Contracts

Question 1

What is a merchant?

Answer 1

A merchant is one who regularly deals in goods of the kind sold or who otherwise by their profession holds themselves out as having special knowledge or skills as to the practices or goods involved.

Question 2

What is an offer?

Answer 2

An offer is something that creates a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. An offer must be an expression of a promise, undertaking, or commitment to enter into a contract and have certainty and definiteness in the essential terms.

Question 3

What is the rule for requirements and output contracts?

Answer 3

In a requirements contract, a buyer promises to buy from a certain seller all of the goods the buyer requires, and the seller agrees to sell that amount to the buyer. In an output contract, a seller promises to sell to a certain buyer all of the goods that the seller produces, and the buyer agrees to buy that amount from the seller. However, there cannot be a tender or a demand for a quantity unreasonably disproportionate to (1) any stated estimate, or (2) any normal or otherwise comparable prior output or requirements.

Question 4

What is the rule for indirect revocation?

Answer 4

An offer may be revoked indirectly if the offeree receives: (1) correct information, (2) from a reliable source, (3) of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.

Question 5

What types of offers are irrevocable?

Answer 5

Options Contract: An offeree gives consideration in exchange for the offeror promising not to revoke an outstanding offer for a certain period of time.

Merchant’s Firm Offer: (1) If a merchant, (2) offers to buy or sell goods in a signed writing, and (3) the writing gives assurances that it will be held open during the time stated, or if no time is stated, for a reasonable time (but in no event may such period exceed 3 months)

Detrimental Reliance: When the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held irrevocable as an option contract for a reasonable length of time.

Performance Contract: The offer for a bilateral or unilateral contract cannot be revoked once the offeree starts to perform. For a unilateral contract, the offeree must notify the offeror of completion within a reasonable period of time.

Question 6

What is acceptance?

Answer 6

Acceptance is a manifestation of assent to the terms of an offer. An offeree can only assign an acceptance if the offeree paid consideration to keep the offer open.

Question 7

What are the rules for additional terms in the acceptance?

Answer 7

Common Law: The offeree must provide an absolute and unequivocal acceptance of every term in the offer. Any different or additional terms in the acceptance make the response a rejection and a counteroffer.

UCC Battle of Forms: If both parties are merchants, additional terms can be included in the acceptance unless the terms materially alter the terms of the original offer (e.g, limiting a party’s risks or the remedies available), the offer expressly limits the terms of the offer, OR the offeror already objected to the added terms, or objects within a reasonable time after notice of them is received. A merchant’s confirmatory memo is subject to the battle of the forms.

Question 8

What is the mailbox rule?

Answer 8

Acceptance by mail or similar means is effective at the moment of dispatch, provided the mail is properly stamped and addressed unless (1) the offer stipulates that acceptance is not effective until received, (2) the offer is part of an options contract, (3) the offeree sends a rejection and then sends an acceptance and the offeror received the rejection first, or (4) the offeree sends an acceptance and then sends a rejection, but the offeror received the rejection first and detrimentally relied on the rejection.

Question 9

What is consideration?

Answer 9

Consideration is a bargained-for exchange between the parties for something of legal value.

Question 10

What is the rule for past consideration?

Answer 10

A promise given in exchange for something already done does not satisfy the bargain requirement. However, some courts will enforce a promise if a past act benefited the promisor and was performed by the promisee at the promisor’s request or in response to an emergency, a subsequent promise to pay for that act will be enforceable.

Question 11

What is the preexisting legal duty rule and what are some of its exceptions?

Answer 11

Performing or promising to perform a pre-existing legal duty is not valid consideration. However, a pre-existing legal duty may constitute valid consideration if (1) new or different consideration is promised, (2) the promise is to ratify a voidable obligation (e.g., minor’s ratification), (3) the pre-existing duty is owed to a third person rather than to the promisor, (4) there is an honest dispute as to the duty, and (5) there are unforeseen circumstances sufficient to discharge a party or the modification is fair and equitable in view of circumstances not anticipated when the contract was made.

Question 12

Is new consideration required for contract modifications?

Answer 12

Common Law: Under general contract law, new consideration is required for contract modifications. Under the modern view, new consideration is not required if (1) the modification is due to circumstances that were unanticipated by the parties when the contract was formed and (2) it is fair and equitable.

