CONTRACTS

Question 1

UCC

Answer 1

UCC governs transactions for goods. A good is identifiable, tangible and moveable.

Question 2

Common Law

Answer 2

Common law governs transactions for real property or services.

Question 3

Offer

Answer 3

Contains clear and definite language (QTIPS), commitment language and communicated to the offeree.

Question 4

Acceptance

Question 5

Mistake

Answer 5

“Mistake” defined –R2K, section 151: “A mistake is a belief that is not in accord with the facts.”

Mistake does not mean bad luck, false prediction of events, or a conscious assumption of uncertain risks. (ex. real estate market dips after purchase is not a mistake to render a contract voidable)

Do not confuse mistake with interpretation. Mistaken belief as to what a contract term meant is a question of interpretation.

Question 6

Mutual Mistake

Answer 6

RULE -Mutual Mistake (R2K, Section 152): Where (1) a mistake of both parties (2) at the time of contract formation (3) as to a basic assumption on which the contract was made (4) has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party (5) unless he bears the risk of mistake.

Question 7

MISTAKE CAVEATS

Answer 7

CAVEAT -Basic Assumption: Look for mistake as to the subject matter, the price, or the terms, going to show lack of mutual assent.

CAVEAT -Material Effect: Look for the result of the mistake. Is the resulting imbalance so severe that the mistake party cannot fairly be required to carry it out. Mistake one that induced assent to the bargain?

CAVEAT -“Unknown injury” Rule: Unless clearly and unambiguously stated, releases for personal injury claims may be avoided on the ground of mutual mistake if the parties at the time of signing the agreement were mistaken as to the existence of an injury, as opposed to the unknown consequences of known injuries.

Factors should be considered on this issue include the language of the agreement; the circumstances of its negotiations and execution, including the legal representation of the parties; the seriousness of the unknown injury; and the consideration paid to the plaintiff for release of the defendant’s liability

Question 8

Unilateral Mistake

Answer 8

Where (1) a mistake of one party at (2) the time a contract was made (3) as to a basic assumption on which the contract (4) has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him (5) if he does not bear the risk of the mistake and: (6) enforcement would be unconscionable, or (7) The other party had reason to know or caused the mistake.

Question 9

MISTAKE: Clerical Error in Construction Contracts

Answer 9

(1) Was the mistake material; (2) Would enforcement be unconscionable (i.e., no profit or loss); (3) Did the mistake result from any positive duty or culpable negligence; (4) Would the plaintiff suffer a hardship if the contractor were afforded relief; (5) Was prompt notice of the mistake given.

Question 10

Risk of Mistake

Answer 10

Rule –R2K, section 154: A party bears the risk of mistake when:
The risk is allocated to him be agreement of the parties, or
He is aware, at the time the contract was made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
The risk is allocated to him by the court on the ground that it is reasonable under the circumstances to do so.

Question 11

Duty to Read

Answer 11

Common law (general) rule: No avoidance of agreement based on a party’s failure to read or understand an agreement or provision. (See Upton Assignee v. Tribilock, 91 U.S. 45 (1875). Does not matter if the party could not read, write, speak in the language of the agreement.

Exceptions:
If the print is illegible.

If the terms are not sufficiently called to the attention of a reasonable party in a fashion that the party would have an opportunity to read the terms under all the surrounding circumstances. (i.e., signs on garage doors, terms on packaging, letterheads, catalogues, etc.)

Fraud/Misrepresentation

Some courts say no K per Restatement (Second) of Contracts Section 20 (Misunderstanding), the duty to read is overcome.

Some courts say bound to terms. Still have duty of due diligence.

Where a person had a fiduciary duty to the other party of the agreement and was obligated to advise of the legal significance.

Question 12

Caveat Emptor

Answer 12

Traditional common-law rule: “Caveat Emptor” Buyer beware. No duty to disclose anything to other party, no matter how material.

Question 13

Misrepresentation

Answer 13

Rule. Misrepresentation. R2K, section 159:A misrepresentation is an assertion that is not in accord with the facts.

