Contracts Flashcards
Contracts Analysis Steps
- What law applies?
- Was k formed?
- Was k enforceable?
- What does k mean?
- Excused performance?
- Breach of k?
- Remedies
- Liquidated damages?
- Third-party beneficiaries?
Contract Formula
K = MA (O+A) + C - D
Contract = Mutual Assent (Offer+Acceptance) + Consideration - Defenses
Express K
promises are communicated by language
Implied K
parties’ conduct indicates they assented to be bound
Quasi-K
NOT a K at all; one party is unjustly enriched at expense of other party, so that the enriched party must pay restitution to other party equal to unjust enrichment
Bilateral K
Exchange of mutual promises - a promise for a promise; Bilateral K offer can be accepted in any rx way. Unless expressly indicated otherwise, assume bilateral.
Unilateral K
Offeror requests performance rather than promise. Offeror (promisor) promises to pay upon completion of requested act by promisee.
Once act is completed –> K formed
Unilateral K requires full performance occurs only in (2) situations:
- Offeror clearly indicates completion of performance is the only manner of acceptance; and
- Offer to the public such as a reward offer.
Magic words = “offer… only by” or a reward offer
Void / Voidable / Unenforceable
Void = K w/o legal effect; cannnot be enforced by either party
Voidable = one or both parties may elect to avoid w/ defenses
Unenforceable = valid K but not enforceable due to defense
Common Law vs. UCC
- UCC governs sale of most tangible goods
- CL governs everything else
Merchant vs. Non-Merchants
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/goods involved.
Article 2 provisions dealing w/ general business practices (SoF, confirmatory memos, firm offers, modification) –> almost anyone in business can be deemed a merchant
Some Article 2 provisions (implied warranty of merchantability) –> narrower and require a person to be a merchant w/ respect to goods of the kind involved in the subject transaction
Non-Merchant if sales are solely personal
K involving goods and nongoods
Determine which aspect is dominant and apply the law governing that aspects.
But if K divides payment b/w goods and services, apply Article 2 to sale portion and CL to service portion
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Good Faith Fair Dealing (GFFD)
Every k within ucc imposes obligation of gffd in performance and enforcement. It means honesty in fact and observance of rx commercial standards.
CL also imposes gffd - breach of duty usually involves exercising discretion in way that deprives other party the fruits of K
Offer
An offer is a communication to the offeree 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. Its terms should be certain and definite. Under the UCC, the key term for an offer to be sufficiently definitie is the quantity term, and all other terms may usually be filled by the court. Under Common Law, description of the land and price must be included.
Notably, adverisements are usually construed as invitations for offers.
Offer - Standard
Objective reasonable person POV, not subjective
Advertisements (Offer & Exception to Rule)
Not an offer; Mere invitation for offers
Advertisements can be an offer if contains:
COP
(1) Certain or definite terms;
(2) Offeree is identified; and
(3) Promise.
Preliminary Negotiations
Not an offer
Price Quotations
Not offers, but can be if given in response to an inquiry that contains a quantity term
Factors considered for intent to enter into a K
- Language;
- Surrounding circumstances;
- Prior practice and relationship of parties.
Offer - definite & certain terms
Inquiry is whether enough of essential terms have been provided so that a K including them is capable of being enforced
- Identification of offeree
- Definiteness of subject matter
Definiteness of subject matter - requirement for specific types of K’s
- Real estate transactions - Must identify land and price terms, courts will not supply missing price term
- Sale of goods - Quantity term must be included (courts cure other info by gap filler)
- Employment and other services - If duration not specified in offer of employment K, can be terminable at will of either party. For other services, nature of work to be performed must be included in offer.
Requirements & Output K
- Requirements K - Buyer promises to buy from a certain seller all goods buyer requires and seller agrees to sell that amount to buyer
- Output K - Seller promises to sell to a certain buyer all of goods that seller produces, and buyer agrees to buy that amount from seller
- Assumed that parties will act in good faith so there can’t be a tender or demand for a quantity unrx disproporionate to:
(1) Any stated estimate; OR
(2) In absence of a stated estimate, any normal or otherwise comparable prior output or requirement. - On exam, watch out for words = require, need, produce, all, only exclusively, solely.
Missing Terms (Price, Time, Vague Terms)
The fact that one or more terms are left open does not prevent formation of K if it appears that parties intended to make a K and there is a rx certain basis for giving a remedy. Majority jx and article 2 hold that court can supply rx terms for those that are missing :
1. Price = except for K for real property, failure to state price doesn’t prevent formation of K if parties intended to form K w/o price being settled. For sale of goods, A2 provides that price will be a reasonable price at time of delivery
2. Time = if agreement doesn’t specify time in which act is to be performed, law implies it is to be performed within rx time
3. Vague Terms = presumption is parties’ intent was to include rx term goes to supplying missing terms. Presumption cannot be made if parties have included a term that makes K too vague to be enforced. But uncertainty can be cured by part performance that clarifies vague term or by acceptance by full performance.
4. Terms to be agreed on later = if term is material, offer is too uncertain
Material Term is Vague or Ambiguous = Offer?
NO valid offer. Neither under UCC or CL.
Watch for terms: appropriate, fair, reasonable… all signal a possible vague problem
Communication to Offeree
To have power to accept an offer, offeree must have knowledge of offer; proposal needs to be communicated to them
Termination of Offer - 4 Methods
- Lapse of time;
- Revocation;
- Rejection;
- Death.
Lapse of Time - Offer
- Offeree must accept offer within specified or reasonable amount of time
- Reasonableness is a question of fact that depends on all circumstances at time the offer and attempted acceptance are made
- If separated by more than a month, raise the issue of whether the offer is still open to accept
Rejection of Offer (Types & Effective Time)
- Express rejection
-
Counteroffer = offer made by offeree to offeror that contains same subject matter as original offer but differs in its terms.
Note –> mere inquiry does not terminate the offer; the test is whether a rx person would believe that the original offer had been rejected. - Conditional Acceptance = when acceptance made expressly conditional of new terms, it’s a rejection of offer. The conditional acceptance is a new offer and original offeror may form K by expressly assenting to new terms. But that offer that results from conditonal acceptance CANNOT be accepted by performance. If parties ship or accept goods after a conditional acceptance, K is formed by their conduct and new terms are NOT included.
Effective when RECEIVED by offeror
Is rejection of / counteroffer to Option K termination of offer?
NO. Rejection of or a counteroffer of option K does NOT constitute a termination of offer. Offeree is still free to accept orignal offer within option period UNLESS offeror detrimentally relied on offeree’s rejection
Revocation (Types & Effective Time)
- Only offeror can revoke
- Offeree MUST be aware of revocation
- Types: Direct; Publication; Indirect
- Indirect if offeree receives (1) correct info (2) from reliable source (3) of acts of offeror that would indicate to a rx person that offeror no longer wishes to make offer.
- Effective when received by offeree. If by publication, effective when published. NO MAILBOX rule. Does NOT matter when recipient actually reads the communication.
4 Limitations on Offeror’s Power to Revoke
- Option K
- Merchant’s Firm Offer
- Detrimental Reliance
- Beginning performance in response to true unilateral performance
- Beginning performance - offer indifferent as to manner of acceptance
Option K
Offeree gives consideration for a promise by offeror not to revoke an outstanding offer
Note –> consideration not req’d for merchant’s firm offer
Merchant’s Firm Offer Under Article 2
- If a merchant
- Offers to buy/sell goods in a signed writing
- Writing gives assurances that it will be held open,
- Offer is NOT revocable for lack of consideration during the time stated, or if no time stated, for a rx time but cannot exceed 3 months
WATCH OUT for an offer that looks like a merchant’s firm offer but includes some consideration – this is an option K and offer can be held open for as long as parties specify.
Detrimental Reliance
When offeror could rx expect offereee would rely to their detriment on the offer, and offeree does so rely, the offer will be held irrevocable as an option K for a rx length of time
Beginning Performance in Response to True Unilateral K Offer
An offer to true unilateral K becomes Irrevocable once performance has begun. Offeror must give offeree a rx time to complete performance. Note – offeree is not bound to complete performance – they may w/d any time prior to completion of performance and there is NO acceptance until performance is complete
Note –> substantial prep to perform do not make the offer irrevocable, but may constitute detrimental reliance sufficient to make offeror’s promise binding to the extent of the detrimental reliance
Beginning Performance - Offer Indifferent As to Manner of Acceptance
Bilateral K may be formed upon start of performance by offeree. Thus, once offeree begins performance, K is complete and revocation becomes impossible. NOTE –> notification of start of performance may be necessary
Death
- Death terminates only revocable offers, NOT irrevocable K’s (option K or start of performance in unilateral K)
- Death or insanity of either party terminate offer, need not communicate to other party
- Destruction of proposed K’s subject matter
- Supervening illegality
Who may accept an offer?
- Only person to whom an offer is addressed
- Member of class to which offer has been directed
- Offeree’s power of acceptance CANNOT be assigned
- But if offeree paid consideration to keep offer open–option K–the right to accept IS TRANSFERABLE
Knowledge of Offer
Offeree must know of offer to accept it!
Acceptance of Offer for Bilateral K
Unless offer specifically provides that it may be accepted only via performance, it will be construed as an offer to enter into bilateral K and may be accepted either by:
(1) Promise to perform; or
(2) Start of performance.
Communicating Acceptance (& Silence)
Unless offer provides otherwise, must communicate acceptance to enter into bilateral K.
Silence is generally not an acceptance UNLESS:
(1) There is duty to speak when previous customs b/w parties indicate that silence acceptance is reasonable
(2) Recipient of service knows or should’ve known the service was being rendered w/ expectation of compensation and by word could have prevented the mistake , recipient may be held to have accepted the offer if they fail to speak.
