Contracts

Question 1

Acronyms

Answer 1

1. Has an acceptable contract been formed? All Contracts Don’t Stink: Agreement (offer + acceptance), Consideration, Defenses, Statute of frauds
2. Has the contract been performed? Pizza With Crawling Escargot: Parol evidence rule, Warranties, Conditions, Excuses
3. Defenses? MINIMUM FD: Misunderstanding, Incapacity, Nondisclosure, Illegality, Mistake, Unconscionability, Misrepresentation, Fraud, Duress
4. Is the contract in SoF world? M. SOUR: Marriage, Suretyship, One Year, UCC, Real property
5. Ways to discharge contractual obligations? FIRM SCAN: Full performance, Impossibility (impracticability or frustration of purpose), Release (in writing only), Mutual recission, Substituted contract, Accord & satisfaction, Novation

Question 2

Common Law vs. UCC

Answer 2

The UCC governs all contracts involving the sale of goods, and common-law (CL) rules govern contracts involving real estate services.

Mixed contract: When a contract includes both goods and services, whichever one predominates will determine the governing law.

Question 3

Merchant

Answer 3

A person who regularly deals in the type of goods involved in the transaction;

A person who by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction; and

In some instances, any businessperson when the transaction is of a commercial nature.

Question 4

Offer

Answer 4

Key question—whether an offeror displays an objectively serious intent to be bound (objective test)

An offer requires a promise, terms, and communication to the offeree
(he must know of the offer; invitations to deal & advertisements are generally not offers, unless ads are specific and limit who may accept the offer)

Promise: A promise is a statement indicating a present intent to enter into a contract.

Terms:
-CL: All essential terms must be provided (parties, subject matter, price, quantity).
-UCC: The essential term is the quantity; a court will “gap fill” any other missing terms.
–> Place for Delivery: If the contract is silent as to delivery, the default place for delivery under the UCC is the seller’s place of business.

Question 5

Requirements & Output Contracts

Answer 5

Requirements contract: “I don’t know how many I need over the next year, but I promise to buy all of them from you.”
-The buyer is offering to buy 100% of whatever amount is needed from this individual seller.

Output contract: “I don’t know how many I will make over the next year, but I promise to sell all of them to you.”
-The seller is offering to sell 100% of whatever amount is produced to this individual buyer.

Both output and requirements contracts are specific enough under the UCC, even though they don’t state an exact quantity term—they provide a formula for calculation.

Question 6

Unilateral vs. bilateral offer

Answer 6

Bilateral contract: Contract in which parties exchange promises; can be accepted by a promise OR by beginning performance

Unilateral contract: Contract in which the offeror makes a promise and the offeree must perform; can only be accepted by complete performance
–> Offered rewards and contests often indicate a unilateral contract.
* To form a unilateral contract, the offeree must (i) know about the offer and (ii) intend to accept the offer by completing performance.

Question 7

Irrevocable offers

Answer 7

Offers are generally revocable, but can be irrevocable under certain circumstances.

1) Option contracts (CL)
* An offer where the offeror promise to hold the offer open for a certain period of time.
* The offeree must pay consideration to the offeror to hold the offer open.

2) Firm offers (UCC)
* A firm offer exists if:
o The offeror is a merchant; and
o The offeror gives assurance that the offer will remain open in a signed writing.
* Irrevocability cannot exceed 90 days

(3) Unilateral contracts: If the offeree has started to perform under a unilateral contract, the offeror cannot revoke the offer.

(4) Detrimental Reliance: Arises when an offeree reasonably and detrimentally relies on the offer in some foreseeable manner
-Look especially for a general contractor/subcontractor context.
-This is a special variant of promissory estoppel.

Question 8

Termination of offer

Answer 8

Revocation: An offer can be terminated if the offeror revokes the offer prior to acceptance.

Revocation is effective when received (e.g., a mailed revocation is not effective until received).

Constructive revocation: If the offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, the offer is automatically revoked.

If the offeree rejects the offer, it will be terminated.

CL: a counteroffer acts as a rejection of the original offer and creates a new offer (a “mere suggestion” of a different term or a “mere inquiry” about changing the terms is not a counteroffer and will not terminate the original offer).

Lapse of time: If an offer is not accepted within a reasonable amount of time, it will be deemed to be terminated.

Death of the offeror: If the offeror dies before the offer is accepted, the offer will be terminated.

Question 9

Acceptance

Answer 9

Acceptance is the objective manifestation by the offeree to be bound by the terms of the offer.