CAVEAT: An assertion is usually words, but can be conduct. (shrug, shake head, nod, thumbs up.)

CAVEAT: Not all misrepresentations permit avoidance of contract.

Question 14

When a Misrepresentation Makes a Contract Voidable –R2K, section 164

Answer 14

Where a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

[Assent induced by fraudulent or material misrepresentation of third party that is justifiably relied upon, contract is voidable unless unmistaken party acts in good faith and gives value or relies materially to the transaction].

Question 15

Three types of Fraudulent Misrepresentation

Answer 15

(a) (classic fraud)Where the maker of the misrepresentation knows or believes that the assertion is not in accord with the facts.

(b) Second type involves a situation where the maker expressly or impliedly suggests that the statement is based on knowledge though he knows it is mere opinion.

(c) The third type involves a situation in which the maker honestly believes his assertion, but lies about its basis.

Question 16

Concealment

Answer 16

Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. Affirmative act designed to prevent another from learning the fact acts as a misrepresentation.

Question 17

Duty to Disclose

Answer 17

Modern view under R2K, section 161. When Non-Disclosure is Equivalent to an Assertion.

(1) Where a person known that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material.

(2) Where he knows that disclosure of fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract if non-disclosure of the fact amounts a to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

(3) where he knows that disclosure of the fact would correct a mistake of the other party as to its contents or effect of a writing, evidencing or embodying an agreement in whole or in part

(4) where the other person is entitled to know the fact because of a relation of trust and confidence between them

Question 18

Material Misrepresentation

Answer 18

misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.

Question 19

Duress

Answer 19

Rule. Duress by Physical Compulsion –R2K, section 174:[Where manifestation of assent is physical conduct compelled by duress, no contract].

Rule. Duress by Threat –R2K, section 175: If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. (Same third party rule as misrepresentation).

Question 20

Improper Threat

Answer 20

Improper Threat -Restatement (Second) of Contracts section 176:

(1) Improper threat if :

(a) what is threatened is a crime or tort, or would result in a crime or tort.

(b) what is threated is criminal prosecution.

Question 21

Undue Influence

Answer 21

(1) Unfair persuasion of party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.

(2) [Undue influence by the other party makes the contract voidable]

(3) [Contract is voidable for undue influence by a third party unless the other party is innocent and has not materially relied on the transaction.]

Question 22

Unconscionability

Answer 22

Unconscionability made up of two elements:

1. Procedural Unconscionability: “Absence of meaningful choice on the part of one of the parties.” (adhesion contracts, hidden or inconspicuous terms)
2. Substantive Unconscionability: “Contract terms which are unreasonably favorable to the other party.” (one-sided terms that “shock” the conscience)

CAVEAT: Not Applied to Merchants.

CAVEAT: General Rule: Unconscionability defense not available for transactions between merchants “because there is no disparity between such entities in either bargaining power or sophistication.”

EXCEPTION: Where the disadvantaged party is technically a merchant but, in terms of education, business acumen and experience, functions like a consumer.

Question 23

Duty of Good Faith

Answer 23

Restatement (Second) of Contracts Section 205: Every contract imposes upon each party a duty of good faith and fair dealing the performance and its enforcement.

UCC, Section 1-203: Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

UCC section 1-102(19) Good faith is “honesty in fact in the conduct or transaction concerned.”

“UCC section 2-103 “Good faith” in the case of a merchant is “honesty in fact and the observance of reasonable commercial standards of fair dealing the in the trade.”

Question 24

Illegal Bargains –Licensing/Certifications

Answer 24

Restatement (Second) of Contracts section 181: [If failure to obtain licensing], a promise to do it is unenforceable on grounds of public policy if:
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(a) the requirement has a regulatory purpose, and
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(b) the interest in the enforcement of the promise is clearly outweighed by the public policy behind the requirement.
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Non-regulatory interests: To enable commerce or business, or to raise money.
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Weightiest public interests: Health and safety of the public.