Acceptance
An acceptance is a manifestation of assent to the terms of an offer. An acceptance of an offer may be made, unless otherwise provided, by any reasonable manner and any medium reasonable under circumstances.
Offers to buy goods for current or prompt shipment
Under Article 2, an offer to buy goods for current/prompt shipment = inviting acceptance either by a promise to ship or by current/prompt shipment of conforming/nonconforming goods
Acceptance must be equivocal
Tradition K law = absolute and unequivocal acceptance of each and every term of offer (mirror img rule)
CL = any different or add’l terms in acceptance make the response a rejection and counteroffer
Acceptance of Offer for Unilateral K
If an offer provides that it may be accepted only performance… special rules:
1. Complete performance req’d for acceptance, but not obligated to complete merely b/c they begun performance. Is it breach if you don’t finish performance? NO, tough luck.
2. Offeree is not req’d to give notice offeror they begun the performance but they’re req’d to notify offeror within rx time after performance has been completed. But no notice req’d if (1) offeror waived notice or (2) offeree’s performance would normally come to offeror’s attention within rx time
Shipment of Nonconforming Goods
- Shipment of nonconforming goods = acceptance creating bilateral K AND breach of K unless seller seasonably notifies buyer that a shipment of nonconforming goods is offered only as an ACCOMODATION
- Accomodation = Counter-offer
- Buyer is NOT req’d to accept accomodation goods and may reject. If rejected, shipper is NOT in breach and may reclaim accomodation goods b/c the tender does not constitue an acceptance of buyer’s original offer.
- Accomodation shipment rule applies only when shipment is used as a form of acceptance.
Watch out for pattern where party accepts an order by promising to ship, seller discovers they lack specified goods, ship nonconforming good as accomodation. THIS is a breach, not accomodation. There was a K that promised to ship. The shipment was NOT acceptance. Thus, accomodation is not possible.
Mirror Image Rule
Only applies to Common Law, is a doctrine stipulating that any acceptance of an offer is deemed to be an unconditional assent to the terms of the offer exactly as it is, without any changes or modifications.
If there are changes or modifications this is a rejection and counteroffer.
Under UCC - Additional Terms Included
The UCC Article 2 abandoned the mirror image rule providing instead that the inclusion of additional or different terms by the offeree in a definite and timely acceptance does NOT constitute a rejection and counteroffer, but rather is effective as an acceptance, UNLESS the acceptance is expressly made conditionally on assent to the additional or different terms.
Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants.
Contracts Involving Nonmerchant
If any party to the contract is NOT a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do NOT become part of the contract UNLESS the offeror expressly agrees.
Contracts Between Merchants
If BOTH parties to the contract are merchants, additional terms in the acceptance will be included in the contract unless:
(1) Materially alter the original terms of the offer, such as by changing a party’s risk or the remedies available;
(2) Offer expressly limits acceptance to the terms of the offer; OR
(3) The offer has already objected to the particular terms, or objects within a reasonable time after notice of them is received.
Knockout Rule
Conflicting terms in the offer and acceptance are knocked out of the contract, because each party is assumed to object to the inclusion of such terms in the contract.
Under this rule, gaps left by knocked out terms are filled by the UCC.
Merchant’s Confirmatory Memo
A merchant’s memo confirming an oral agreement that contains different or additional terms is also subject to the battle of the forms provision.
Depending on the jx, different terms are treated either the same as additional terms or knocked out.
Mutual Assent
Mutual assent is described as an agreement on the “same bargain at the same time” or “a meeting of the minds”. Mutual assent typically requires an offer and acceptance.
Mutual Assent is Uncertain
In situations in which it cannot be determined w/ certainty which specific communication was the offer and which the acceptance but the parties act as though there is a contract, the UCC considers this a binding contract even though the moment of its making is uncertain.
Mailbox Rule
Acceptance by mail or similar means is effective at the moment of dispatch, provided that the mail is:
(1) Properly addressed; and
(2) Stamped.
Mailbox Rule Exceptions
(1) The offer stipulates that acceptance is not effective until received;
(2) Option contract is involved (an acceptance under an option contract is effective only upon receipt);
(3) Offeree sends a rejection and then sends an acceptance, in which case whichever arrives first is effective;
(4) Offeree sends an acceptance and then a rejection, in which case the acceptance is effective, unless the rejection arrives first and the offeror detrimentally relies on it.
Acceptance by Unauthorized Means
An acceptance transmitted by unauthorized means or improperly transmitted by authorized means may still be effective if it is actually received by the offeror while the offer is still in existence.
Bilateral Contracts Formed by Performance
If a contract is not formed by the parties’ communications, but they begin to perform as if they formed a contract, a contract is formed.
Auction Contracts
The UCC contains some special rules regulating auction sales. A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner.
An auction sale is w/ reserve unless the goods are explicitly put up without reserve.
With reserve - means the auctioneer may withdraw the goods at ANY TIME until he announces completion of the sale.
Consideration
Courts will enforce a promise as a contract ONLY IF it is supported by consideration or a substitute for consideration.
For consideration there must be:
(1) A bargained-for exchange between the parties; and
(2) Legal value
(meaning that which is bargained for must be considered of legal value or, as it traditionally stated it must constitute a benefit to the promisor or a detriment to the promisee).
Bargained-For Exchange
Requires that the promise induce the detriment and the detriment induce the promise.
Note: There is no bargain involved when one party gives a gift to another.
Act or Forbearance by Promisee Must be of Benefit to Promisor
An act or forbearance by the promisee is sufficient consideration to form a contract if it benefits the promisor. The benefit, however, need not be economic.
i.e. Gratification of influencing the mind of another is sufficient.
Past or Moral Consideration
A promise given in exchange for something already done does not satisfy the bargain requirement.
Exception: Where a past obligation is unenforceable because of technical defense, that obligation will be enforceable if a new promise is made in: (1) writing or (2) partially performed.
Also note: 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.
Adequacy of Consideration
Generally, the Courts do not inquire into the adequacy or fairness of consideration. However, if something is entirely devoid of value, it is insufficient.
i.e. Paying $300 for a CD that is actually worth $20. As long as there is a bargain, Courts do not look at whether it was worth the amount.
Legal Detriment
Legal detriment results if the promisee does something they are not legally obligated to do or refrains from doing something they have a legal right to do.
Legal Benefit
Legal benefit is a forbearance or performance of an act that the promisor was not legally entitled to demand or expect.
Preexisting Legal Duty
Performing or promising to perform an existing legal duty is insufficient consideration.
HOWEVER, there is consideration to preexisting legal duty if:
(1) New or different consideration is promised;
(2) Promise is to ratify a voidable obligation;
(3) Preexisting duty is owed to a third person rather than to the promisor;
(4) There is an honest dispute as to the duty; OR
(5) There are unforeseen circumstances sufficient to discharge a party (modern view: the modification is fair and equitable in view of circumstances not anticipated when the contract was made).
Modification of Contracts
Under general contract law, a contract cannot be modified unless the modification is supported by NEW consideration. The modern view (apply for MBE), however, permits modification without consideration if:
(1) Modification is due to circumstances that were unanticipated by the parties when the contract was made; and
(2) It’s fair and equitable.
NOTE: Under the UCC, consideration is not necessary to modify; all the parties need are good faith promises of new and different terms.
Good Faith Agreement Modification for UCC
A good faith agreement modifying a contract subject to the UCC needs NO consideration to be binding.
Discharge of Debts
A debt can be discharged through an accord and satisfaction. An accord must be supported by consideration.
Even if the consideration is of lesser value than the originally bargained-for consideration in the prior contract, it’s sufficient if the new consideration is of a DIFFERENT type or if the claim is to be paid to a third party.
Note: Payment of a smaller sum than due on the existing debt is generally not sufficient consideration. However, payment earlier than required or payment in different form i.e. stock/cash is a change in performance and could make the payment of a smaller amount sufficient consideration.
Forbearance to Sue
A promise to refrain from suing on a claim constitutes consideration if the claim is valid or the claimant in good faith believed the claim was valid.
Mutual and Illusory Promises
Consideration must exist on both sides of a contract. If only one party is bound to perform, the promise is illusory and will not be enforced.
Courts often supply implied promises to infer mutuality.
Examples of contracts that satisfy mutuality requirement:
(1) Requirements and output contracts;
(2) Conditional promises (unless the contract is entirely within the promisor’s control);
(3) Contracts where a party has the right to cancel, if that right is somehow restricted;
(4) Exclusivity agreements;
(5) Voidable promises;
(6) Unilateral and option contracts; and
(7) Gratuitous suretyship promises made before or at the same time that consideration flows to the principal debtor.
Promise will NOT be found illusory if:
(1) At least one alternative involves legal detriment and the power to choose rests w/ the promisee or a third party; or
(2) Valuable alternative (involving a legal detriment) is actually selected.
Promissory Estoppel
(1) Promise made;
(2) Reasonably foreseeable there will be detrimental reliance; and
(2) Justice requires enforcement.
Consideration is NOT necessary if the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice if:
(1) Promisor should reasonably expect to induce action or forbearance; and
(2) Such action or forbearance is in fact induced.
Note: Only apply promissory estoppel when there’s no consideration. Go through consideration analysis first.
Defenses Based on Lack of Capacity
(1) Contracts of Infants (Minors);
(2) Mental Incapacity;
(3) Intoxicated Persons
Contracts of Infants (Minors)
Infants (in most jx, anyone under the age of 18) generally lack capacity to enter into a contract binding on themselves. But, contractual promises of an adult made to an infant are binding on the adult.
