenant not to sue
Accord & satisfaction
Novation

Question 46

Installment contract

Answer 46

A contract in which the goods or payment are to be delivered in multiple shipments, and each shipment is to be separately accepted by the buyer.

• For goods, payment by the buyer is due upon each delivery unless the price cannot be apportioned or the parties specifically contract that payment is due upon completion of the entire contract.
• Exception to the Perfect Tender Rule for shipments that substantially comply

A breach by nonperformance accompanied by a repudiation generally constitutes a total breach. But it constitutes a partial breach when the only remaining duty at the time of the breach (1) is held by the breaching party and (2) is for the payment of money in unrelated installments.

Question 47

Mirror Image Rule

Answer 47

Common law; states that the acceptance must mirror the terms of the offer. Any change to the terms of the offer, or the addition of another term not found in the offer, acts as a rejection of the original offer and as a new counteroffer.