Bilateral contract: Can be accepted by a promise OR by the beginning of performance

Unilateral contract: Can only be accepted by complete performance

Manner of acceptance:
-Any reasonable means of acceptance is allowed, unless the offer limits the means of acceptance (implied-in-fact: accept by gestures/actions).
-Silence is generally not acceptance, unless the offeree has reason to believe that silence will constitute an acceptance.
-if no legal K but act like agreement, only terms both writings agree on are K (UCC gap filling)

Question 10

Counteroffers and mirror-image rule

Answer 10

Mirror-image rule (Common Law)
-The acceptance must mirror the terms of the offer.
-Any changes/additions to the terms constitute a rejection of the original offer and a counteroffer.

UCC (no mirror-image rule)
*One or both parties are not merchants:
o An acceptance from the offeree with changes or additions will be a valid acceptance (e.g. confirming memo).
o However, the contract will not include the changes or additions unless the offeror agrees to them.

*Both parties are merchants:
o An acceptance from the offeree with additions or differences will be a valid acceptance
o The contract will include the additions unless:
(a) They materially alter the terms of the original offer;
(b) The original offer limits acceptance to the terms of the offer; or
(c) The offeror objects to the changed or new terms.

o The different terms:
(a) Minority: initial offer controls
(b) Majority: knock out rule (neither term governs and look to UCC gap filling provisions)

*Terms that materially alter a contract include a warranty disclaimer or severe limitations on a party’s remedies. Terms that do not materially alter a contract include setting a reasonable time for a party to complain about the goods or reasonable limitations on remedies.

Question 11

Mailbox rule

Answer 11

Under the mailbox rule, an acceptance is valid when placed in the mail.

Exception: If there is an option contract or firm offer, the acceptance is only valid when received before the offer expires.

Special issue: If a party mails a rejection of an offer and then mails an acceptance to the offer, the first communication to be received is effective.

Question 12

Consideration

Answer 12

Consideration requires a bargained-for change in the legal position between parties. Look for a legal detriment.

Legal detriment: A legal detriment can take the form of a promise to do/not do something, or performance/refraining from performance.

Adequacy of consideration: a pretense is insufficient ($1), but a court will not look at the economic value of the items being exchanged.

Question 13

Gifts

Answer 13

A gift from one party is not supported by consideration because the receiving party is not suffering a legal detriment.

Question 14

Promise not to sue

Answer 14

Settling a legal claim can be sufficient consideration, but only if:
a) The plaintiff has a reasonable belief in the validity of the claim; or
b) There is reason to doubt the validity of the claim due to uncertain law.

Question 15

Past consideration

Answer 15

Under the common law, a legal detriment incurred in the past does not constitute consideration because it was not bargained for in exchange for a legal detriment.

Moral consideration/material benefit rule: under the modern trend, a promise not supported by consideration may be enforceable if it is made in recognition of a significant benefit previously received by the promisor from the promisee.
* This rule does not apply if the promisee conferred the benefit as a gift to the promisor.
* The court may also reduce the amount of money owed under the promise if it is disproportionate to the benefit conferred by the promisee.

Question 16

Promissory estoppel (detrimental reliance)

Answer 16

Substitute for consideration under a contract

The promise will be binding in the absence of consideration if:
* The promisor should reasonably expect the promise to induce action or forbearance;
* The promise actually induces action or forbearance; and
* Injustice can be avoided only by enforcement of the promise.

The damages awarded under promissory estoppel are usually limited to reliance damages.

Question 17

Quasi-contract (i.e., implied-in-law contract)

Answer 17

No enforceable contract, but only fair to pay:
1. The plaintiff conferred a measurable benefit on the defendant;
2. The plaintiff reasonably expected to get paid; and
3. It would be unfair to let the defendant keep the benefit without paying.

*Quasi-contract damages are often limited, as justice requires, to the fair value of the benefit conferred (restitution)

Question 18

Misunderstanding

Answer 18

Arises when each party attaches a different meaning to the same words

For this defense, you must show that:
1) The parties use a material term that is open to two or more reasonable interpretations (the objective test cannot apply);
2) Each side attaches a different meaning to the term; and
3) Neither party knows, or should know, of the confusion.

Question 19

Incapacity

Answer 19

Lack capacity to make contract:

1. Minors (under 18)
2. People who are mentally ill—two standards:
   * The person cannot understand the nature and consequences of his actions; or
   * The person cannot act in a reasonable manner in relation to the transaction (if the other side knows or has reason to know this).
   3) Very intoxicated persons (if the other side knows or has reason to know this)

What happens if you make a contract with a person who lacks capacity?

-The contract is voidable: the incapacitated party can disaffirm.

-Contract for necessities: the party without capacity must still pay fair value (not necessarily the contract price)
–>Necessity: something you really need to live (e.g., food, clothing, or shelter)

-A party without capacity can ratify the deal by keeping the benefits of the contract after capacity is obtained.