An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. The contract must be disaffirmed as a whole; it can’t be affirmed in part and disaffirmed in part. If an infant chooses to disaffirm, they must return anything that they received under the contract that still remains at the time of disaffirmance.
Note: There is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed.
Implied Affirmation
Retaining benefits after gaining capacity. A minor affirms either expressly or by conduct, such as by failing to disaffirm the contract w/ a reasonable time after reaching majority.
Necessaries
Items necessary for subsistence, health, or education (including food, shelter, clothing, and medical care). A minor may disaffirm a contract for necessaries but will be liable in restitution for the value of benefits received.
Exceptions to Legal Incapacity to Contract
States have created statutory exceptions for student loans, insurance contracts, and agreements not to reveal an employer’s proprietary information.
Mental Incapacity
One whose mental capacity is so deficient that they are incapable of understanding the nature and significance of a contract may disaffirm when lucid or by a later appointed legal representative.
They may likewise affirm during a lucid interval or upon complete recovery, even without formal restoration by judicial action.
Generally, the contract is voidable. They are only liable in quasi-contract for necessaries.
Note: Mentally incompetent person has no ability to contract once a guardian has been appointed, so any attempted contracts by an incapacitated person who is under guardianship are void.
Intoxicated Persons
One who is intoxicated that they don’t understand the nature and significance of their promise may be held to have made only a voidable promise IF the other party had reason to know of the intoxication.
The intoxicated person may affirm the contract upon recovery.
There may be quasi-contractual recovery for necessaries furnished during the period of incapacity.
Duress and Undue Influence
Contracts induced by duress or undue influence are voidable and may be rescinded as long as they are not affirmed.
Misunderstanding - Ambiguous Contract Defense
If the contract includes a term w/ at least two possible meanings, the result depends on the parties’ awareness of the ambiguity:
(1) Neither party aware - No contract, unless both parties intended the same meaning;
(2) Both parties aware - No contract unless both parties intended the same meaning; or
(3) One party aware - Binding contract based on what the ignorant party reasonably believed to be the meaning of the ambiguous words.
Ambiguity is one area where subjective intent is taken into account.
Mutual Mistake on Existing Facts Defense
If both parties entering into a contract are mistaken about existing facts (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party if the mistake concerns:
(1) Basic assumption on which the contract is made;
(2) Material effect on the agreed-upon exchange; AND
(3) Party seeking avoidance did not assume the risk of the mistake.
If Party Bore the Risk
Mutual mistake is not a defense if the party asserting mistake as a defense bore the risk that the assumption was mistaken. This commonly occurs when one party is in a position to better know the risks than the other party or where the parties knew that their assumption was doubtful.
If there’s a Mistake in Value
Still an enforceable contract. If the parties to a contract make assumption as to the value of the subject matter, mistakes in those assumption will generally not be remedied - even though the value of the subject matter is generally a basic assumption and the mistake creates a material imbalance - because both parties usually assume the risk that their assumption as to value is wrong.
Unilateral Mistake Defense
If only one of the parties is mistaken about facts relating to the agreement, the mistake will not prevent formation of a contract.
But, if the non-mistaken party knew or had reason to know of the mistake made by the other party, the contract is voidable by the mistaken party. As w/ mutual mistake, the mistake must have a material effect on the agreed-upon exchange, and the mistaken party must not have borne the risk of the mistake.
Mistake by the Intermediary (Transmission)
When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake.
Fraudulent Misrepresentation (Fraud in the Inducement)
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 the fraudulent misrepresentation. This is fraud in the inducement.
Material Misrepresentation
Whether or not a misrepresentation is fraudulent, the contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material.
Misrepresentation is material if:
(1) It would induce a reasonable person to agree; or
(2) Maker knows that for some special reason it is likely to induce the particular person to agree, even if a reasonable person would not.
Note: Misrepresentation can be inferred from conduct.
Justified Reliance
A party is not entitled to relief if the reliance was unreasonable under the circumstances.
Note: Failure to read a contract or use care in reading it does not necessarily preclude a party from avoiding a contract for misrepresentation.
Innocent Party May Rescind
Innocent party does not have to wait until they’re sued on the contract but may take affirmative action in equity to rescind the agreement.
Public Policy Defenses
If the consideration or subject matter of the contract is illegal, the contract is void.
Exceptions:
(1) Plaintiff is unaware of the illegality while the Defendant knows of the illegality;
(2) Parties are not in pari delicate (one party is not as culpable as the other); or
(3) Illegality is the failure to obtain a license when the license is for revenue-raising purposes rather than for protection of the public.
If only the purpose of the contract is illegal, the contract is voidable by a party who was:
(1) Unaware of the purpose; or
(2) Aware but did not facilitate the purpose and the purpose does not involve serious moral turpitude.
Unconscionability
Allows court to modify or reduce to enforce an entire contract or a provision in it to avoid “unfair” terms, usually due to some unfairness in the bargaining process. Determined at the time the contract was formed.
Note: Unfair price alone is not a ground for unconscionability.
(1) Unfair surprise;
(2) Oppressive terms;
(3) Tested when contract formed.
Common Instances of Procedural Unconscionability (4)
(1) Inconspicuous Risk-Shifting Provisions;
(2) Contracts of Adhesion;
(3) Exculpatory Clauses;
(4) Limitations on Remedies.
Inconspicuous Risk-Shifting Provisions
Standardized printed form contracts often contain a material provision that seeks to shift a risk normally borne by one party to the other. Courts have invalidated these provisions because they’re inconspicuous or incomprehensible to the average person, even if brought to their attention.
Contract of Adhesion
Contract of adhesion is a contract where the parties are of such disproportionate bargaining power that the party of weaker bargaining power could not have negotiated for variations in the terms of the contract.
These contracts are prepared by the party with greater bargaining power for use in all similar business transactions and given to customers on a take-it-or-leave it basis.
Exculpatory Clauses
Releasing a contracting party from liability for their own intentional wrongful acts is usually found to be unconscionable because such a clause is against public policy.
Limitations on Remedies
Contractual clauses limiting liability for damages to property generally will not be found unconscionable UNLESS it is inconspicuous.
But, a contract that limits a party to a certain remedy and that remedy fails of its essential purpose, the limitation may be found unconscionable and courts will ignore it.
Effect if Court Finds Unconscionable Clause
Courts may:
(1) Refuse to enforce the contract;
(2) Enforce the remainder of the contract without the unconscionable clause; or
(3) Limit the application of any clause so as to avoid an unconscionable result.
Unconscionability Defense Should Apply When:
Great differences in bargaining power (i.e. big company vs. average consumer). Note: A contract turning out badly for one party is insufficient in itself to give rise to unconscionability.
Statute of Frauds Defense
In most instances, an oral contract is enforceable unless their subject matter falls under the SOF. Then, it must be evidenced by a writing signed by the party to b bound.
Statute of Frauds Categories: MY LEGS!!!
(1) Marriage
(2) Year
(3) Land sales
(4) Executors
(5) Goods for $500+
(6) Sureties
Marriage SOF
A promise made in consideration for marriage must be evidenced by a writing. This applies to promises that induce marriage by offering something of value.
Year SOF
Contracts impossible to complete within 1 year is subject to SOF. Part performance does not satisfy the SOF in this case. The date runs from the date of the agreement (formation) and NOT from the date of performance.
Note: Even if the contract CANNOT be performed within a year, full performance by one party will remove it from the Statute.
Also, if there is no date in the contract, if in theory the job can get done in less than a year, it does not fall within SOF (Superman standards).
Overall: If the actions are not completed within a year, but in theory they could have gotten the task done within less than a year, it will NOT be subject to SOF.
No SOF requirements for Lifetime Deals
Watch out for a contract measured by a lifetime - i.e. A promise to “work until I die” is not within the SOF, why?
Because it is capable of performance within a year - a person can die at any time.
BUT: Contract for an 1+ year is subject to SOF. Must be in writing and signed by the party to be bounded.
Lifetime contract? Not subject to SOF.
Land Sales SOF
A promise creating an interest in land must be evidenced by a writing. This includes not only agreements for the sale of real property, but also:
(1) Leases for more than one year;
(2) Easements of more than one year;
(3) Mortgages and most other security liens;
(4) Fixtures;
(5) Minerals (or the like) or structures if they are to be severed by the buyer.
Items that do NOT create an interest in land:
(1) Contracts to build a building or to find a buyer for a seller (I.e. a broker’s contract) do not create an interest in land;
(2) Full performance by the seller (conveyance of the property to the purchaser) will take the contract out of the SOF. Part performance by the buyer may also remove the contract from the statute.
Note: Construction contracts are not necessarily subject to SOF if it can be finished within a year.
Equal Dignity Rule
The authorization to enter into a contract on behalf of someone else, (i.e. an agent) must be in writing only if the underlying deal would be subject to SOF.
Oral authorization is OK if the underlying deal is not subject to SOF.
Executors SOF
A promise by an executor or administrator to pay the estate’s debts out of their own funds must be evidenced by writing.
Goods for $500+ SOF
A contract for the sale of goods for a price of $500 or more is within the SOF and generally must be evidenced by a signed writing to be enforceable.
Under the UCC, partial performance takes the contract out of the Statute of Frauds if the goods have been either received and accepted or paid for.
Sureties SOF
A promise to answer for the debt or default of another must be evidenced by writing. The promise may arise as a result of a tort or contract, but it must be collateral to another person’s promise to pay, and not a primary promise to pay.
Must see language “if X doesn’t pay, I will pay”
However, if the main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is not within SOF even though the effect is still to pay the debt of another.
(i.e. homeowner promises to pay contractor’s debt to building supplier if contractor does not pay, so contractor can obtain supplies to work on homeowner’s house)
Noncompliance w/ the SOF
Noncompliance w/ the SOF renders the contract unenforceable at the option of the party to be charged. So, the party being sued may raise the lack of a sufficient writing as an affirmative defense.