UCC: New consideration is not required for contract modifications. The parties only need to make good faith promises of new and different terms.

Note, contract modifications must fall within the Statute of Frauds.

Question 13

What is an illusory promise?

Answer 13

An illusory promise is one in which only one party is bound to perform (i.e., there is no consideration). This typically occurs when an offer is not certain or definite (e.g., I want to buy all the widgets I want). If the illusory promise is based on an alternative performance (e.g., a unilateral right to cancel the contract), the illusory promise will becomes adequate consideration if the time to choose an alternative performance passes.

Question 14

What are the rules for duress, undue influence, unconscionably, and misrepresentation?

Answer 14

Contracts induced by duress, undue influence, and misrepresentation are voidable and may be rescinded as long as they are not affirmed.

Duress often occurs when an acceptance is procured by threats. Generally, taking advantage of another person’s economic needs is not duress, but withholding something someone wants or needs will constitute economic duress if: (1) the party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; and (2) there are no adequate means available to prevent the threatened loss.

Elements of undue influence are: (1) undue susceptibility to pressure by one party, and (2) excessive pressure by the other party. Undue influence concerns often arise when the dominant party is in a confidential or caregiver relationship with the influenced party.

If a party induces another to enter into a contract by using fraudulent misrepresentation, the contract is voidable by the innocent party if they justifiably relied on a material misrepresentation. A misrepresentation is material if it would induce a reasonable person to agree or the maker knows that it is likely to induce the particular person to agree, even if a reasonable person would not.

For a contract to be invalid based on unconscionability, there must be both (1) procedural unconscionability (gross inequality of bargaining power) and (2) substantive unconscionability (terms that are unreasonably favorable to one party). If only one of these is met, the court may refuse to enforce the contract or may enforce the contract without the unconscionable term.

Question 15

What are the rules for mistake?

Answer 15

Mutual Mistake: A contract may be voidable because both parties are mistaken about facts relating to the agreement if (1) the mistake concerns a basic assumption on which the contract is made, (2) the mistake has a material effect on the agreed-upon exchange, and (3) the party seeking avoidance did not assume the risk of the mistake. Notably, a mutual mistake in value is generally not grounds for rescinding a contract.

Unilateral Mistake: If the nonmistaken party knew or had reason to know of the mistake made by the other party, the mistake has a material effect on the agreed-upon exchange, and the mistaken party did not bear the risk of the mistake, the contract is voidable by the mistaken party.

Question 16

What types of contracts fall within the Statute of Frauds?

Answer 16

Think MY LEGS: (1) marriage contracts (i.e., promises in consideration of marriage), (2) contracts that cannot be completed within one year from the date of contract (3) contacts for the sale of land (leases/easements must be longer than 1 year), (4) executor or administrator promise to personally pay estate debts, (5) goods worth more than $500, (6) suretyships (i.e., promises to pay the debt of another)

Question 17

When is a contract removed from the Statute of Frauds?

Answer 17

A contract modification can take a contract outside the Statute of Frauds. Modifications must be in writing.

A land sale contract can fall outside the Statute of Frauds if at least two of the following exist: (1) payment, (2) possession, and/or (3) valuable improvements. If the seller conveys the property to the buyer, this takes the entire land sale contract outside the Statute of Frauds.

Goods that have been paid for and accepted as part of a contract for the sale of goods fall outside the Statute of Frauds.

The goods are specially manufactured for the buyer and the seller has made a substantial beginning in their manufacture or commitments for their purchase before notice of repudiation is received.

In a contract between merchants, one party, within a reasonable time after an oral agreement has been made, sends to the other party a written memo confirming the contents of the contract. The other party must (1) have reason to know of the confirmation’s contents and (2) they do not object to it in writing within 10 days of receipt. The memo does not need to be signed by the party against whom it is enforced; the memo only needs to be signed by one of the parties.

Question 18

What is the parol evidence rule?

Answer 18

When parties to an agreement express their agreement in writing with the intent that it embodies the final expression of their bargain the writing is a final integration. Written or oral evidence contemporaneous with the final integration is inadmissible to vary the terms of the writing.

Question 19

When is parol evidence admissable?

