Contracts

Question 1

What is a requirements contract?

Answer 1

A requirements contract is a contract under which a buyer agrees to buy all that is required of a product from the other party. There is consideration in these agreements because the promisor suffers a legal detriment.

Question 2

What is an acceleration clause?

Answer 2

An acceleration clause is a clause that allows a party to recover the entire repayment amount once the other party misses an installment payment.

Question 3

What are six exceptions to the parole evidence rule?

Answer 3

Evidence of prior or contemporaneous oral or written agreement is admissible to establish:

• whether writing is integrated and, if so, completely or partially
• meaning of ambiguous term
• defense to formation or enforcement (e.g., fraud, duress, mistake)
• ground for granting or denying remedy (e.g., rescission, reformation)
• subsequent contract modifications
• condition precedent to effectiveness

Question 4

Define intended beneficiary.

Answer 4

One to whom the promisor will pay directly to relieve the promisee from a debt or whom the promisee intends to give the benefit of the promised performance

Question 5

How long can a firm offer remain irrevocable?

Answer 5

No longer than three months

Question 6

Does an option contract terminate upon the offeror’s death or the offeror becoming mentally incapacitated?

Answer 6

No, because consideration was paid to keep the offer open for a specified period of time.

Question 7

What is the main difference between contract modification under the common law and contract modification under the UCC?

Answer 7

At common law, modifications require consideration; under the UCC, they require only good faith.

Question 8

Can a creditor assign only rights the creditor had in the contract at the time of the assignment?

Answer 8

Yes– the assignee takes all of the rights of the assignor as the contract stands at the time of the assignment.

Question 9

Define condition precedent.

Answer 9

A condition that precedes the obligation to perform

Question 10

When is the implied warranty of merchantability implied, and how is it disclaimed?

Answer 10

The implied warranty of merchantability is implied whenever the seller is a merchant.

The disclaimer can be oral, but must use the term “merchantability” and must be conspicuous if in writing. Language that indicates there is no implied warranty is sufficient (e.g., “as is” or “with all faults”).

Question 11

What types of contracts are governed by the common law?

Answer 11

Contracts for services or real estate

Question 12

What are special rules under the UCC for auctions?

Answer 12

The UCC, which governs contracts for the sale of goods, provides special rules for auction sales. One such rule limits the seller’s ability to bid at an auction sale. It allows a winning bidder to avoid the sale or pay the price of the last good-faith bid if the auctioneer (1) knowingly accepted a bid by the seller or on the seller’s behalf or (2) procured the seller’s bid to drive up the price of the goods. However, the winning bidder may not do so if:

• the seller bid at a forced sale* (e.g., a foreclosure sale initiated by a secured creditor) or
• the seller gave notice reserving the right to bid.

Question 13

What is an implied-in-fact contract?

Answer 13

An implied-in-fact contract is a contract that results when a person’s assent to an offer is inferred solely from the person’s conduct. To be contractually bound, the person must not only intend the conduct but also know or have reason to know that the conduct may cause the offeror to believe the offer was accepted.

Question 14

What are four forms of consideration?

Answer 14

Consideration can take the form of:

1. A return promise to do something
2. A return promise to refrain from doing something legally permitted
3. The actual performance of some act
4. Refraining from doing some act

Question 15

Where a guardianship over an individual’s property has been recognized by a court, is seller’s lack of actual knowledge of the guardianship or the individual’s inability to contract relevant?

Answer 15

No, it’s irrelevant– the contract will still be void.

Question 16

What is an output contract?

Answer 16

An output contract is a contract under which a seller agrees to sell all that she manufactures of a product to the buyer. There is consideration in these agreements because the promisor suffers a legal detriment.

Question 17

What is the difference between an assignment and a delegation?

Answer 17

An assignment is the transfer of rights under a contract, and a delegation is the transfer of duties and obligations under the contract.

Question 18

Define fraud in the inducement, and state its effect on a contract.

Answer 18

Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract.

Effect: Contract is VOIDABLE by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.

Question 19

What is the upper limit on recoverable liquidated damages?

Answer 19

15% of the purchase price– any higher, and they constitute a penalty.

Question 20

What is the basic concept of legal detriment?

Answer 20

There must be something of substance, either an act or a promise, which is given in exchange for the promise that is to be enforced.

Question 21

Define offer.

Answer 21

An offer is an objective manifestation of a willingness by the offeror to enter into an agreement that creates the power of acceptance in the offeree.

Question 22

Define condition subsequent.

Answer 22

A condition that excuses the duty to perform after a particular event occurs

Question 23

During auctions, does a bidder have the right to withdraw a bid?

Answer 23

Yes, until the completion of the sale (and it doesn’t matter if it’s a reserve or a non-reserve auctions.)

Question 24

Who lacks the capacity to make a contract?

Answer 24

(i) Minors (under the age of 18);

(ii) People who are mentally ill;

(iii) People who are intoxicated; and

(iv) People whose property is under guardianship by reason of adjudication.

Question 25

Define accord and satisfaction.

Answer 25

Under an accord agreement, a party to a contract agrees to accept a performance from the other party that differs from the performance that was promised in the existing contract, in satisfaction of the other party’s existing duty.