Question 25

Contracts in Restraint of Trade (Non-Compete Agreements)

Answer 25

A. Restrictive agreements will be enforced by the courts unless:
(a) The agreement is found to be contrary to public policy (Only really applicable to professions that benefit the public, i.e. doctors);
(b) Unnecessary for protection of legitimate interest of the employer; or
(c) Unnecessarily restrictive of the rights of the employee, with due regard being given to the subject matter of the contract and the circumstances and conditions under which it is to be performed.

Question 26

Pure Public Policy

Answer 26

Note-Pure Public Policy Analysis

This is a last resort defense. It should come last in your defenses analysis.

“Public policy is a very unruly horse, and one you get astride it you never know where it will carry you. It may lead you from sound law. It is never argued at all but when other points fail.”

Restatement (Second) of Contracts Section 178: A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.
Factors to look at for enforcement: (a) Parties’ expectations, (b) forfeiture if no enforcement, (c) special public interest
Factors to look at for public policy: (a)Strength of polices as evidenced in in legislation or judicial decisions, (b) whether public policy furthered by non-enforcement, (c) the degree of seriousness and deliberateness of the misconduct, (d) directness between the misconduct and misconduct.

Question 27

Recognized “Non-illegal” Public Policies (not exhaustive):

Answer 27

Health and Safety of the Public
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Restraints against Trade
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Marriage -See Wilcox v. Trautz, Massachusetts Supreme Judicial Council, 1998:Reflecting change in social mores as to unmarried cohabitation, Massachusetts court determined contracts between unmarried cohabitants no primarily based on sexual services to be enforceable.
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Wagering -See Metropolitan Creditors Service v. Sadri, California Court of Appeal, 1993:General acceptance of gambling did not change firm public policy against enforcing “gambling debts” in state.

Question 28

CONDITION

Answer 28

“Condition” defined, See R2K section 224: A condition is an event, other than the mere lapse of time, that is not certain to occur, but must occur to activate an existing, contractual duty, unless the condition is excused.

Question 29

CONDITIONS

Answer 29

Non-occurrence of condition results in discharge of obligor’s duty, not a breach, unless obligor is under a duty that the condition occur, i.e. a promissory condition, an event that creates both a legal duty and a promissory duty. R2K section 225(3).

Question 30

Determining Condition or Promise

Answer 30

Courts look to the intention of the parties to determine whether the parties intended a provision to be a condition or promise.
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If language is unambiguous, then the provisions will be interpreted with its plain meaning.
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If language is ambiguous, courts use the standard maxims of interpretation to determine.

Question 31

Standards of Preference with Regard to Conditions

Answer 31

(1) In case of doubt, interpretation is preferred that avoids forfeiture by obligee, unless the condition is in the control of the obligee and obligee assumed the risk.
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(2) Promise preferred in cases of doubt between promise, condition, or promissory condition
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(3) Condition precedent is favored over conditions subsequent.

Question 32

Conditions Precedent v. Conditions Subsequent

Answer 32

Original Analysis categorized conditions into conditions precedent, conditions that activate a dormant duty, and conditions subsequent, conditions that discharge a duty.
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Whether condition subsequent or precedent is only relevant on those occasions when there is a dispute as to whether the condition occurred and which party has the burden of proving that the condition occurred.

Restatement (Second) of Contracts treats all conditions as conditions precedent. R2K 224. “Conditions subsequent” now called “Events terminating a duty.”

Conditions precedent favored over conditions subsequent

Question 33

Condition of Personal Satisfaction

Answer 33

When a contract conditions one party’s performance on the ‘satisfaction’ of another, there are two standards which can be applied:
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Objective Reasonable Satisfaction Standard is used when the contract involves commercial quality, operative fitness, or mechanical utility with knowledgeable persons are capable of judging. See R2K section 228.
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The subjective personal satisfaction standard is applied when the contract involves personal aesthetics, taste, or fancy.

Question 34

Express Conditions

Answer 34

Conditions created by the words or conduct of the parties.

Question 35

Constructive Conditions

Answer 35

Conditions imposed by the Court to prevent unjust enrichment.