Question 20

Mutual mistake

Answer 20

Affects both parties. Adversely party can rescind (void) if:

1) There is a mistake of fact, existing at the time that the deal is made;
2) The mistake relates to a basic assumption of the contract and has a material impact on the deal; and
3) The impacted party did not bear the risk of mistake.

Question 21

Unilateral mistake

Answer 21

Applies if only one party is mistaken as to an essential element of the contract

The mistaken party can rescind (void) the contract if:
(1) all elements of mutual mistake are met; and
(2)(a) The mistake would make enforcement of the contract unconscionable; or
(2)(b) Non-mistaken party failed to disclose the mistake or caused the mistake.

Question 22

Misrepresentation

Answer 22

A statement at the time of contracting that is not true.
-can be intentional (fraudulent) or accidental

To assert this defense, the party must show:
1) A misrepresentation of a present fact (not opinion);
2) That is material OR fraudulent (intentional); and
3) That is made under circumstances in which it is justifiable to rely on the misrepresentation.

*can also call this fraudulent misrepresentation/fraud in the inducement

Question 23

Fraud in the execution

Answer 23

You trick someone into signing something that they do not even know is a contract

Question 24

Nondisclosure

Answer 24

The other party does not learn the truth about something, but now you just remain quiet

Normally, you do not need to tell the other side about all material facts related to the deal.

Except: A special (fiduciary) relationship or active concealment

Question 25

Duress

Answer 25

An improper threat that deprives a party from making a meaningful choice to contract

Economic duress: arises when one party makes threats to induce another party to contract (or modify a contract)

*If physically compelled, the contract is void.

*When a party is induced to enter into a contract due to other duress (e.g., a threat of pursuing a civil action in bad faith), the contract is voidable.

*generally, a threat to breach a contract is not improper for purposes of duress. However, if the breach would violate the duty of good faith and dealing, it would constitute an improper threat.

Question 26

Undue influence

Answer 26

Arises when a party puts very intense sales pressure on another party, who often seems weak-minded or susceptible to high-pressure sales tactics

Question 27

Capacity

Answer 27

Certain parties are considered to be incompetent to enter into a contract (e.g., due to infancy, mental illness, or intoxication).

Question 28

Illegality

Answer 28

Illegal contracts are unenforceable.

But, a contract entered in furtherance of an illegal act (that is not itself illegal) will still be enforced.

Typically, the law will just leave the parties where they stand. There is a modern trend toward allowing less-guilty parties to recover restitution (i.e., get their money back).

Contracts against public policy—are not enforced

Question 29

Unconscionability

Answer 29

A court will not enforce a contract that is so unfair, no reasonable person would agree to it.

Two types of unconscionability:
-Procedural: unfair bargaining process (hidden term, absence of meaningful choice)
-Substantive: actual term in contract is significantly unfair

Remedies: The court may refuse to enforce the entire contract, strike the unconscionable portion of the contract, or limit the unconscionable terms.

Question 30

Statute of frauds approach & when applies

Answer 30

Approach to SOF:
1) Determine whether the SOF applies to the contract.
2) If the SOF applies, determine whether the requirements (written, signed by party to be charged) are met.
3) If the requirements are not met, discuss exceptions (part/full performance, estoppel).

Types of contracts: The SOF applies to contracts involving:
1) Marriage: a contract made in consideration of marriage (like a prenup)
2) Suretyship: a contract promising to guarantee the debt of another
3) Contracts that cannot be performed within one year of making
4) Sale of goods for $500 or more
5) Real property: a contract for the sale of an interest in real property (doesn’t typically included leases of less than 1 year)

*The main-purpose exception—if the main purpose in agreeing to pay the debt of another is for the surety’s own economic advantage, then we are not in SOF world.

Question 31

SOF requirements

Answer 31

There must be a writing signed by the person to be charged (i.e., the person against whom enforcement is sought) that contains the essential terms of the deal.

1) Writing
* The writing does not have to be a formal contract.
* Multiple writings can be put together to meet the requirements (as long as they reference each other).
* The writing does not have to exist at the time of the promise; it can be created after the promises are made.
* Sale of goods for $500 or more: The writing need not contain all the terms of the contract, but the contract is not enforceable against the party beyond the quantity of the goods shown in writing.

2) Signature
* The writing must be signed by the party against whom the contract is enforced.
* A document on company letterhead may be enough to constitute a signed writing.

Question 32

SOF exceptions

Answer 32

If the SOF is not met, a court will still enforce the contract in limited situations.

1) Contracts that cannot be performed within one year of making
-If full performance has occurred by either party, court will enforce it.