If the SOF is not raised as a defense, it is waived.
Contract Modification
A written contract can be modified orally, but the modification must be in writing if the contract as modified falls within the SOF.
i.e. A sale of goods contract, if the contract as modified is for $500 or more, it must be evidenced by a writing; if the contract as modified is for less than $500, no writing is necessary.
Clauses Prohibiting Oral Modification
Unenforceable in Common Law contracts;
Enforceable in Article 2 UCC contracts.
Under Common Law, if a contract explicitly provides that it may be modified only by a writing, the parties can orally modify the contract. (Not effective)
Under the UCC, if a contract explicitly provides that it may be modified or rescinded except by a signed wiring, that provision is given effect. If the contract is between a merchant and a non merchant, however, this provision requires the non merchant’s separate signature. (Clause effective)
Waiver - Orally Modifying a Contract
Parties attempting to orally modify a contract that requires written modification is technically ineffective as a modification but can operate as a waiver.
A waiver will be found whenever the other party has changed position in reliance on the oral modification. However, a party who makes a waiver affecting an executory (not yet performed) portion of the contract may retract the waiver if they notify the other party that strict performance of the waived terms is required.
Waiver may not be retracted if the other party detrimentally relied on it.
Doctrine of Part Performance - Land Sales Exceptions for SOF
(1) Leases of 1 year or less it can be oral;
(2) Part performance of real estate contracts -
(Need at least (2) of the following)
*Payments;
*Possession;
*Valuable Improvements.
If it falls under the above excepts, contract does not fall under SOF.
Exception for Service Contracts
Full performance contract satisfies SOF. But, part performance does not satisfy SOF.
i.e. Sesame Street orally agrees to employ Big Bird for 2 yrs for $50,000. Big Bird works for 2 years, but Sesame Street refuses to pay. Does Big Bird need a writing to satisfy SOF?
- No because there was full performance.
However, if Sesame Street fires Big Bird after only 3 months?
- Yes, Sesame Street can raise a SOF defense. So, apply the SOF analysis then go to restitution to provide remedy for the Plaintiff who has not been justly compensated for working 3 months. Provide Big Bird restitution - Reasonable FMV of the benefit conferred by Sesame Street.
Exception for Sale of Goods Contracts
Part performance takes a sale of goods contract out of the SOF when:
(1) Goods have been accepted;
(2) Goods paid for; or
(3) Substantial beginning of specially manufactured goods (made to order, seller cannot resell them).
If a sales contract is only partially paid for or accepted, the contract is enforceable only to the extent of the partial payment or acceptance.
If goods are either received and accepted or paid for, the contract is enforceable without writing.
However, contract is not enforceable beyond the quantity of goods accepted or paid for. Thus, if only some of the goods called for in the oral contract are accepted or paid for, the contract is only partially enforceable.
If an indivisible item (i.e. a boat) is partially paid for, most courts hold that SOF is satisfied for the whole item.
Judicial Admissions Exception
Agreement admitted under oath enforceable without writing.
If the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in Court that the contract for sale was made, the contract is enforceable without a writing (but in such a case the contract is not enforced beyond the quantity of goods admitted). Treated the same as though the party signed the writing.
Merchant Confirmatory Memorandum Rule
(1) Both parties are merchants;
(2) Agree to contract;
(3) One party sends signed writing containing quantity terms; and
(4) No objection by recipient within 10 days.
If two merchants agree over the phone and one sends a written confirmation to the other, Article 2 allows one merchant to use its own confirmation to satisfy the SOF against another merchant.
Equitable and Promissory Estoppel against SOF
Estoppel may be applied if it would be inequitable to allow the SOF to defeat a meritorious claim.
i.e. Situations where the Defendant falsely and intentionally tells the Plaintiff that the contract is not within the SOF or induces the Plaintiff to change position in reliance on an oral agreement.
Writing Requirement for SOF
SOF requires only one or more writings that:
(1) Reasonably identify the subject matter of the contract;
(2) Indicate that a contract has been made between the parties; and
(3) State w/ reasonable certainty the essential terms.
Writing can be a receipt, letter, a check w/ details in the memo line, or a written offer that was accepted orally.
Electronic Record Satisfies Writing Requirement
If a law requires a record to be in writing, an electronic record (I.e. an email) satisfies the law.
Common Law Writing Requirements for SOF
(1) All material terms (Who is the contract between and what is this contract about?);
(2) Defendant’s signature.
Writing for Land Sale Contracts
Must contain description of the land and the price.
Writing for Employment Contracts
Must state the length of the employment.
Writing for Sale of Goods Contracts
Must indicate that a contract has been made; specify the quantity term; and Defendant’s signature.
Signature Requirements
Signatures requirement is liberally construed by most courts. A signature is any mark or symbol made w/ the intention to authenticate the writing as that of the signer.
Does not have to be handwritten, it can be printed or typed.
Under the UCC, a party’s initials or letterhead, as well as electronic signature is also sufficient.
Remedies if Contract is Within Statute
If a contract violates the SOF, in almost all cases a party can sue for:
(1) the reasonable value of the services; or
(2) part performance rendered; or
(3) the restitution of any other benefit that has been conferred.
If there is part performance
Part performance takes the contract out of the SOF, the performing party has the option of suing on the contract for expectation damages rather than merely in restitution for the value of the benefit conferred.
Parol Evidence Rule
The Parol Evidence rule applies to any issues to final writing. The rule excludes evidence of:
(1) Prior or contemporaneous agreements;
(2) Contradicting the final agreement integration.
The final writing supersedes any prior oral made prior to the writing because it is more reliable.
While a final expression of agreement may not be contradicted by any prior agreement, it may be supplemented by course of dealing or usage of trade or by course of performance. A course of dealing, when inconsistent with a usage of trade, controls.
NOTE: If there is no writing, and the contract was made orally, look to SOF.
NOTE: Parol evidence can be oral or written before the final written integration. If it is after - then that is an attempt to modify the contract.
Exceptions to Parol Evidence Rule (words)
(1) Partially integrated writing;
(2) Defense Against Formation;
(3) Vague or ambiguous term;
(4) Correct clerical error.
Partial Integration
Parol evidence is allowed to add to a partially integrated writing, but not a complete integration. Partial integration is a final statement of the agreement but not a complete statement as to the entire deal.
The UCC presumes all writings are partial integrations.
Defense Against Formation
A party can bring in parol evidence to establish defenses to enforcements (i.e. fraud, duress, mistake, and illegality)
Vague or Ambiguous Terms
If there is uncertainty or ambiguity in the written agreement’s terms or a dispute as to the meaning of those terms, parol evidence can be received to aid the fact finder in reaching a correct interpretation of the agreement.
Correct clerical error
There are juxtapositions of information, it’s just a correction of a typo.
Merger Clause
A merger clause recites that the agreement is the complete agreement between the parties. The presence of a merger clause is usually determinative in large commercial contracts.
For most contracts, however, the modern trend is to consider it as one factor in determining integration.
Exceptions to Parol Evidence Rule (performance)
After looking at the exceptions for words, go to the parties’ performance:
(1) Course of performance;
(2) Course of Dealing;
(3) Trade Usage.
Note: Express terms are given greater weight than course of performance, course of dealing, and usage of trade. Course of performance is given greater weight than court of dealing or usage of trade; and court of dealings is given greater weight than usage of trade. So go in order.
Course of Performance
Parties’ conduct under prior installments of current contract.
Course of Dealing
Parties’ conduct in prior contracts.
Trade Usage
Industry norms parties are aware of.
Supplemental Gap Filler Terms
Contract for the sale of goods requires the quantity term. If other terms are missing from the agreement Article 2 has gap-filler provisions to fill the missing terms.
Price
If nothing has been said as to price:
Price is left open to be agreed upon by the parties and if they fail to agree or the price is to be fixed in terms of some standard that is set by a third person or agency and it it’s not set, then the price is a reasonable price at the time of delivery.
Place of Delivery
If the place of delivery isn’t specified, the place usually is the seller’s place of business, if they have one; otherwise, it’s the seller’s home.
Time for Shipment or Delivery
If time for shipment/delivery is not specified, it is due within a reasonable time.
Time for Payment
If time for payment isn’t specified, payment is due at the time and place at which buyer is to receive the goods.
Assortment
If a contract provides that an assortment of goods is to be delivered and doesn’t specify which party is to choose, the assortment is at the buyer’s option.
If the party who has the right to specify the assortment doesn’t do so reasonably, the other party is excused from any resulting delay and may either proceed in any reasonable manner or treat the failure as a breach.
Warranties
Contracts for the sale of goods automatically include a warranty of title. They also may include certain (1) express warranties; and (2) implied warranties.
Express Warranties
Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model creates an express warranty if the statement, description, sample, or model is part of the basis of the bargain.
i.e. this ring is solid 24 carat gold.
Note: A statement related to the value of the goods or a statement purporting to be only the seller’s opinion doesn’t create an express warranty. i.e. all our clothes are top notch and best quality.
Implied Warranty of Merchantability
Goods are fit for ordinary, foreseeable purpose. This is implied by law and not based on what the merchant stated.
(1) Merchant seller who is regularly selling that type of goods;
(2) Then automatically under Article 2, those goods have implied warranty of merchantability.
Implied Warranty of Fitness for a Particular Purpose
A warranty will also be implied in a contract for the sale of goods whenever:
(1) Any seller, merchant or not, has reason to know the particular purpose for which the goods are to be used and that the buyer is relying on the seller’s skill and judgment to select suitable goods; and
(2) Buyer in fact relies on the seller’s skill or judgment.
i.e. the hypo will contain a special purpose, and seller will have knowledge that the buyer is relying on their skill.