Answer 19

Parol evidence is admissable if the writing is a partial integration. The UCC presumes all writings are partial integrations. In such a case, the contract can be supplemented with additional terms, so long as they do not contradict the written contract.

Parol evidence is also admissible to prove formation defects, conditions precedent to effectiveness, prove collateral agreements, interpret the meaning of ambiguous terms, to correct clerical errors, and to prove subsequent modifications.

Question 20

What are the general rules for contract interpretation?

Answer 20

Express terms > the parties’ course of performance (i.e., the contract involves repeated occasions for performance by either party) > the parties’ course of dealing (i.e., conduct in previous transactions) > trade usage (i.e., a practice or method of dealing).

UCC Gap Filler Rule: The UCC’s gap-filler rule supplements missing terms in an agreement, including the price (reasonable price at the time of deliver if not agreed to), place of delivery (usually the seller’s place of business), time for shipment or delivery (usually a reasonable time), time for payment (payment usually due at the time an place at which the buyer is to receive the goods), or assortment (at buyer’s option).

Question 21

What are the implied warranties of merchantability and fitness?

Answer 21

The implied warranty of merchantability is a warranty in an contract for goods of the kind sold by a merchant that warrants the goods are fit for the ordinary purpose for which such goods are used. The seller must be a merchant with respect to the goods of the kind involved in the subject transaction. This is narrower than the general definition of merchant.

The implied warranty of fitness is a warranty that arises whenever (1) a seller has reason to know the particular purpose for which the goods are to be used, (2) the buyer is relying on the seller’s skill and judgment to select suitable goods, and (3) the buyer in fact relies on the seller’s skill or judgment.

Note: If there is a breach of warranty, a plaintiff is entitled to the difference between the value of the goods accepted and the value they would have had if they had been as warranted, plus incidental and consequential damages

Question 22

Can the implied warranties of merchantability and fitness be disclaimed?

Answer 22

The implied warranties of merchantability and fitness can be disclaimed in conspicuous writing. The former must mention merchantability. Both are normally disclaimed using “as is” or “with all faults” language. To be effective, a disclaimer of warranty or limitation on remedies must be agreed to during the bargaining process.

Question 23

What are the rules for risk of loss?

Answer 23

Effect of Breach - If the buyer has a right to reject the goods, the risk of loss doesn’t pass to the buyer until the defects are cured or the buyer accepts the goods in spite of their defects. If the buyer revokes acceptance, the risk of loss rests with the seller to the extent of any deficiency in the buyer’s insurance coverage.

Noncarrier Case - A noncarrier case is a sale in which it appears that the parties did not intend that the goods would be moved by a common carrier (for example, when you buy groceries). In such a case, if the seller is a merchant, risk of loss passes to the buyer only when they take physical possession of the goods. If the seller is not a merchant, risk of loss passes to the buyer upon tender of delivery.

Carrier Case - A carrier case is a sale in which it appears that the parties intended the goods to be moved by a carrier. There are two types of carrier cases: shipment contracts and destination contracts. Shipment contracts do not authorize or require the seller to ship the goods by carrier to a particular destination, meaning the risk of loss passes to the buyer when the goods are delivered to the carrier. Destination contracts require the seller to deliver the goods at a particular destination, meaning the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination.

If a contract includes the language “free on board” or FOB followed by the seller’s location, the contract is a shipment contract. However, if any other city location is included, the contract is a destination contract.

If goods that were identified when the contract was made are destroyed (1) without the fault of either party and (2) before the risk of loss passes to the buyer, the contract is avoided. If the goods were not identified until after the contract was made, the seller is this situation will have to prove impracticability.

Question 24

What are the rules for performance?

Answer 24

Common Law: A party’s basic duty at common law is to substantially perform all that is called for in the contract. A breach of contract is minor if the obligee gains the substantial benefit of their bargain despite the obligor’s defective performance. A minor breach does not relieve the aggrieved party of their duty of performance under the contract; it merely gives them a right to damages (setoff) for the minor breach. If the obligee does not receive the substantial benefit of their bargain, the breach is considered material. The materiality of the breach is based on (1) the amount of benefit received by the nonbreaching party; (2) the adequacy of compensation for damages to the injured party; (3) the extent of part performance by the breaching party; (4) hardship to the breaching party; (5) negligent or willful behavior of the breaching party; and (6) the likelihood that the breaching party will perform the remainder of the contract. If the breach is material, the nonbreaching party (1) may treat the contract as at an end; that is, any duty of counterperformance owed by them will be discharged, and (2) will have an immediate right to all remedies for breach of the entire contract, including total damages.