2) UCC Sale of Goods for $500 or more
-If full performance has occurred by the party seeking to enforce the contract (e.g., goods have been fully delivered or fully paid for), the contract will be fully enforceable.

-If part performance has occurred (part of the purchase price has been paid), the contract will be enforceable to the extent that the money has been paid.

-No writing required if the contract involves specially manufactured goods for the buyer.

-Letter or Memorandum of Confirmation: A contract is enforceable against the receiving party if:
o Both parties are merchants;
o A party sends a confirmatory letter/memo that meets the SOF (writing, signed, essential terms of the deal) to the other party; and
o The other party knowingly receives the memo and does not object in writing within 10 days.

3) Sale of Land
If the contract involves the sale of land, the contract will be enforced if at least two of the following three acts have occurred:
-Payment (part or full);
-Possession; or
-Substantial improvements to the land.

4) Estoppel (applies to all contract types): If a party reasonably and detrimentally relies on a promise, a court may enforce the contract against the other party.

(5) Judicial admission

Question 33

Warranties

Answer 33

Express warranty, Implied warranty of merchantability, and Implied warranty of fitness for a particular purpose.

Question 34

Express warranty

Answer 34

A promise or description of the item that is part of the basis of the bargain is an express warranty unless it is merely the seller’s opinion.

The use of a sample or model creates an express warranty that the goods sold will be like the sample.

Disclaimer: Disclaimer clauses that conflict with express warranties are ignored.

Question 35

Implied warranty of merchantability

Answer 35

This warranty is triggered only when the seller is a merchant dealing in the goods at issue.

Warrants that the goods are fit for ordinary commercial purposes.

Disclaimer: This warranty can be disclaimed through a clear written “as is” statement or an oral statement that uses the term “merchantability.”

Question 36

Implied warranty of fitness for a particular purpose

Answer 36

Triggered when a buyer relies on a seller’s expertise to select a special type of good that will be used for a special purpose

The seller need not be a merchant for this implied warranty to apply.

Disclaimer: This warranty can be disclaimed by general language such as “as is”, but the disclaimer must be in writing and be conspicuous.

Question 37

Modification (CL)

Answer 37

Under the common law, a modification must be supported by consideration.

Preexisting duty rule: a promise to do something that you are already legally obligated to do is not consideration.

Exceptions to preexisting duty rule:
1) A change in performance;
2) A third party promising to pay; or
3) Unforeseen difficulties that would excuse performance.

Promising partial payment for release from a debt obligation: if debt is currently due and undisputed, the modification is not binding.

Statute of Frauds: If the modified contract falls within the SOF, it must be in writing unless an exception applies

Provisions prohibiting oral modifications: A provision requiring a modification to be in writing even though the modification would not otherwise fall within the SOF is not enforceable.

Question 38

Modification (UCC)

Answer 38

A modification does not require additional consideration, as long as the modification is entered into in good faith by both parties.

Statute of Frauds: If the modified contract falls within the SOF, it must be in writing unless an exception applies

Provisions prohibiting oral modifications: A provision prohibiting oral modifications to a sales contract is valid—even if the modification would not otherwise fall within the SOF.

Question 39

Accord & Satisfaction

Answer 39

The parties to an earlier contract agree that performance will be satisfied instead by the completion of a different performance.

Accord: A new agreement where a party agrees to accept a different performance than what was agreed upon

Satisfaction: Occurs when the different performance is completed by the other party, which discharges the original contract duties and the accord agreement duties

*If the accord is not performed, the other side can sue on either the original obligation or the new promise.

Question 40

Parol Evidence Rule

Answer 40

Under the PER, extrinsic evidence of oral or written communications prior to the written contract (e.g., contract negotiations) are generally inadmissible for contradicting the terms of the contract.

Integration
-The PER only applies if the writing in question is “integrated” (i.e., intended to be the final agreement regarding the terms of the contract).
-The court will look at the words in the contract to determine if the parties intended for it to be a total or partial integration.

Total: The writing contains all the terms of the agreement.
-No parol evidence is admissible.
-Merger clause: If the contract has a “merger” clause stating that the contract is the final and complete understanding of the parties, it is likely to be a total integration.

Partial: The writing contains some of the terms of the agreement.
-Parol evidence is admissible to supplement the writing, as long as it is consistent with the writing (and do not contradict any of the terms).
-UCC more forgiving: assumed partial integration unless parties would’ve certainly included word

Question 41

PER exceptions

Answer 41

Parol evidence will be admissible in limited situations:

-Subsequent agreement: The PER does not prohibit evidence of modifications or statements made after the contract was written.

-Ambiguity and interpretation: Evidence is admissible for purposes of interpreting or clarifying an ambiguity in the contract.