Question 36

Frequently Used Constructive Conditions (you should know)
R2K section 234. Order of Performance

Answer 36

(1) Where all or part of the performance to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.
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(2) Except for above, where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary

Question 37

Divisible v. Severable Contracts

Answer 37

R2K section 183 -Agreement severable only if:
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the parties’ performances must be separable into corresponding pairs of part performances and
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the parts of each pair must be regarded as agreed equivalents

Question 38

UCC –Installment Contracts v. Single Lot Delivery

Answer 38

UCC Section 2-307: Unless otherwise agreed, all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender.
But where the circumstances give either party the right to make or demand delivery in lots, the price, if it can be apportioned, may be demanded for each lot.
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UCC Section 2-612(1): “Installment contract” is a contract that requires or authorizes delivery of goods in separate lots to be separately accepted “even though the contract contains a clause ‘each delivery is separate contract’ or its equivalent.” […] If separate acceptance of separate deliveries is contemplated, no generalized contrast between wholly ‘entire’ and wholly ‘divisible’ contract has any standing under this Article.”
Divisible v. Severable Cont

Question 39

Materiality of Breach
R2K section 241 factors:

Answer 39

(1) Extent injured party deprived of benefit he reasonably expected;
(2) Extent that injured party can be compensated for the deprived benefit;
(3) Extent breaching party will suffer forfeiture;
(4) Likelihood of cure;
(5) Extent of bad faith in breaching party’s failure to perform.

Question 40

Can breach be cured?

Answer 40

Factors to determine whether defect may be cured, per R2K section 242:
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Extent the reasonable expectation of the injured party has been secured,
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Injured party have security to assure cure by defaulting party?
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Has breaching party given assurances that breach is to be cured?
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Has the market changed to be more favorable to the breaching party?
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Has the party breached other agreements or parts of the K?
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What is the financial ability of the breaching party to cure?

Question 41

Material Breach - Breach based on Delay of Performance

Answer 41

Factors for determining whether delay in performance is material breach:
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241 factors +
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Extent that it reasonably appears that delay may prevent or hinder other party from making substitute arrangements; and
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Extent that agreement provides that performance is to be without delay. (R2K only)
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CAVEAT: If there is no indication in the agreement that time is of the essence or of vital importance, failure to perform on the exact day does not discharge duty to perform.

Question 42

UCC –Perfect Tender Rule

Answer 42

RULE –Perfect Tender Rule -UCC section 2-601: [I]f the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole; or accept the whole; or accept any commercial unit or units or reject the rest.
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CAVEAT -UCC section 2-602: Rejection must be in reasonable time of tender or delivery of the goods.
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However, the buyer’s duty is not discharged while seller still has time to cure, i.e. while there is still time for performance.
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Further, seller has a reasonable time after time for performance if seller reasonably believed the goods would be acceptable. Based on surrounding circumstances and the change of position /inconvenience to buyer.

Question 43

Perfect Tender Rule CAVEAT -

Answer 43

CAVEAT -Rejection After Acceptance -UCC section 2-608: The buyer may revoke acceptance within a reasonable time of discovery of the nonconformity only if the nonconformity substantially impairs the value of the goods

Question 44

Material Breach - Time is of the Essence Clauses

Answer 44

If the parties clearly indicate time is of the essence, and there is no question about the intention of the parties, failure to perform on the specific day is material breach.
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However, if the clause is part of a pre-printed form, Courts look to the intention of the parties rather and purpose of the contract than a printed clause in the contract.

Question 45

Anticipatory Repudiation

Answer 45

RULE: The doctrine of anticipatory repudiation requires a definite and unequivocal manifestation of an intent not to render the promised performance when the time fixed for it in the contract arrives. Doubtful and indefinite statements that performance may or may not take place are not enough t constitute anticipatory repudiation.
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CAVEAT –Repudiation by Conduct: Conduct such as an obligor selling or leasing goods or land necessary to perform a contract or makes a contract for their sale to another prior to the time of performance, such conduct will constitute a repudiation. (See R2k 250; UCC 2-610)
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CAVEAT: Repudiation must be of the entire performance, or a material part thereof

Question 46

Retraction of Repudiation

Answer 46

General Rule: A repudiating party can retract their repudiation if (1) they communicate the retraction before performance is due unless (A) the non-repudiating party has materially changed their position, or (B) the non-repudiating party has some way manifested an intention to treat the contract as rescinded/breached.