Warranty of Title
Any seller of goods warrants that the title transferred is good, that the transfer is rightful, and that there are no liens or encumbrances against the title of which the buyer is unaware at the time of contracting.
This warranty arises automatically and need not be mentioned in the contract.
Warranty Against Infringement
A merchant seller regularly dealing in goods of the kind sold also automatically warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims.
But a buyer who furnishes specifications for the goods to the seller must hold the seller harmless against such claims.
Disclaimer of Warranties
(1) Warranty of Title - title warranty can be disclaimed or modified only by specific language or by circumstances that give the buyer notice that the seller does not claim title or that they are selling only such rights as they or a third party may have.
(2) Implied Warranties - Implied warranties of merchantability and fitness for a particular purpose can be disclaimed by either specific disclaimers or general methods of disclaimer. The Warranty for a particular purpose can be disclaimed only by a conspicuous writing.
(3) Warranty of Merchantability - Warranty of merchantability can be specifically disclaimed or modified only by mentioning merchantability. If the sales contract is in writing, the disclaimer must be conspicuous.
Seller can disclaim warranties in (2) ways:
Sell the goods stating:
(1) “As is” or “With all faults”;
(2) Conspicuous disclaimer.
Conspicuous Writing
A term is conspicuous when it is so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it.
(1) Large type than surrounding test;
(2) Contrasting type, font, or color; or
(3) Set off from the text by marks that call attention to it.
“As is” or “With all faults”
By using “as is” or “with all faults” or similar language, the seller disclaims warranties.
Examination or Refusal to Examine
If the buyer, before entering into the contract, has examined the goods/sample/model as fully as they desire or has refused to examine, there is no warranty as to the defects that a reasonable examination would have revealed.
Express Warranties
UCC provides that words or conduct relevant to the creation of express warranties and words or conduct rending to negate such warranties shall wherever possible be construed as consistent w/ each other, but negation or limitation is inoperative to the extent that such construction is unreasonable.
Once an express warrant is made, it’s very difficult to disclaim.
Limitation on Damages
Generally, parties may include in their contract a cause limiting the damages available in the case of breach of warranty, as long as it is not unconscionable.
(i.e. limitations on personal injury caused by a breach of warranty)
Timing - Disclaimers and Limitations in the Box
To be effective, a disclaimer of warranty or limitation on remedies must be agreed to during the bargaining process.
Most Courts hold that a warranty disclaimer or limitation on remedy included inside the packaging of goofs is not effective against a buyer.
Clickwrap
Computer software often comes w/ terms that appear on the user’s computer screen during installation process requiring the purchaser to agree to the terms before installing.
Such limitations and disclaimers typically are upheld on the rationale that the purchaser can return the software if they disagree w/ the conditions.
Difference between goods tendered as warranted
The measure of damages for breach of any warranty is the difference between the value of the goods accepted and the value of the goods as warranted, measured at the time of acceptance.
If there are special circumstances, damages may be measured different to account for those circumstances.
Buyer can recover appropriate incidental and consequential damages.
Breach of Warranty of Title
If the warrant of title is breached, the foods are reclaimed by the true owner or lien holder, dispossessing the buyer.
The buyer then may:
(1) Rescind the contract;
(2) Revoke acceptance of the goods; or
(3) Sue for damages.
Special Circumstances - Appreciation and Depreciation
If there are special circumstances, the value of the goods is measured at the time of dispossession rather than at the time of acceptance.
Appreciation (such as art) or depreciation (car) in the value of the goods from the time of delivery until dispossession is usually considered a special circumstance.
If the contract is silent on who bears the risk and neither party is to blame for the incident, who bears the loss?
If there was a breach, i.e. delivery was late (Even though the reason for delay is neither party to blame) the breaching party bears the risk of loss.
Non Carrier Case
Merchant sellers bear the risk of loss until the buyer receives physical possession of the goods because merchants are repeat players.
Non-merchant sellers pass the risk of loss sooner, the buyer will bear the risk of loss once the non-merchant seller tenders the goods - making the goods available to the buyer.
Defective Goods
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.
Buyer generally has the right to reject for any defect.
Destroyed Goods
If the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term then:
(1) Loss is total the contract is void; and
(2) Loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.
Revocation of Acceptance
If the buyer rightfully revokes acceptance, the risk of loss is treated as having rested on the seller from the beginning to the extent of any deficiency in the buyer’s insurance coverage.
Carrier Case (i.e. UPS, Fedex, etc.)
A carrier case is a sale in which it appears that the parties intended the goods to be moved by a common carrier.
The risk of loss will shift to the buyer when the seller completes its delivery obligation, not when the actual delivery occurs.
Delivery obligations: (1) Shipment contract; or (2) Destination contracts.
Shipment Contract
(1) Seller delivers goods to common carrier;
(2) Arranges for delivery; and
(3) Notifies buyer;
(4) Then risk of loss passes to buyer on delivery to carrier
*Assume shipment contract on the exam. Buyer assumes the risk of loss before she even receives the delivery. Bar loves to test on this!
Destination Contract
Seller must deliver the goods at a particular destination, the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination.
Free on Board (FOB)
The letters FOB are always followed by a location and the risk of loss passes to the buyer at the named location. The seller bears the risk and expense of getting the goods to the named location.
These contracts can be either shipment or destination contract, depending on the location named.
FOB followed by seller city = shipment contract.
FOB followed by any other city (buyer’s city or any other location) = destination contract.
Performance Obligations for Common Law Contracts
Substantial performance is enough - meets contract’s essential purpose.
Performance Obligations for UCC Article 2 Contracts
Requires a perfect tender rule - the delivery and condition of the goods must be exactly as promised in the contract.
Installment Contracts
Requires delivery of goods in separate installments over specified period.
Buyer Right of Inspection
Buyer has a right to inspect the goods before they pay unless the contract provides for payment C.O.D. or otherwise indicates that the buyer has promised to pay without inspecting the goods.
Implied Acceptance
If there is a long delay, more than a month or so for when the buyer received the goods to when they complain about the goods, they likely impliedly accepted the goods and it’s too late to reject.
Payment Terms
Tender of payment by check is sufficient unless the seller demands cash and gives the buyer time to get it.
If a check is given, the buyer’s duty to pay is suspended until the check is either paid or dishonored.
Check provided on a weekend example: (1) buyer has met their performance obligation because they can pay by check unless otherwise agreed; (2) Seller can refuse the check, but that gives the buyer additional/reasonable time to come back w/ cash.
Conditions in Contracts
(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.
Conditions are not promises. Look for words “if” “as long as” “until” “when” “unless” “on the condition that” “provided that”
If there is an express condition, it must be perfectly satisfied. If that condition precedent is not perfectly met, promisor then has no obligation to perform.
Note: Conditions do not create obligations (promise), so it is not considered a breach.
Promise
Promises is a commitment to do or refrain from doing something. If a promise is unconditional, the failure to perform according to its terms is a breach of contract.
Failure of Condition v. Breach of Contract
Failure of a contractual provision that is only a condition is not a breach of contract, but it discharges the liability of the promisor whose obligations on the conditional promise never mature.
Interpretation of Provisions in a Contract as Promise or Condition
Look to the intent of the parties. Courts will look at the words and phrases used by the parties, their prior practices, the custom in the business community with respect to the provision.
Satisfaction Condition (Reasonable Person Standard)
Satisfaction measured by reasonable person standard unless the contract deals w/ art or personal taste.
Personal Taste Judgment (Subjective Standard)
Subjective standard, a condition of satisfaction is fulfilled only if the promisor is personally satisfied (i.e. art, dental work, portraits).
Even if a condition requires personal satisfaction, a promisor’s lack of satisfaction must be:
(1) Honest; and
(2) Good faith.
Condition Precedent
A condition precedent is one that must occur BEFORE an absolute duty of immediate performance arises in the other party.
Condition Subsequent
A condition subsequent is one that, when it occurs, cuts off an already existing absolute duty of performance.
Condition Concurrent
Condition concurrent are those that are capable of occurring together, and that the parties are bound to perform at the same time. Thus, in effect, each is a condition “precedent” to the other.
Constructive (Implied) Conditions of Performance
Common implied condition is that the duty of each party to render performance is condition on the other party either rendering their performance or making a tender of their performance.
Effect of Condition - Equitable Remedy
If a contract is not enforceable due to the failure or occurrence of a condition, and one of the parties has fully or partially performed, they can usually recover under unjust enrichment theories.
Conditions Excused
A duty to immediate performance w/ respect to a conditional promise doesn’t become absolute until the conditions:
(1) Have been performed; or
(2) Legally excused.
Excuse of Condition by Hindrance or Failure to Cooperate
If a party having a duty of performance that is subject to a condition prevents the condition from occurring, the condition will be excused if the prevention is wrongful.
Excuse of Condition by Waiver or Estoppel
Party having the benefit of a condition under a contract may indicate by words or conduct that they will not insist on that condition’s being met. Consideration is not required for a valid waiver of condition.
Anticipatory Repudiation
Occurs if a promisor, prior to the time set for performance of their promise, indicates that they WON’T perform when the time comes. If the requirements set forth below are met, this anticipatory repudiation will serve to excuse conditions.
Nonrepudiating party has (4) alternatives:
(1) Can sue immediately;
(2) Suspend their performance and wait to sue until the performance date;
(3) Treat the repudiation as an offer to rescind and treat the contract as discharged; or
(4) Ignore the repudiation and urge the promisor to perform (they can still sue for breach and are excused from performing unless the promisor retracts the repudiation)
Retraction of Repudiation
A repudiating party may at any time before their next performance is due withdraw their repudiation unless the other party has:
(1) Canceled;
(2) Materially changed their position in reliance to the repudiation; or
(3) Otherwise indicated that they consider the repudiation final.