-Collateral deal: Evidence of a separate deal between the parties is admissible, if the deal is not part of the written contract.

-UCC: Evidence of usual performance and dealing between parties is admissible.

-Condition precedent: Evidence of a condition precedent to the existence of the contract is admissible.

-If extrinsic term would “naturally be permitted”

*the PER also does not apply to evidence used to raise a formation defense or establish an enforcement defense.

Question 42

Promises (CL)

Answer 42

Parties may exchange contractual promises which require them to act or refrain from acting.

*When in doubt, courts are more likely to find that a contract term provides a promise rather than a condition.

Common Law: Substantial performance

-A party must substantially perform his part of the contract.

-A party who substantially performs may recover on the contract even though that party has not rendered full performance.

–>A delay in performance does not necessarily constitute a failure to substantially perform.

-A party who has not substantially performed generally cannot recover damages based on the contract, but she may be able to recover through restitution.

-A party who fails to substantially perform is in material breach.

Question 43

Promises (UCC)

Answer 43

Perfect tender:
-The parties must strictly perform all duties under the contract, or they will be in breach.

-The buyer has a right to inspect the goods, and once he accepts them, he has an obligation to pay.

-If either the tender or the goods are nonconforming, then the buyer has the right to accept or reject all or part of the goods.

–> Right to cure: If a buyer rejects goods as nonconforming and time still remains to perform under a contract, the seller has a right to cure and tender conforming goods.

-A party who fails to strictly perform is in material breach.

UCC: Installment contracts:

-An installment contract is defined as one in which the goods are to be delivered in multiple shipments (i.e., segments).

–> Each shipment is to be separately accepted by the buyer.

–> Payment is due upon each delivery, unless the price cannot be apportioned.

-Nonconforming segments: The buyer can reject only if the nonconformity substantially impairs the value of that shipment to the buyer and cannot be cured.

–> If the seller makes adequate assurances that he can cure the nonconformity, then the buyer must accept the shipment.

–> Remaining segments: The buyer may cancel the entire contract only if the nonconformity substantially impairs the value of the entire contract to the buyer.

Question 44

Conditions

Answer 44

A condition is a future event that must occur before a party’s contractual rights or obligations are created or destroyed (if condition not met, may be no contract).

Condition precedent: Must occur before the other party has an obligation to perform

Condition subsequent: Duty to perform will be excused if the condition occurs

Express:
-Conditions expressed in the contract itself (e.g., “on condition that”)
-Must be fully met
-Satisfaction contracts: objective test, unless aesthetic (then subjective. If bad faith, breach).

Implied:
-Conditions which a court may find exist because the nature of the contract suggests that the parties intended the condition
-Require substantial performance (no material breach, satisfies constructive condition of exchange if failure is not willful)
-can then recover damages deficiency
*Divisibility: If a contract is clearly divisible, then it will be broken into mini-contracts for the purposes of determining if there has been substantial performance.

UCC: perfect tender (perfect goods & perfect delivery)

Question 45

Excuse of conditions

Answer 45

Waiver: A condition may be waived by words or conduct; the waiving party would then have a duty to perform.

Wrongful interference: If a party hinders the other party’s performance and interferes with the occurrence of the condition, the condition will be excused, and the wrongful party will have duty to perform.

Estoppel: If a party indicates that it will not enforce a condition, and the other party reasonably relies on this, the party will be estopped from later enforcing the condition.

*Note that conditions may also be suspended or excused by election or forfeiture.

Question 46

Method of Delivery

Answer 46

1. Tender at Seller’s place of business
   -seller just needs to give the goods to the buyer
2. Shipment contract [F.O.B. Seller’s place of business]
   -The seller must take three actions to satisfy perfect delivery:
   a) Get the goods to a common carrier;
   b) Make arrangements for delivery; and
   c) notify the buyer.
3. Destination contract [F.O.B. Buyer’s place of business]
   -The seller must get the goods to the buyer’s business and notify the buyer.

Question 47

Risk of Loss

Answer 47

1) Check whether the parties have already dealt with the risk problem in the contract. If so, their agreement will control.

2) If not, ask whether either party has breached (typically another part of the contract).
-If so, the breaching party bears the risk of loss.

3) If there is no breach, and the goods are being shipped, then ask what type of delivery contract it was:
-If it was a shipment contract, then the risk of loss during delivery rests with the buyer.
-If it was a destination contract, then the risk of loss during delivery rests with the seller.

4) In all other cases, ask whether the seller is a merchant.
-If so, the risk of loss stays with the seller until the buyer receives the goods.
-If not, the risk of loss moves to the buyer when the seller tenders the goods.