CAVEAT: If adequate assurances are demanded, a repudiating party must give those assurances. i.e., if repudiation, and adequate assurances demanded, in order to retract, repudiating party must give those assurances.
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NOTE: Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Question 47

Adequate Assurances

Answer 47

Rule: Where there are reasonable grounds for insecurity that other party will not perform, a writingthat clearly demands adequate assurances that performance will be rendered will justify suspension of performance of the demanding party for a time not to exceed a reasonable time (If UCC, a reasonable time not to exceed thirty days. See UCC section 2-609)
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If no assurances given by then, then treat like repudiation.

Question 48

Excused Conditions –Prevention and Hindrance, and Waiver

Answer 48

NOTE: The non-occurrence of a condition may be excusedfor a variety of reasons: to avoid forfeiture, where the other party repudiatesthe agreement, impracticability, frustration for purpose, prevention or hindrance as part of a breach of duty of good faith and fair dealing, and waiver. (See R2K section 225(1))

Question 49

Breach of Duty of Good Faith and Fair Dealing to Excuse Condition

Answer 49

R2K section 245, comment a: Duty of good faith and fair dealing means a duty of cooperation and a duty to refrain from conduct that will prevent or hinder the occurrence of that condition or by taking affirmative steps to cause its occurrence

Question 50

Waiver

Answer 50

A waiver is a voluntary or intentional relinquishment of a known right.

Waiver may be proven where words or conduct manifests an intention to act in a manner inconsistent with their known rights

Question 51

Waiver of Material Conditions

Answer 51

Waiver may be retracted if there is still reasonable time for the condition to occur, the other party has not materially changed their position in reliance of the waiver, and the waiver is not of a material condition.

Question 52

Impossibility

Answer 52

Restatement (Second) of Contracts Section 262 –Death or Incapacity of Person Necessary for Performance

Restatement (Second) of Contracts Section 263 –Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for Performance

Question 53

Commercial Impracticability

Answer 53

RULE: R2K, Section 261 –Discharge by Supervening Impracticability: Where after a contract is made, a party’s performance is made (A) impracticable (B) without his fault by the occurrence of an event the non-occurrence of which was a (C) basic assumption on which the contract was made, his duty to render that performance is discharged, (D) unless the language or the circumstances indicate the contrary.

CAVEAT: Impracticable/Impossibility –Not obtainable by means and with expense impracticable in a business sense. Must be a greatly disproportionate expense with no other reasonable alternatives.

Question 54

Frustration of Purpose

Answer 54

Discharge by Supervening Frustration: Where, after a contract is made, a party’s (A) principal purpose is substantially frustrated (B) without his fault by the occurrence of an event the non-occurrence of which was (C) a basic assumption on which the contract was made, his remaining duties to render performance are discharged, (D) unless the language or the circumstances indicate the contrary.
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CAVEAT -Substantially Frustrated: The frustrated purpose must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Must be a total frustration of the purpose of the contract, not just merely an unprofitable result. No reasonable alternatives.

Question 55

Impossibility / Frustration of Purpose

Answer 55

Without his fault –The party cannot have cause the impracticability/Frustration.

Basic Assumption -Must be an assumption of the occurrence or non-occurrence of a contingency so basic, rare or extraordinary that reasonable parties would not have addressed it in the contract. The assumption must be held by both parties at the time of contract.

Unless Language of the circumstances indicate the contrary (i.e., you cannot have assumed the risk).

Question 56

Force Majeure

Answer 56

Effect is to excuse performance for various events beyond their control, i.e. Acts of God, fires, floods, war, civil strife, strikes, and shortages of raw materials