Contracts

Question 1

UCC - Firm Offer

Answer 1

Contracts for the sale of goods are governed by the UCC. Under the UCC firm-offer rule, a merchant’s signed, written offer to buy or sell goods may contain assurances that it will remain open. If so, the offer is irrevocable for the time stated in the offer or, if no time is stated, for a reasonable time. The signed offer need not always contain a full, handwritten signature, such as when:

initialing the relevant clause is appropriate under the circumstances

or the merchant handwrites on his/her letterhead to confirm that a firm offer was made.

Question 2

Accord Agreement

Answer 2

An existing contractual obligation can be discharged by an accord agreement. Under this agreement, a contracting party agrees to accept performance that differs from what was promised in an existing contract in satisfaction of the other party’s existing duty. When a claim is unliquidated or otherwise subject to dispute, it can be discharged by accord and satisfaction if:

the person against whom the claim is asserted tendered a negotiable instrument (e.g., a check)

the instrument was accompanied by a conspicuous statement indicating that it was tendered as full satisfaction of the claim (e.g., “payment in full”) and

the claimant obtained payment of the instrument.

Question 3

FIRM SCAN

Answer 3

Ways to discharge contractual obligations

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

Question 4

Third-Party Intended Beneficiary

Answer 4

A third-party beneficiary is a nonparty to a contract who receives an advantage or benefit from that contract. If the contracting parties intended for the contract to benefit the third party, the third party is an intended beneficiary with enforceable rights under the contract. Those rights vest when the beneficiary:

detrimentally relies on the rights created
manifests assent to the contract at one party’s request or
files a lawsuit to enforce the contract.

Once this occurs, the original contracting parties are bound to perform the contract. Any efforts to rescind or modify the contract after vesting are void unless the third party consents to the rescission or modification.

Question 5

Novation

Answer 5

Obligations under a contract can generally be delegated to another.* However, the person delegating his/her duties (the delegator) is not released from liability unless there is a novation. A novation is the substitution of a new contract for an old one when a party to the original contract agrees to release the other party (the delegator) and substitute a new party (the delegatee). A novation can be express or it can be implied after delegation if:

the delegator repudiates liability to the other party to the original contract and
that party accepts performance from the delegatee without reserving rights against the delegator.

Question 6

Anticipatory Repudiation

Answer 6

The doctrine of anticipatory repudiation generally applies when a contracting party clearly and unequivocally indicates an unwillingness to perform a promise before the time for performance is due. Upon repudiation, the nonrepudiating party may:

treat the repudiation as a breach of the contract or
ignore the repudiation and demand performance.

However, this doctrine does not apply when the date of performance has not passed and the nonrepudiating party has fully performed. Under those circumstances, the nonrepudiating party must wait until the repudiating party’s performance is due before filing suit.

Question 7

Parol Evidence Rule

Answer 7

The parol evidence rule generally bars evidence of prior or contemporaneous agreements that contradict the terms of an integrated writing—i.e., a writing that presents the final expression of the parties’ agreement. A writing may be fully or partially integrated. However, the UCC presumes that a contract for the sale of goods (e.g., jewelry) is only partially integrated.* As a result, evidence that supplements a written contract is admissible—but evidence that contradicts the writing is inadmissible.

Question 8

Assignment

Answer 8

An assignment is the transfer of contractual rights to a third party. If an assignment is not supported by consideration, then it is a gratuitous assignment and is generally revocable (exceptions listed in the table above). A revocable assignment is automatically revoked upon the death, incapacity, or bankruptcy of the assignor.

Question 9

UCC “Fill the Gaps”

Answer 9

The UCC “fills the gaps” for many missing terms in a contract for the sale of goods. If the contract omits a price term or if the parties agree to set the price in the future but fail to do so, then the UCC supplies a reasonable price at the time of delivery.

Question 10

Accord v. Substitute Contract

Answer 10

Parties to a contract may agree to change one or both parties’ performance through an accord agreement or a substitute contract:

Accord agreement – when a party agrees to accept different performance in satisfaction of (i.e., in place of) the original promise; after breach, the party can sue under either the original contract or the accord agreement.