Question 48

Discharge of Duty to Perform

Answer 48

In certain circumstances, a promisor party’s duty to perform will be discharged, regardless of whether there is a promise or condition involved. All relevant theories for discharging a promisor party’s duty to perform should be discussed:

FIRM SCAN: Full performance, Impossibility (impracticability or frustration of purpose), Release (in writing only), Mutual rescission (unless one side fully performed), Substituted contract, Accord & satisfaction, Novation.

Question 49

Impracticability

Answer 49

A duty may be discharged if:

-An unforeseeable event occurs (e.g., natural disaster) making the performance of the contract extremely difficult; AND

-The nonoccurrence of the event was a basic assumption at the time of the contract.

-The party seeking discharge must not be at fault.

*Non-extraordinary increases in the cost of performance are not a sufficient basis for this defense.

Question 50

Impossibility

Answer 50

An unforeseeable event occurs, making it objectively impossible for the party to perform.

*Common fact patterns for impracticability & impossibility: Performance becomes illegal after the contract is formed; The subject matter of the contract is destroyed; or in a services contract with a “special person,” the performing party dies or is incapacitated.

Question 51

Frustration of purpose

Answer 51

Performance can still occur, but something has happened to undermine the entire reason for the creation of the contract.

*can rescind the contract.

*Similar to impracticability, the nonoccurrence of the event must have been a basic assumption at the time of the contract and the party seeking discharge was not at fault.

Question 52

Third-Party Beneficiary Contracts

Answer 52

A third-party beneficiary contract results when the parties to a contract intend that the performance by one of the parties is to benefit a third person who is not a party to the contract.

*Intended v. Incidental Beneficiaries: When a contract benefits persons other than the parties to the contract, a third party can enforce the contract if the third party is an intended beneficiary. Otherwise, the third party is an incidental beneficiary who cannot enforce the contract.

*A creditor beneficiary arises when the promisee strikes a deal with the promisor in order to repay some earlier debt to the third party.

*A donee beneficiary arises when there is no preexisting obligation, but the promisee clearly intends to confer a gift of enforcement on a third party.

Question 53

Revoking Third-Party Rights

Answer 53

The initial counterparties might try to revoke or modify the third-party’s right to enforce the contract.

If the third party knows about the promise and has changed position in reasonable reliance on the promise, he may be able to make out a claim under promissory estoppel

A third party will not lose enforcement rights if any of the following facts are true, as these facts cause the right to vest:
-The beneficiary detrimentally relies on the rights (similar to promissory estoppel);
-The beneficiary manifests assent to the contract; or
-The beneficiary filed a lawsuit to enforce the contract.

The promisor can assert any contract defense against the third party that he would be entitled to assert against the promisee.

Question 54

Assignment of Rights

Answer 54

Almost all contract rights can be assigned.

-If the contract prohibits assignments, the assigning party has breached when he makes the assignment, but the third party can still recover from the guarantor.

-If the contract invalidates assignments, the third party cannot recover because there is no power or right to assign.

If assign rights more than once:
-If the rights are assigned without consideration, the assignment is generally revocable and the last assignment controls.
-If the rights are assigned for consideration, then the first assignment for consideration is typically irrevocable and will hold.
–>Limited exception: A later assignment will take priority if the second assignee does not know of the initial assignment and is first to obtain payment or a judgment (i.e., a bona fide purchaser for value without notice).

Assignments are not allowed when they (i) materially increase the duty or risk of the obligor or (ii) materially reduce the obligor’s chance of obtaining performance.

Question 55

Delegation of Duties

Answer 55

Generally, obligations under a contract can be delegated, as long as the contract does not prohibit delegation and as long as the other party does not have some special interest in having a specific individual perform.

When obligations are delegated, the delegator is not released from liability.

The delegator is still liable if the delegatee does not perform.

(Novation: Delegator is only released from liability if the other party to the contract agrees to release the delegator as a party to the contract and substitute a new one).

A delegatee is generally not liable for breach unless she receives consideration from the delegating party.

Question 56

Novation

Answer 56

Arises when BOTH parties agree that a substitute person will take over the contractual obligations.

*If there is a valid novation, then the original promisor will be excused from performance.

Question 57

Breach of contract

Answer 57

If a duty to perform exists and has not been discharged, a party’s non-performance is a breach.

Question 58

Anticipatory Repudiation (CL)

Answer 58

If a party clearly and unequivocally repudiates, the nonbreaching party has two options:

1) Treat the repudiation as a breach and sue immediately for damages
-BUT, if you have completed the entire performance and are only waiting for payment, you cannot sue early.

2) Ignore the repudiation, demand performance, and see what happens.