Failure to Give Adequate Assurances
(1) There must be reasonable grounds innocent party believes prospective failure of performance by the other party;
(2) Party may ask for adequate assurance in writing; and
(3) Innocent party then can treat that as anticipatory repudiation and innocent party may be excused from their own performance.
Adequate Assurance
Party cannot use adequate assurance provision to rewrite contract or demand certain assurance. Party is only entitle to ADEQUATE assurance.
Discharge by Rescission
Rescission will serve to discharge contractual duties. Rescission may be either mutual or unilateral.
Mutual Rescission
The contract may be discharged by an express agreement between the parties to rescind. The agreement to rescind is itself a binding contract supported by consideration, namely, the giving up by each party of their right to counterperformance from the other.
Each party must have some performance remaining for effective rescission (if performance is completed by the parties, contract cannot be rescinded).
Unilateral Rescission
Party desiring rescission must have adequate legal grounds. Most common are: Mistake, misrepresentation, duress, and failure of consideration.
If the non assenting party refuses to grant rescission, the other party may file an action in equity to obtain it.
Modification Agreement
If a contract is subsequently modified by the parties, this will serve to discharge those terms of the original contract that are the subject of the modification.
It will not serve to discharge the entire contract.
Accord and Satisfaction Agreement
Agreement to accept different performance to satisfy existing duty.
Accords without satisfaction does not excuse the original debt. Party can go after the original debt or the accord to be satisfied.
“If… then…”
Novation
Agreement to substitute a new party for an existing one.
(1) A previous valid contract;
(2) An agreement among all parties, including the new party to the new contract;
(3) Immediate extinguishment of contractual duties as between the original contracting parties; and
(4) A valid enforceable new contract.
Original party’s obligations are excused.
Delegation
(1) One party finds replacement party to perform without agreement from original contracting parties; then
(2) Original party’s obligations are not excused.
Impossibility/Impracticability
Later unforeseen event makes party’s performance impossible.
Under Article 2, it’s known as impracticability. Finding of impracticability is that the party to perform has encountered extreme and unreasonable difficulty and/or expense, and its nonoccurrence was a basic assumption of the parties.
Must be objective that the duties could not be performed by anyone.
Death or Incapacity
Death or the physical incapacity of a person necessary to effectuate the contract serves to discharge it.
Essential person to contract excuses performance.
NOTE: Obligation goes to the estate of the decedent, so they still need to pay.
Supervening Illegality
Supervening illegality may serve to discharge a contract under impossibility.
Increase in cost for performance
Not a valid excuse to not perform. It must be extreme and unreasonable for it to fall under impracticability.
Subject Matter Destroyed
Destruction of the subject matter will render a contract impossible only if the very thing destroyed is necessary to fulfill the contract. If the thing destroyed is not actually necessary, impossibility is not a defense.
Discharge by Frustration of Purpose
Frustration will exist if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge. Required to show:
(1) Supervening act or event leading to the frustration;
(2) Parties did not reasonably foresee the act or event occurring;
(3) Purpose of the contract has been completely or almost completely destroyed by this act or event; and
(4) Both parties understood the central purpose.
Then the performance is excused if contract’s essential purpose has been undermined.
When a contractor is under a contractual duty to construct a building and the building is destroyed by an act of nature while it is still a work in progress, the destruction __________.
A contractor’s duty to construct a building is not discharged by destruction of the work in progress. However, if the destruction was not caused by the contractor, such as by an act of nature, most courts will extend the date of performance beyond the original deadline.
Destruction during Construction from Force of Nature
The general rule is that a contractor is responsible for destruction of the premises under construction prior to completion. Once the residence is completed, risk of loss shifts to the owner.
Breach Elements
A breach of contract occurs when a party fails to perform once:
(1) Condition precedent to performance are performed or excused;
(2) Time to perform arrives; and
(3) Performance is not discharged.
Then this failure to perform in accordance w/ contractual terms will amount to breach of the contract.
Nonbreaching Party must show
(1) They are willing and able to perform;
(2) But for the breaching party’s failure to perform.
Material Breach Elements
In determining whether a breach is material or minor, courts look at:
(1) Amount of benefit received by the non breaching party;
(2) Adequacy of compensation for damages to the injured party;
(3) 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) Likelihood that the breaching party will perform the reminder of the contract.
Minor Breach
A breach of contract 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 for the minor breach.
Material Breach
If obligee does not receive the substantial benefit of their bargain, the breach is considered material. Nonbreaching party may:
(1) Treat the contract as at an end; any duty to 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.
Determining Substantial Performance
Court looks to:
(1) Benefit received by non breaching party;
(2) Part performance by breaching party;
(3) Hardship to breaching party.
Minor Breach + Anticipatory Repudiation
Minor breach couples w/ an aticipatory repudiation, the non breaching party may treat it as material breach, they can sue immediately for total damages and are permanently discharged from any duty to further performance.
Time for Performance
Failure to perform within state time usually does not equal to material breach, unless:
Time of the essence - courts look to all circumstances.
Perfect Tender Rule (PTR) - Sale of Goods
If goods or their delivery fail to conform to the contract in any way, the buyer generally may:
(1) Reject all;
(2) Accept all; or
(3) Accept any commercial units and reject the rest.
Acceptance of Goods
Buyer accepts goods if they:
(1) Indicate goods conform to contract;
(2) Indicate they’ll keep nonconforming goods;
(3) Fail to reject within reasonable time;
(4) Fail to notify seller of rejection;
(5) Act inconsistent w/ seller’s ownership (changes to the goods).
Acceptance May be Revoked When:
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 the seller’s assurance that the goods conformed to the contract.
Revocation of Acceptance
Must occur:
(1) Within a reasonable time after the buyer discovers or should have discovered the defects; and
(2) Before any substantial change in the goods occurs that is not caused by a defect present at the time the seller relinquished possession.
Exceptions to the Perfect Tender Rule - Right to Cure
If the delivery is early, Seller has a right to cure. If the buyer has rejected goods because of defects, the seller may within the time originally provide 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.
Additionally, if the buyer rejects a tender of nonconforming goods that the seller REASONABLY believed would be acceptable, 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. Seller must show:
(1) Trade practices or prior dealings w/ the buyer led the seller to believe that the goods would be acceptable; or
(2) Seller could not have known of the defect despite proper business conduct.
Exceptions to the Perfect Tender Rule - Installment Contracts
(1) Buyer can reject installment if nonconformity substantially impairs value of installment; and
(2) Seller cannot cure the defect.
Contract breached only if nonconformity substantially impairs entire contract’s value.
*Installment contracts - i.e. delivery in 3 different shipments.
Specific Performance
Available when legal remedy is INADEQUATE – court orders breaching party to perform or face contempt of court charges
Note –> watch out for party seeking to specifically enforce K w/ liq damages clause – such clause does not make a legal remedy adequate.
Specific Performance Available for Land and Rare or Unique Goods
- Specific performance is always available for land sale Ks b/c all land is unique.
- Available for goods that are RARE or UNIQUE at the time performance is due BUT it is NOT available for breach of K to provide services even if services are rare or unique (involuntary servitude prohibited by Constitution)
Injunction
Court may enjoying breaching employee from working for a competitor throughout the duration of K if services contracts are rare or unique
Covenant Not to Compete
Most courts will grant an order of specific performance to enforce a K not to compete if
(1) Services to be performed are unique (hence rendering $ inadequate) AND
(2) Covenant is reasonable, meaning
- rx necessary to protect a LEGITIMATE INTEREST of the person benefited by the covenant (employer/purchaser of covenanter’s biz)
- covenant must be rx as to its geographic scope of duration (can’t be broader than benefitted person’s customer base and cannot exceed 1 or 2 years) AND
- covenant must NOT harm public
Equitable Defense - Laches
P has delayed bringing action and delay has prejudiced D
Equitable Defense - Unclean Hands
Party seeking specific performance is guilty of wrongdoing in the transaction being sued upon
Equitable Defense - Sale to BP
Subject matter has been sold to a person who purchased for value and in good faith
Article 2: Buyer’s Nonmonetary Remedies - Cancellation
If buyer rightfully rejects goods b/c they do NOT conform to K, one of her options is to simply cancel K
Article 2: Buyer’s Right to Replevy Goods: (1) On Buyer’s Prepayment; (2) On Buyer’s Inability to Cover
On Buyer’s Prepayment – If buyer has made at least PART payment of purchase price of goods that have been identified under K and the seller has NOT delivered the goods, buyer may replevy the goods from seller in 2 circumstances:
(1) Seller becomes insolvent within 10 DAYS after receiving buyer’s first payment OR
(2) Goods were purchased for personal, family, household purposes
In either case, buyer must TENDER any unpaid portion of purchase price to seller.
On Buyer’s Inability to Cover – Buyer may replevy undelivered, identified goods from seller if buyer, after rx effort, is unable to cover.
Buyer’s Right to Specific Performance
Available where goods are unique or otherwise other proper circumstances. Court may order specific performance even where goods have not yet been identified to K by seller.
Seller’s Right to Withhold Goods
If buyer fails to make payment due on or before delivery, seller may withhold delivery of goods.
Seller may also withhold delivery of goods when goods are sold on credit and before goods are delivered, seller discover buyer is insolvent, But in such case, seller must deliver goods if the buyer tenders CASH for their payment
Seller’s Right to Recover from Buyer on Buyer’s Insolvency
If seller learns that buyer has received delivery of goods on credit while insolvent, seller may reclaim goods upon demand made within 10 DAYS after buyer’s receipt of goods.