Substitute contract – when the parties form a second agreement that immediately discharges the original contract; after breach, a party can sue under the substitute contract only.

Whether the parties formed an accord agreement or a substitute contract is a fact issue that depends on the formality of the agreement. The more formal the agreement (e.g., words discharging original duties, consideration on both sides), the more likely the fact finder will determine that the parties intended to create a substitute contract.

Question 11

Anticipatory Repudiation - Retracted

Answer 11

The doctrine of anticipatory repudiation applies when a contracting party clearly and unequivocally repudiates (i.e., indicates an unwillingness to perform) a promise before performance is due. A repudiation can be retracted if the nonrepudiating party receives notice of the retraction before:

canceling the contract
materially changing position in reliance on the repudiation or
indicating that he/she considers the repudiation to be final.

If the repudiation is not retracted, then the nonrepudiating party may (1) treat the repudiation as a breach or (2) ignore it and demand performance pursuant to the contract.

Question 12

Consequential Damages

Answer 12

The primary goal of contract damages is to put the nonbreaching party in the same position as if the contract had been performed. This is typically done by compensating the nonbreaching party for actual economic losses. Such losses include consequential damages, which arise from special circumstances unique to the contracting parties rather than directly from the transaction itself. To be recoverable, consequential damages must have been reasonably foreseeable to the breaching party when the contract was entered.

Question 13

Firm Offer - Acceptance

Answer 13

Under the mailbox rule, an acceptance that is mailed within the allotted response time is effective when sent unless the offer provides otherwise. However, this rule does not apply to firm offers, options, or other irrevocable offers. Under the UCC, a merchant’s offer to sell goods is firm (i.e., irrevocable) if it is made in a signed writing that assures that the offer will remain open. Acceptance of a firm or otherwise irrevocable offer is effective only if it is received by the offeror before the offer expires.

Question 14

Condition Precedent Waiver

Answer 14

A contracting party may generally avoid performance if a condition precedent—i.e., an uncertain future event that must occur before performance becomes due—has not occurred. The nonoccurrence of a condition may be excused, however, if the party who would benefit from the condition waives it by words or conduct. And the waiving party cannot retract the waiver once the other party has detrimentally relied on it.

Question 15

Nonconforming Goods - Rejection

Answer 15

Under the UCC’s perfect-tender rule, a seller must deliver goods that conform perfectly to the contract. A buyer can therefore reject nonconforming goods within a reasonable time after delivery by promptly notifying the seller of the rejection.

After rejection, the buyer has an obligation to take reasonable care of any goods in its possession until the seller has had a reasonable amount of time to retrieve them. When the seller does not retrieve the goods or provide further instructions, the buyer may generally choose to store, reship, or sell the goods on the seller’s behalf. However, the buyer is required to sell the goods on the seller’s account if:

the buyer is a merchant—i.e., one who regularly deals in goods of the kind involved or who, by occupation, holds him/herself out as having knowledge or skills unique to the goods involved*

the goods involved are perishable or threaten to speedily decline in value and

the seller has no local agent to whom the goods can be returned.

Question 16

Quasi-Contract

Answer 16

A “quasi in rem” remedy is effective against a defendant in reference to property, while an “in personam” remedy is effective against a defendant directly. In personam remedies are available for most causes of action, including quasi-contract. A plaintiff can recover in quasi-contract—despite having no contractual relationship with the defendant—if the plaintiff conferred a non-gratuitous and measurable benefit on the defendant that resulted in unjust enrichment because:

the defendant had the opportunity to decline the benefit but knowingly accepted it or
the plaintiff had a reasonable excuse for not giving the defendant an opportunity to decline.

Question 17

Parol Evidence Rule - Condition Precedent

Answer 17

The parol evidence rule generally prevents a party to a written contract from presenting extrinsic evidence of a prior or contemporaneous agreement that contradicts the terms of the contract as written. However, evidence may be admitted to prove a condition precedent to the existence of the contract. A condition precedent is a condition that must occur to trigger a party’s obligation to perform.