Retraction: The promisor party can retract its repudiation until/unless the other party:
-Commenced a lawsuit, or
-Acted in reasonable reliance on the repudiation (materially changed position).

UCC: Reasonable grounds for insecurity about the other side’s performance allows you to demand an adequate assurance of performance.
-If the party fails to respond within a reasonable time (not to exceed 30 days), you can treat this as repudiation.

Question 59

Material vs Minor Breach

Answer 59

UCC: Perfect Tender Rule (perfect goods, perfect delivery)

Common Law:
A material breach occurs when the nonbreaching party does not receive the substantial benefit of the bargain.

-The nonbreaching party can withhold any promised performance and pursue remedies for breach.

A minor breach occurs when the breaching party has substantially performed, but not fully performed.

-The nonbreaching party is entitled to pursue remedies for the minor breach, but it still must perform under the contract.

Question 60

Damages

Answer 60

Expectation Damages, Consequential Damages, Reliance Damages, Incidental Damages, Duty to Mitigate Damages

Question 61

Equitable Remedies

Answer 61

Restitution, Specific Performance

Question 62

Expectation Damages

Answer 62

This is the normal way to calculate damages in contracts.

Goal: to put a party in the same economic position it would be in if the contract had been performed as promised.

Measured by comparing the value of the performance without the breach (contract price) to the value of the performance with the breach (fair market value of performance).

Diminution in value: If the award of expectation damages would result in economic waste, then courts may instead award damages equal to diminution in value (How much lower is the market value of what you got versus what you wanted?)

If the breach is willful, and only completion of the contract will give the nonbreaching party the benefit of its bargain, then a court may award expectation damages even if that award would result in economic waste.

Question 63

Consequential Damages

Answer 63

Consequential damages are reasonably foreseeable damages other than expectation damages that are related to the breach of the contract (e.g., loss of profit).

In order to recover consequential damages, three elements must be met:
1. Foreseeability: The damages must be natural and probable consequences of the breach or contemplated by the parties at the time the contract was formed.
2. Causation: The plaintiff must show that the damages were caused by the defendant’s breach.
3. Certainty: The plaintiff must prove the dollar amount with reasonable certainty.
-If the amount is too speculative (e.g., a new business), the court will not award consequential damages.

Question 64

Special Problems with Expectation Damages

Answer 64

Lost Volume Profits (LVP)
-If the paying party breaches, then normally the selling party needs to mitigate by reselling the goods or services to another person.
-But if the seller is a retailer who sells this type of product all the time, the seller might try to argue for LVP (put in situation would’ve been in without breach)

Incomplete Performance
-If the paying party breaches in a partially completed building contract, the builder CANNOT continue to work on the job. This runs counter to mitigation: it would be “running up the damages.”
-Adjust the recovery to take account of the fact that the builder did not need to finish the job
-Use this formula: Expectation Damages = Contract Price – Amount already Paid – Amount that Would Be Needed to Finish the Job

Question 65

Reliance Damages

Answer 65

These are damages that the nonbreaching party incurs in reasonable reliance upon the promise that the other party would perform.

Goal: to put a party in the same economic position that it would be in if the contract had never been performed in the first place

*Can’t get both expectation and reliance damages

Question 66

Incidental Damages

Answer 66

These are damages that arise when the nonbreaching party is trying to remedy the breach (e.g., in a commercial contract, the cost of finding a replacement seller of goods).

Question 67

Duty to Mitigate Damages

Answer 67

The nonbreaching party has duty to avoid or mitigate its damages by taking reasonable steps to seek replacements/substitutes for goods and/or services.

A failure to take reasonable steps to mitigate damages will reduce the damages recovered by the nonbreaching party.

Question 68

Restitution

Answer 68

Goal: to give the plaintiff an amount equal to the economic benefit that the plaintiff conferred on the defendant

This can sometimes equal reliance damages, but it need not.

Restitution allows nonbreaching and breaching parties to recover damages under an unjust enrichment theory (i.e., not based on the contract).

Nonbreaching party:
-A nonbreaching party cannot seek restitution if it has performed all of its duties and the only performance due from the other party is the payment under the contract.
–> The nonbreaching party must seek expectation damages instead.
-Restitution damages based on the reasonable value of the benefit conferred on the other party.

Breaching party
-If a party has not substantially performed, it will be in breach of contract, and cannot recover under the contract.
-However, if the nonbreaching party has benefited from the breaching party’s performance, the breaching party can recover for the benefit conferred minus the damages the nonbreaching party is entitled to.

Quasi-contract (i.e., implied-in-law contract)
-If there is no enforceable contract, a court may award restitution damages on the basis of quasi-contract if:
1. The plaintiff conferred a measurable benefit on the defendant;
2. The plaintiff acted without gratuitous intent (i.e., he intended to be paid); and
3. It would be unfair to let the defendant retain the benefit.