Note –> buyer still must have possession of goods!
But 10 DAY limit N/A if misrepresentation of solvency has been made in WRITING to particular seller within 3 MONTHS before delivery.
Also, seller may stop delivery of goods in possession of a carrier or other bailee if they discover that buyer is INSOLVENT. But seller must deliver goods if buyer tenders cash for their payment.
Seller’s Remedy for Buyer’s Breach
Seller may stop delivery of carload, truckload, planeload, if buyer breaches K or seller has right to withhold performance pending receipt of assurances
Seller’s Ability to Force Goods on Buyer Limited
Limited to an action for price when seller is unable to resell goods to others at rx $
Right to Demand Assurances
If there is a RX GROUND FOR INSECURITY re party’s performance, other party may demand in WRITING assurances that performance will be forthcoming in the proper time.
Until they receive adequate assurances, party may SUSPEND their own performance.
If proper assurances are NOT given within rx time (30 days after a justified demand for assurances), they may treat K as repudiated.
Compare –> Anticipatory repudiation requires clear indication the other party is unwilling/unable to perform (I’m not going to perform). But “I’m not sure if I can perform” most likely is only a reason to demand assurances
3 main nonmonetary reliefs under article 2
- Buyer’s nonmonetary remedies
- Seller’s nonmonetary remedies
- Right to demand assurances
Expectation Damages
Sufficient damages for P to substitute performance; benefit of the bargain.
Reliance Damages
If P’s expectation damages are too speculative to measure, P may elect to receive damages they have suffered based on their rx reliance on K
Awards P cost of their performance – put P in position they would have been had K never been performed
Incidental Damages
Associated w/ Ks for sale of goods
Includes:
- expenses rx incurred by buyer in inspection, receipt, transportation, care, custody of goods rightfully rejected
- seller sooting, shipping, returning, reselling goods as a result of buyer’s breach
Note –> incidental damages are ALWAYS available; does NOT need to be foreseeable.
Consequential Damages
- Arise b/c of non breaching party’s particular circumstances and often consist of lost profits
- Must be rx fx at time of K formation
- Breaching party must have known or had reason to know of special circumstances giving rise to damages
- In Ks for sale of goods, only BUYER, not seller, can recover consequentials
Certainty Rule
P must prove losses suffered were certain in nature and NOT speculative.
Traditional courts – if breaching party prevented non breaching party from setting up a new biz, court wouldn’t award lost profits from prospective biz as damages b/c too speculative
Modern courts – may allow lost profits as damages if they can be made more certain by observing similar businesses in the area or other businesses previously owned by the same part
Nominal Damages
May be awarded when breach is shown but no actual loss is proven
Liquidated Damages
Enforceable if
(1) Damages for K breach are difficult to estimate or ascertain at the time k formed and
(2) Amount agreed on is a rx forecast of compensatory damages in case of breach.
- Rx test = comparison b/w art of damages prospectively probable at time of K formation and liquidated damages figure.
- If liquidated damages amt is unrx, courts will construe this as a PENALTY and will no enforce provision
Exam Tip = single lump sum liquidated damages clause that does not vary w/ severity of breach is likely invalid/penalty
Recoverable even if no actual damages (if liquidated damages requirement are met)
P will receive the liquidated damages act. Most courts hold this is so even if no actual money or pecuniary damages have been suffered
K for sale of goods - buyer’s damages when seller does NOT deliver OR buyer rejects/revokes
If seller does not deliver or buyer properly rejects goods or revokes acceptance of goods, buyer’s basic damages are difference between K price AND either
(1) market price or
(2) cost of buying replacement goods PLUS incidental AND consequential damages, if any, less expenses saved as a result of seller’s breach.
Difference b/w K price and cost of replacement goods (cover)
If buyer chooses the cover measure, then buyer must make a reasonable K or substitute goods IN GOOD FAITH and WITHOUT UNRX DELAY.
Difference b/w K price and market price
If buyer measures damages by the difference b/w K price and market price, market price usually is determined as of the time the buyer learns of breach and the place of tender
Note –> seller damages are measured at time of delivery while buyers are at time they learn of the breach
Seller delivers nonconforming goods that buyer accepts - warranty damages and notice requirement
- If buyer accepts goods that breach one of seller’s warranties, the buyer may recover as damages loss resulting in normal course of events from the breach ==> difference b/w value of goods as delivered and value they would have had if they had been according to K, plus incidental and consequential damages
- to recover damages for any defect as to accepted goods, buyer must within RX TIME after they discover or should have discovered the defect, NOTIFY seller of the defect. IF they do not, they lose right to sue.
Seller anticipatorily breaches K
difference b/w market price the buyer learned of breach and K price
When is seller liable for consequential damages?
(1) seller had reason to know of buyer’s general or particular requirements and
(2) subsequent loss resulting form those needs could not rx be prevented by cover.
Particular needs must be made known to seller but general requirements usually need not be
Goods for resale
If buyer is in biz of reselling goods, seller deemed to have knowledge of resale
Goods necessary for manufacturing
If seller knows goods they provide are to be used in manufacturing process, they should know that their breach would cause a disruption in production leading to loss of profits.
Buyer wrongfully repudiates or refuses to accept conforming damages = 3 measures of damages for seller?
In addition to incidental…
1. Resell goods and recover difference b/w K price and resale price
2. Recover difference b/w market price [at time and place of delivery] and K price or
3. if above measures are inadequate b/c seller could have made an additional sale, recover under a lost profits measure the difference b/w K price and cost to seller ==> can use this for seller whose supply of goods is unlimited
Where buyer accepted goods - action for price
If buyer has…
- accepted goods and not paid or
- not accepted goods and seller is unable to resell them at any rx price or
- if goods have been lost or damaged at a time the risk of loss was on buyer,
The seller may maintain an action against buyer for FULL K price
Standard measure for damages for breach of land sale K
K price - FMV
Employment K
Was breach by employer or employee?
- breach by employer = irrespective of when breach occurs, employee’s damages is full K price but can be reduced if failed duty to mitigate
- breach by employee = if employee materially breaches employment k, employer is entitled to recover cost of replacing employee. Breaching employee may offset money owed for work done to date.
- employment at will = may be terminated at any time for any reason. Thus termination of at-will by either party does not result in breach. A position characterized as ‘permanent’ is emp-at-will
Construction K
- If construction K breached by OWNER, builder will be entitled to profits that would have resulted from K + any cost expended.
- If breached after completed, measure is full K price + interest
- If K breached by builder, owner is entitled to cost of completion + rx compensation for the delay. Most courts allow builder to offset or recover for work performed to date to avoid unjust enrichment of owner
- If breach is only late performance, owner entitled to damages incurred bc of late performance
Restoration and Economic Waste - Construction Ks
If building K not properly performed, owner is entitled to cost of fixing defect. BUT unlesss there is special significance attached to use of particular item AND significance is communicated to builder, court will not order a remedy that results in undue economic waste.
Courts are SPLIT on the result when a party Ks to restore property and willfully refuses to do so bc it is much more costly than any diminution in value of property
Ks calling for installment payments
if K calls for payments in installments and a payment NOT made, there is only a PARTIAL breach. Aggrieved party is limited to recovering only the missed payment, not entire K price.
However, the K may include an ACCELERATED CLAUSE making entire am due on any late payment, then aggrieved party may recover ENTIRE amount
Mitigation
CL = non breaching party CANNOT recover damages that could’ve been avoided w/ rx effort. they must not incur further expenditures or costs and they must make r effort to cut down losses by procuring substitute performance at a fair price. If they don’t, they will not be able to recover those damages that might have been avoided after breach.
Generally a party may recover the expenses of mitigation.
Mitigation - Employment K
If breaching employer can prove a comparable job in the same locale was available, then K damages against breaching employer for lost wages will be reduced by the wages that P would have received from COMPARABLE JOB
Mitigation - Manufacturing K
If person for whom goods are being manufactured breaches, manufactures is under duty to mitigate by NOT CONTINUING TO WORK after breach.
However, if facts are such that completion of manufacturing project will decrease rather than increase damages, manufacturer has right to continue
Mitigation - Construction K
Builder does NOT owe duty to avoid consequences of owner’s breach by securing other work but does have duty to mitigate by NOT CONTINUING TO WORK after breach. If completion will decrease damages, it will be allowed
Mitigation - K for sale of goods
RULE OF MITIGATION UNDER ARTICLE 2 DOES NOT APPLY
Injured buyer is NOT required t cover and uninjured seller is not required to resell
Market damages are always available if buyer does not cover or seller does not resell
Seller cannot ring action against buyer for FULL K PRICE unless the goods cannot be resold at a rx [rice or were damaged or lost when risk of loss was on buyer
Does duty to mitigate reduce or prohibit recovery?
REDUCE, not prohibit
Restitution
Based on preventing unjust enrichment when one has conferred a benefit on another w/o gratuitous intent
Can provide a remedy not only when K exists and has been breached but also when K is unenforceable and in some cases when no K relationship exists b/w parties
When are actions to recover restitutionary damages such as implied in law K, quasi-K, quantum meruit available?
When K is unenforceable or no K b.w parties exist
Restitution measure of damages
Value of benefit conferred
although usually based on benefit received by D, recovery may also be measured by detriment. suffered by P if benefits are difficult to measure or benefit measure would achieve an unfair result
Restitution - When K Breached
If K breached and non breaching party hasn’t fully performed, they may cancel K and sue for restitution to prevent unjust enrichment.
If P has fully performed, they are limited to their damages under K - this may be less than they would’ve received in restituionary action b/c restitutiolnary remedy isn’t limited to K price
When is restitutionary remedy desirable?