UCC: Article 2 generally requires a perfect tender—the delivery and condition of the goods must be exactly as promised in the contract. If goods on their delivery fail to conform to the contract in any way, the buyer may generally reject all, accept all, or accept any commercial units and reject the rest. A buyer’s right to reject is generally cut off by acceptance. A buyer accepts where the buyer indicates to the seller that the goods conform to the requirements or the the buyer will accept the goods even though they do not conform; the buyer fails to reject within a reasonable time after tender or delivery of goods or fails to seasonably notify the seller of their rejection; or the buyer does any act inconsistent with the seller’s ownership. However, a buyer may revoke acceptance if the goods have a defect that substantially impairs their value to the buyer and the buyer accepted the goods on the reasonable belief that the goods would be cured and it has not been or the buyer accepted the goods because of the difficulty of discovering the defect or because of the seller’s assurance that the goods conformed to the contract.

Question 25

What are the rules for conditions?

Answer 25

A condition is either (1) an event or state of the world that must occur or fail to occur before a party has a duty to perform; or (2) an event or state of the world, the occurrence or nonoccurrence of which releases a party from their duty to perform. There can be no breach of promise until the promisor is under an immediate duty to perform.

One common type of condition precedent is the promisor’s satisfaction. In contracts involving mechanical fitness, utility, or marketability, a condition of satisfaction is fulfilled by a performance that would satisfy a reasonable person. If the contract involves personal taste or personal judgment, a condition of satisfaction is fulfilled only if the promisor is personally satisfied.

Question 26

What are the rules for accord and satisfaction?

Answer 26

An accord is an agreement in which one party to an existing contract agrees to accept, in lieu of the performance that they are supposed to receive from the other party, some other, different future performance. The accord, taken alone, won’t discharge the prior contract; it merely suspends the right to enforce it in accordance with the terms of the accord contract. Satisfaction is the performance of the accord agreement. Its effect is to discharge not only the original contract but also the accord contract as well.

The majority view is that a debtor’s offer to make a partial payment on an existing debt will suffice for an accord and satisfaction if there is some “bona fide dispute” as to the underlying claim or there is otherwise some alteration, even if slight, in the debtor’s consideration.

Question 27

What are the differences between impossibility, impracticability, and frustration?

Answer 27

Impossibility: Contractual duties will be discharged if it has become objectively impossible to perform them.

Impracticability: Contractual duties will be discharged if performance has become impracticable, meaning the party to perform has encountered extreme and unreasonable difficulty and/or expense and its nonoccurrence was a basic assumption of the parties.

Frustration: Contractual duties will be discharged if performance has become frustrated, meaning (1) there is some supervening act or event leading to the frustration, (2) at the time of entering into the contract, the parties did not reasonably foresee the act or even occurring, (3) the purpose of the contract has been completely or almost completely destroyed by this act or event, and (4) the purpose of the contract was realized by both parties at the time of making the contract.

Question 28

What is the rule for revoking acceptance of nonconforming goods?

Answer 28

Generally, the buyer’s power to reject nonconforming goods is terminated once the goods are accepted and the buyer is obligated to pay the price less any damages resulting from the seller’s breach. However, the buyer may revoke their acceptance if the goods have a defect that substantially impairs their value to the buyer and: (1) They accepted the goods on the reasonable belief that the defect would be cured and it has not been OR (2) They accepted the goods because of the difficulty of discovering the defects or because of the seller’s assurance that the goods conformed to the contract.

Question 29

What are the exceptions to the perfect tender rule?

Answer 29

If the buyer has rejected goods because of defects, the seller may within the time originally provided for performance “cure” by giving reasonable notice of their intention to do so and making a new tender of conforming goods that the buyer must then accept.

Ordinarily, the seller has no right to cure beyond the original contract time. However, if the buyer rejects a tender of nonconforming goods that the seller reasonably believed would be acceptable “with or without money allowance,” the seller, upon a reasonable notification to the buyer, has a further reasonable time beyond the original contract time within which to make a conforming tender.