Question 18

UCC Parol Evidence Rule

Answer 18

Under the UCC parol evidence rule, which applies to contracts for the sale of goods (e.g., T-shirts), evidence of prior or contemporaneous agreements cannot be used to contradict the terms of a final written agreement. However, a course of performance can be used to explain or supplement those terms. A course of performance is a sequence of conduct that is relevant to understanding an agreement between the parties if:

the agreement involved repeated occasions for performance by a party and

the other party accepted performance without objection and with knowledge of the course of performance.

Question 19

Contract Not Specifying Assortment of Goods

Answer 19

When a contract for the sale of assorted goods does not specify who will choose the assortment, the UCC imposes a duty on the buyer to make that selection. If the buyer fails to specify the assortment of goods, then the seller can treat that failure as a breach—but only if the buyer’s failure to specify the assortment materially impacts the seller’s performance.

Question 20

New Promise to Pay Debt

Answer 20

A contract must generally be supported by consideration to be enforceable. However, there are circumstances in which a promise is enforceable without consideration. For example, a new promise to pay a debt after the statute of limitations has run is enforceable without any new consideration. When the new promise is an express promise, most jurisdictions require that the new promise be in writing and signed by the debtor to be enforceable.

Question 21

Illegal Contract

Answer 21

A contract to perform an illegal act (e.g., fraud) is void and unenforceable. However, restitution damages may be recoverable if the claimant conferred a benefit on the other party and:

was justifiably ignorant of the facts that made the contract illegal*

was less culpable than the other party (i.e., was not in pari delicto) or

withdrew before the contract’s illegal purpose was achieved and did not engage in serious misconduct (e.g., shockingly immoral, unethical, or unjust behavior).

Question 22

Suretyship

Answer 22

Suretyship is a three-party contract in which a surety promises to be secondarily responsible to a creditor (the obligee) for another’s (the principal’s) debt or other obligation if that person fails to perform. A suretyship falls within the statute of frauds and therefore must generally be in writing and signed by the party against whom enforcement is sought. However, a suretyship is excepted from the statute of frauds if it was made mainly for the surety’s economic advantage or to indemnify (i.e., reimburse) the creditor for monetary loss.

Question 23

Assignment

Answer 23

An assignment is the transfer of rights under a contract. An assignment is valid so long as there is a present intent to transfer contractual rights. It need not be accompanied by consideration. But when an assignment is made without consideration (i.e., a gratuitous assignment), it is revocable by the assignor (i.e., the party assigning rights to another) unless:

the obligor (i.e., the party obligated to perform) has already performed—i.e., the assignee obtained the payment or other performance under the contract from the obligor
a document symbolizing the assigned right has been delivered to the assignee
a written assignment signed by the assignor has been delivered to the assignee or
the assignee (i.e., the party receiving assigned rights) has detrimentally relied on the assignment.

Question 24

Expectation Damages - Construction

Answer 24

Expectation damages are intended to put the non-breaching party in the same position as if the contract had been performed. Expectation damages must be calculated with reasonable certainty. In construction contracts, the general measure of damages for a contractor’s failure to begin or to complete a building project is the difference between the contract price and the cost of construction by another builder, plus any progress payments made to the breaching builder and compensation for the delay in completing the construction.

Question 25

Consequential Damages

Answer 25

Actual damages can be either direct or consequential. Consequential damages are a direct result of the breach but need not be the usual result of the breaching party’s conduct. Instead, consequential damages need only be a reasonably foreseeable result of the breach given the parties’ specific circumstances. The breaching party must have reasonably foreseen the consequential damages for them to be recoverable. Damages are foreseeable if they were a natural and probable consequence of breach, if they were “in the contemplation of the parties at the time the contract was made,” or if they were otherwise foreseeable. Consequential damages do not concern the value of the lost performance due to breach, but there must be a causal link between the breach and the consequential damages for them to be recoverable. And the plaintiff must prove the dollar amount of consequential damages with reasonable certainty not speculatively.