Losing K b/c normal K expectation damages or reliance damages would be for lesser amt
Breach by Plaintiff - Restitution
P may seek restitution even if he breached - if breach was intentional, some courts won’t grant breaching party restitution. BUT modern courts permit it but limit to K price less damages incurred as a result of breach
Restitution of advance payments or deposit if buyer of goods breaches
if buyer paid part of purchase price in advance and then breaches K, can usually recover some of payments
UNLESS seller can prove greater damages, they may keep advance payments totaling 20% of purchase price or $500, whichever less.
Balance must be returned to buyer
If there is a valid liquidated damages clause, seller need refund only excess of buyer’s payments over the amount of liquidated damages
When there is a breaching party attempting to collect partially performed K, consider in order 3 theories
- substantial performance
- divisibility
- restitution
Quasi-K
restitution available here when K was made but is unenforceable and unjust enrichment otherwise would result
also available when no K relationship b/w parties if:
1. P conferred benefit on D by rendering svc or expending properties;
2. P conferred benefit w/ rx expectation of being compensated for its value
3. D knew or had reason to know P’s expectation AND
4. D would be unjustly enriched if they were allowed to retain benefit w/o compensating P
Recission
Available where original K is voidable and rescinded. Parties are left as though a K had never been made. The grounds fo recision must have occurred either BEFORE OR AT THE TIME K FORMED. The grounds are:
1. mutual mistake of material fact
2. unilateral mistake if other party knew or should have known of mistake
3. unilateral mistake if hardship by mistake party is so extreme it outweighs. there party’s expectations under K
4. misrepresentation of fact or law by either party as to a material factor in negotiations that was relied upon
5. other grounds - duress, undue influence , illegality, lack of capacity and failure of consideration
All equitable defenses are available in recession action – P’s negligence is not a defense
Can add restitution to recision
Reformation of K
Remedy whereby writing set forth the agreement b/w parties is CHANGED so that it conforms to original intent of parties.
- negligence does no bar reformation [failed to read it]
- clear and convincing standard
- Parol evidence and SoF N/A but many courts will deny reformation if it would add land to K w/o complying w/ SoF
- Existence of BFP for value is also a defense to reformation
- Reformation not permitted frights under 3P will be unfairly affected
Reformation due to mistake requirements (3)
- agreement b/w parties
- agreement to put the agreement in writing
- variance b/w original agreement and writing
Reformation due to misrepresentation
If writing is inaccurate due to misrepresentation, P can choose b/w reformation and avoidance.
To qualify for reformation, misrep must relate to content of legal effect of the accord.
Misrep as to subject matter of agreement are not grounds for reformation; recession and damages are proper remedy for that
SOL - Statute of Frauds Limitations under UCC
- For sale of K, UCC provides 4 year SOL
- Parties may shorten period by agreement to NO LESS THAN ONE YEAR but CANNOT lengthen it
- Accrual of action = when breach occurs; period begins to run regardless of whether aggrieved party knows about breach
SOL - Breach Of Warranty Actions
For a breach of warranty action, breach occurs and limitations period begins to run upon DELIVERY of goods. True even if buyer does not discover breach until much later
SOL - Warranty Extends to Future Performance
If there is an express warranty that explicitly extends to future performance of goods, the 4 year SOL does NOT begin to run until AFTER buyer should’ve discovered the breach
SOL - Implied warranties breached on deliver
Since implied warranties cannot explicitly extend to future performance, they are breached, if at all, upon delivery
Entrusting
Entrusting goods to merchant who deals in goods of that kind gives them power but NOT right to transfer all rights of the entruster to a buyer in the ordinary course of business
Entrusting includes both delivering goods to merchant and leaving purchased goods w/ merchant for later pick up or delivery
Buying in ordinary course means buying in good faith from a person who deals in goods of the kind w/o knowledge that sale is in violation of ownership right of 3P
Voidable title concept
if sale induced by fraud, seller can rescind sale and recover goods from fraudulent buyer
But the defrauded seller may not recover the goods from a good faith purchaser for value who bought from the fradulent buyer – rights of a defrauded seller are cut off both by good faith buyer and by a person who takes a security interest in goodsT
Thief generally cannot pass title
if thief steals goods from true owner and then sells them to buyer, thief is unable to pass title to buyer b/c title void.
EXCEPTION:
if buyer has made ACCESSIONS [valuable improvements] to the goods or the true owner is ESTOPPED from asserting title
Do intended or incidental beneficiaries have contractual rights?
Intended only
Determining whether intended beneficiary
- whether beneficiary is identified in K
- receives performance directly from promisor or
- has some relationship w/ promisee to indicate intent to benefit
Creditor vs. Donee Beneficiary
Creditor beneficiary is a person whom a debt is owed by the promisee
Donee beneficiary is a person whom the promisee intends to benefit gratuitously
Third party beneficiary vs. promisor
- Beneficiary may sue promisor on K
- Promisor may raise against third party beneficiary any defense that promisor has against promisee
- Whether promisor may use defenses the promisee would have against 3PB depends on whether promisor made absolute promise to pay or only a promise to pay what the promisee owes the beneficiary
- If promise is absolute, promisor cannot assert promisee’s defenses but if it is not, can assert promisee’s defenses
Third party beneficiary vs. promisee
Creditor beneficiary can sue the promisee on existing obligations b/w them. May also sue promisor but may obtain only one satisfaction. A donee beneficiary has no right to to promisee unless grounds for a detrimental reliance remedy exist
Promisee vs promisor
promisee may sue promisor both at law and equity for sp. performance if promisor is not performing for third person
When do rights of beneficiary vest?
Third party can enforce K only if their rights have vested. This occurs only when they:
1. manifest assent to promise in the manner requested by parties
2. bring suit to enforce the promise or
3. materially change position in a justifiable reliance on promise
Prior to vesting, promisee and promisor are free to modify or rescind the beneficiary’s rights under k
Assignment
1) 2 parties in K
2) 1 party assigns his right to 3P
3) assignee can enforce rights against party who owes duty
What rights may be assigned?
Generally all rights can be assigned. Except:
1. assignment that would substantially change obligor’s duty or risk [ex, personal service contracts where service is unique]
2. assignment of future rights to arise from future Ks
3. assignment prohibited by law
Effect of assignment
extinguishes privy b/w obligor and assignor but establishes b/w obligor and assignee
What is necessary for an effective assignment?
assignor must manifest intent to immediately and completely transfer rights; writing usually not required.
Right being assigned must be adequately described. It is not necessary to use the word assign any accepted words of transfer will suffice. A gratuitous assignment is effective; consideration not required.
2 Types of Assignments: 1) Assignment for value and 2) Gratuitous assignments
1) For value if done for consideration or taken as security or payment for preexisting debt – CANNOT BE revoked.
2) Gratuitous is revocable
Exceptions to revoking gratuitous assignment
Irrevocable if
1. Obligor has already performed
2. Token chose [tangible claim like stock certificate] is delivered
3. assignment of a simple chose [intaingble claim like K right]
4. assignee can show detrimental reliance on gratuitous assignment [estoppel]
Express K provision against assignment
- a clause prohibiting assignment of K will be construed as barring only delegation of assignor’s duties
- a clause prohibiting assignment off K rights doesn’t bar assignment but merely gives obligor right to sue for damages.
- however if K provides that attempts to assign will be VOID, the parties can bar assignment
- also if assignee has notice of nonalignment clause, assignment will be ineffective
Assignee, Obligor, Assignor Rights and Liabilities
- Assignee can sue obligor
- Assignee is entitled to performance under K
- Obligor cannot raise defenses assignor might have against assignee
- In every assignment for value, assignor warrants that:
1. they have no made prior assignment of same right
2. the right exists and not subject to undisclosed defenses
3. they won’t interfere w/ assigned right
Assignee may sue assignor for breach of any of these warranties, but assignor won’t be liable to assignee if the obligor is incapable of performing
Multiple assignments - which assignee gets to collect?
Gratuitous assignments are easily revoked — the LAST gratuitous assignee prevails over earlier ones b/c later gift revokes earlier one.
Assignment for consideration are more durable : if second assignee has paid value and take w.o notice of first assignment:
SUBSEQUENT ASSIGNEE gets
1. 1st judgment against obligor
2. 1st payment of claim from obligor
3. delivery of a token chose
4. the party to a novation releasing assigor
5. can proceed against 1st assignee on estoppel theory
Delegation
delegator promises to perform for obligee. Y delegates duty to delegate.
What duties may be delegated?
All duties EXCEPT:
1. duties involve personal judgment and skill
2. delegation would change obligee’s expectancy
3. special trust reposed in delegator by other party to K
4. contractual restriction on delegation
What is necessary for effective delegation?
Delegator must manifest present intent to make delegation. no special formalities. may be oral or written.
If K says no assignment, does that mean no delegation?
yes!
Delegation - Rights and liabilities of parties
obligee must accept performance from delegate of all duties that may be delegated.
The delegator remains liable on K; thus, obligee may sue the delegator for non-performance by the delegate.
Obligee may require delegate to perform ONLY if there has been an assumption [delegate exp or impliedly promises they will perform duty delegated and this promise is supported w/ consideration/equivalien] This promise creates K b/w delegator and delegate in which obligee is 3P beneficiary
Novation
Substitutes a new party for an original party to K; requires assent of all parties and completely releases original party.
Exceptions to Parole Evidence Rule (When Evidence is Offered for Certain Purposes)
- to aid in the interpretation of existing terms;
- to show that a writing is or is not an integration;
- to establish that an integration is complete or partial;
- to establish subsequent agreements or modifications;
- to show that the terms were the product of illegality, fraud, duress, or mistake; and
- to show a written agreement is contingent on a condition precedent.