In an installment contract situation, an installment can be rejected only if the nonconformity substantially impairs the value of that installment and cannot be cured. In addition, the whole contract is breached only if the nonconformity substantially impairs the value of the entire contract.

Question 30

What are the main types of monetary remedies?

Answer 30

Expectation Damages: Damages sufficient for the non-breaching party to purchase a substitute performance. These are the main type of damages.

Reliance Damages: Damages suffered based on the non-breaching party’s reasonable reliance on the contract. These damages are designed to put the plaintiff in the position that would have been in had the contract never been formed.

Incidental Damages: Damages incurred by the non-breaching party while attempting to address the breach.

Consequential Damages: Damages that a reasonable person would have foreseen as a probable result of the breach. The breaching party must have known or had reason to know of the special circumstances giving rise to the damages. The plaintiff must prove that the losses suffered were certain in their nature and not speculative.

The previously mentioned damages are compensatory damages.

Liquidated Damages: Damages the contract states must be paid in the event of a breach. Liquidated damages are enforceable if (1) damages for contractual breach are difficult to estimate or ascertain at the time the contract is formed; and (2) the amount agreed on is a reasonable forecast of compensatory damages in the case of breach.

Lost Volume Seller: If the seller’s supply of goods is unlimited (that is, they can obtain all the goods they can sell), then they are a lost volume seller, and the lost profits measure can be used.

Unjust Enrichment: Restitution may also be available in a quasi-contract action when there is no contractual relationship between the parties if: (1) The plaintiff has conferred a benefit on the defendant by rendering services or expending properties; (2) The plaintiff conferred the benefit with the reasonable expectation of being compensated for its value; (3) The defendant knew or had reason to know of the plaintiff’s expectation; (4) AND The defendant would be unjustly enriched if they were allowed to retain the benefit without compensating the plaintiff.

Question 31

What is the rule for entrustment?

Answer 31

Entrusting goods to a merchant who deals in goods of that kind gives them the power (but not the right) to transfer all rights of the entruster to a bona fide buyer in the ordinary course of business.

Question 32

What are the rules for third-party beneficiaries?

Answer 32

Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining if a beneficiary is intended, consider whether the beneficiary (1) is identified in the contract, (2) receives performance directly from the promisor, or (3) has some relationship with the promisee to indicate intent to benefit. A third party can enforce a contract only if their rights have vested. This occurs when they: (1) manifest assent to a promise in the manner requested by the parties; (2) bring a suit to enforce the promise; or (3) materially change position in justifiable reliance on the promise. Any third-party beneficiary can sue the promisor, but only creditor third-party beneficaries can sue the promisee.

Question 33

What are the rules for assignments?

Answer 33

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor. Once the obligor has knowledge of the assignment, they must render performance to or pay the assignee. If the obligor renders performance to or pays the assignor, they do so at their own risk. The assignment must manifest an intent to immediately and completely transfer the assignor’s rights.

Sometimes there are multiple assignments. The last gratuitous assignee prevails over earlier gratuitous assignees because a later gift assignment revokes an earlier one. Additionally, the first assignee to pay value for an assignment will prevail over all earlier and later assignees assuming this assignee did not know of any previous assignments.

Question 34

What are the elements of novation?

Answer 34

The elements for a valid novation are: (1) a previous valid contract; (2) an agreement among all parties, including the new party (or parties) to the new contract; (3) the immediate extinguishment of contractual duties as between the original contracting parties; and (4) a valid and enforceable new contract.

Question 35

When is a partial payment of a debt valid consideration?

Answer 35

If, in addition to making a partial payment, the debtor (1) gives security in addition to the party payment, (2) refrains from bankruptcy or insolvency proceedings, (3) arranges for a composition agreement, or (4) pays part of a claim, the full amount of which is in bona fide dispute, the debtor has given consideration for the discharge of the larger amount.

Question 36

What are the rules for repudiation?

Answer 36

Anticipatory repudiation occurs if a promisor, prior to the time set for performance of their promise, unequivocally indicates that they won’t perform when the time comes.

A repudiating party may at any time before their next performance is due withdraw their repudiation unless the other party has canceled, materially changed their position in reliance on the repudiation, or otherwise indicated that they consider the repudiation final.