Question 26

Mitigation

Answer 26

A party to a contract must avoid or mitigate damages to the extent possible by taking steps that do not involve undue risk, expense, or inconvenience. A non-breaching party is held to a standard of reasonable conduct in preventing loss. The non-breaching party’s failure to mitigate does not give the breaching party a right to sue the non-breaching party for such failure; it only reduces the non-breaching party’s damages recovery.

Question 27

Restitution

Answer 27

An action in restitution is based on the restoration to the plaintiff of the benefit conferred on the defendant.

Question 28

Repudiation

Answer 28

Repudiation may be retracted so long as the other party has not canceled the contract or materially changed position.

Question 29

Mailbox Rule (Rejection Then Acceptance)

Answer 29

The mailbox rule states that a timely sent acceptance is effective when sent, not upon receipt. However, if a communication is sent rejecting the offer, and a later communication is sent accepting the contract, the mailbox rule does not apply, and the first one to be received by the offeror prevails.

Question 30

UCC - Specific Performance

Answer 30

In general, specific performance is not available as a remedy for breach of a contract when damages are an adequate remedy for the nonbreaching party. Because the seller in a sale-of-goods contract typically receives money from the buyer in exchange for the goods, damages are an adequate remedy for the seller. Although the Uniform Commercial Code (UCC) lists specific performance as a remedy for the buyer of goods, the UCC does not list specific performance as a corresponding remedy for the seller of goods.

Question 31

Auction - Bidder’s Retraction

Answer 31

In either type of auction, a bidder has the right to retract (i.e., withdraw) a bid until the auctioneer announces the completion of the sale (e.g., at the fall of the auctioneer’s hammer). However, the bidder’s retraction will not revive any prior bids. That is because the auctioneer’s acknowledgment of a subsequent bid acts as a rejection of a prior bid.

Question 32

UCC Firm Offer - Oral

Answer 32

Under the UCC firm-offer rule, an offer is irrevocable if the offeror is a merchant who provides a signed, written assurance that the offer will remain open.

Question 33

Capacity

Answer 33

A person lacks the capacity to enter into a contract if (1) that person was too intoxicated to reasonably understand the nature or consequences of the contract and (2) the other party had reason to know of the intoxication.

Question 34

Anticipatory Repudiation

Answer 34

Contracts for the sale of goods (e.g., costumes) are governed by the Uniform Commercial Code (UCC). A contract is breached when a party fails to perform its contractual duties at the time performance is due. A breach can also occur before the time for performance arises or elapses under the doctrine of anticipatory repudiation. This doctrine applies when a contracting party clearly and unequivocally repudiates (i.e., indicates an unwillingness to perform) a promise before performance is due. Upon repudiation, the nonrepudiating party may:

ignore the repudiation and demand performance or

treat the repudiation as a breach of the contract and seek remedies—e.g., a buyer’s right to cover by seeking replacement performance from another seller.

Question 35

Nonbreaching Seller & Insolvent Buyer

Answer 35

A nonbreaching seller may reclaim goods from a buyer when the seller (1) discovers the buyer received the goods on credit while insolvent and (2) demands the goods be returned within 10 days after their receipt. But this 10-day limitation does not apply if the buyer misrepresented its solvency in writing within three months before delivery.

Question 36

Quasi-Contract

Answer 36

Courts recognize the existence of an implied-in-law contract (“quasi-contract”) when one party confers a benefit on another and has a reasonable expectation of compensation. Otherwise, the benefited party would be unjustly enriched. Such situations occur when: (i) the plaintiff has conferred a “measurable benefit” on the defendant; (ii) the plaintiff acted without gratuitous intent; and (iii) it would be unfair to let the defendant retain the benefit because either the defendant had an opportunity to decline the benefit but knowingly accepted it, or the plaintiff had a reasonable excuse for not giving the defendant such opportunity, usually because of an emergency.

Question 37

Risk of Loss

Answer 37

The UCC provides that a merchant seller generally retains the risk of loss in the absence of a contract term to the contrary until the buyer receives the goods. However, if the buyer is in breach of the contract, the risk of loss passes to the buyer to the extent of any deficiency in the seller’s insurance coverage.