Question 69

Liquidated Damages

Answer 69

Stated in the contract as an explicitly negotiated amount due upon breach

Courts are wary about awarding liquidated damages and will do so only if:
1) The amount of liquidated damages was reasonable at the time of contracting; and
2) Actual damages from breach would be uncertain in amount and difficult to prove.

Question 70

Specific Performance

Answer 70

Under the remedy of specific performance, the nonbreaching party can ask a court to order the breaching party to perform the contract.

Equitable relief is the exception, not the norm in contract law.

Awarded only when monetary damages are considered inadequate for some reason.

Specific performance is presumptively available for real estate transactions.

Specific performance is presumptively not available for contracts of personal service.
-Rarely, a court might grant an injunction prohibiting a breaching party from performing similar services for a competitor for a reasonable period of time/place

*Must be feasible for the court to enforce and supervise the breaching party’s performance

UCC—Specific performance is available only for unique goods like art or custom-made items.

Question 71

Specific Performance Defenses

Answer 71

A court will not grant specific performance if the breaching party can assert defenses of laches or unclean hands.

Laches: The nonbreaching party waited an unreasonably long time to seek specific performance, and the delay prejudiced the breaching party.

Unclean hands: The nonbreaching party engaged in unethical or immoral acts relating to the contract.

Question 72

Right of Reclamation

Answer 72

Arises when an unpaid seller tries to reclaim goods that were sold on credit when the buyer is insolvent.

To assert this remedy, the following facts must be present:
1) The buyer is insolvent at the time of receipt of the goods;
2) The seller must demand the return of goods within 10 days of receipt (or within a reasonable time if the buyer misrepresented his solvency to the seller in writing within three months before delivery); and
3) The buyer still has the goods.

Question 73

UCC Buyer’s Remedies for Failure to Tender

Answer 73

Under the UCC, the buyer has several alternative remedies if the seller fails to tender the goods

1. Damages
   The buyer may recover the market price minus the contract price.
   *The UCC also permits recovery for incidental and consequential damages resulting from the seller’s breach.
2. Cover
   The buyer may purchase similar goods elsewhere and recover the replacement price minus the contract price.
3. Specific performance
   The buyer may demand specific performance for unique goods or if the buyer is unable to cover.

Question 74

UCC Buyer’s Remedies for Non-Conforming Tender

Answer 74

-Buyer has the right to accept or reject all or part of the goods.
-The buyer has the right to inspect the goods before deciding whether to accept or reject.
-Payment does not constitute acceptance if there is no opportunity to inspect the goods before payment.

1. Rejection
   -A valid rejection requires that the buyer give notice to the seller within a reasonable time, before “acceptance.”
   -Rejection triggers the seller’s right to cure.
2. Right to cure: The seller has a right to cure a defective tender if:
   -The time for performance under the contract has not yet elapsed; or
   -The seller had reasonable grounds to believe that the buyer would accept despite the nonconformity.
3. Acceptance
   -Under the UCC, the buyer accepts goods by expressly stating acceptance, or using the goods, or failing to reject the goods.

-A buyer may revoke an acceptance of goods if there is a defect that substantially impairs their value to the buyer and:
–>The buyer accepted the goods on the reasonable belief that the seller would cure the defect, but the seller has failed to do so; or
–> The buyer accepted the goods without discovery of the nonconformity, and such acceptance was reasonably induced either by the difficulty of discovering the nonconformity before acceptance or because the seller gave assurances that the goods were conforming.

-The buyer must inform the seller of its decision to revoke within a reasonable time after the nonconformity is discovered or should have been discovered by the buyer.

*for installment contracts, The buyer can reject a specific delivery that is not perfect only when there is substantial impairment in the installment that cannot be cured.

Question 75

UCC Seller’s Remedies

Answer 75

If the buyer wrongfully rejects a tender of goods, the seller is entitled to incidental damages as well as one of three alternative remedies:

1. Collect damages
   The seller would ordinarily be entitled to the contract price minus the market price at the time and place for tender, together with any incidental damages, less any expenses saved as a result of the buyer’s breach.
2. Resell the goods
   If the seller elects to resell and sue for the contract price minus the resale price, then the resale must be (i) only of goods identified in the contract and (ii) commercially reasonable. However, if the seller wishes to resell the goods in a private sale, the seller must first give the buyer reasonable notice of his intent to resell.
3. Recover the price
   The seller can recover the price after rejection only if the seller is unable to sell the goods at a reasonable price after a reasonable effort or circumstances indicate that such an effort will not yield a sale.