A “satisfaction” is the performance of the accord agreement; it will discharge both the original contract and the accord contract.

Question 26

What is the formula for expectation damages?

Answer 26

Expectation Damages = loss in value + other loss - cost avoided - loss avoided

Question 27

What’s a reasonable length of time for acceptance in a face-to-face or telephone negotiation?

Answer 27

Acceptance by the end of the conversation.

Question 28

What doctrine comes into play when an unexpected event arises that destroys one party’s purpose in entering into the contract, but performance of the contract is not rendered impossible?

Answer 28

The doctrine of frustration of purpose.

The frustrated party is entitled to rescind the contract without paying damages.

Note: The event that arises must not be the fault of the frustrated party, and its nonoccurrence must have been a basic assumption of the contract.

Question 29

Does the statute of frauds apply when payment for goods has been made and accepted?

Answer 29

No, even if it would otherwise apply

Question 30

[Battle of the Forms] Under the UCC, when both parties are merchants, an additional term in the acceptance is automatically included in the contract, unless: (Name the 3 exceptions)

Answer 30

(i) The term materially alters the original contract;

(ii) The offer expressly limits acceptance to the terms of the offer; or

(iii) The offeror has already objected to the additional terms, or objects within a reasonable time after notice of them was received.

Note: If any one of these three exceptions is met, the term will not become part of the contract, and the offeror’s original terms control.

Question 31

Under the common law, if the breach is material, what remedies can be sought by the nonbreaching party?

Answer 31

The nonbreaching party is able to withhold any promised performance and pursue remedies for breach, including damages.

Note: If the breach is minor, the nonbreaching party may be able to recover damages, but that party also still must perform under the contract.

Question 32

When are objective and subjective standards each used to determine whether a condition is satisfied?

Answer 32

The preferred method is an objective standard based upon whether a reasonable person would be satisfied. However, when the aesthetic taste of a party determines whether the other party’s performance is satisfactory, satisfaction is determined under a subjective standard.

Question 33

Under the Second Restatement, can an extrinsic term that would “naturally be omitted” from a writing be introduced?

Answer 33

Yes, so long as it does not contradict the writing.

Question 34

What are the three events that would cause the rights of an intended beneficiary to vest?

Answer 34

The rights of an intended beneficiary vest when the beneficiary:

i) Materially changes position in justifiable reliance on the rights created;

ii) Manifests assent to the contract at one party’s request; or

iii) Files a lawsuit to enforce the contract.

Question 35

State the common-law mirror-image rule.

Answer 35

The common-law mirror-image rule states that the acceptance must mirror the terms of the offer. Any change to the terms of the offer, or the addition of another term not found in the offer, acts as a rejection of the original offer and as a new counteroffer.

Question 36

What is the difference between a gift and valid consideration?

Answer 36

The test to distinguish a gift from valid consideration is whether the offeree could have reasonably believed that the intent of the offeror was to induce the action. If yes, there is consideration and the promise is enforceable.

Question 37

Does a debtor’s promise to pay part of a barred antecedent debt need consideration to be enforceable?

Answer 37

No, a debtor’s renewed promise to pay all or part of a preexisting debt is enforceable if the debtor renewed the promise despite the existence of a technical defense to recovery (like statute of limitations or bankruptcy) and the renewed promise was made in writing or partially performed.

Question 38

When may a nonbreaching party pursue specific performance as a remedy?

Answer 38

When damages are an inadequate remedy, the nonbreaching party can pursue specific performance.

Note: Legal remedies are often inadequate in contracts for land or other unique goods.

Question 39

Define the common-law four-corners rule.

Answer 39

Under the common law, a court was permitted to look only to the writing itself (within the “four corners” of the document) for evidence of intent (regarding whether there is total, partial, or no integration).

Question 40

When is the warranty of fitness for a particular purpose implied, and how is it disclaimed?

Answer 40

The warranty of fitness for a particular purpose is implied whenever the seller has reason to know that (i) the buyer has a particular use for the goods, and (ii) the buyer is relying upon the seller’s skill to select the goods.
A disclaimer must be in writing and be conspicuous.

Question 41

What is a material breach?

Answer 41

A material breach is found when the non-breaching party fails to receive the substantial benefit of its bargain.

Question 42

When is a revocation of an offer, sent by mail, effective?

Answer 42

Upon receipt. (Example: On day 1, A mails an offer to B. On day 2, A mails a revocation to B. If B receives the offer and accepts before receiving the revocation, a contract is formed.)

Question 43

Define the material benefit rule.

Answer 43

Under the material benefit rule, when a party performs an unrequested service for another party that constitutes a material benefit, the modern trend permits the performing party to enforce a promise of payment made by the other party after the service is rendered, even though, at common law, such a promise would be unenforceable due to lack of consideration.

Question 44

Define “economic waste” in the construction context.

Answer 44

Economic waste occurs when the cost to fix or complete the construction is clearly disproportional to any economic benefit or utility gained as a result.

Question 45

What is the difference between a void and voidable contract?

Answer 45

A void contract results in the entire transaction being regarded as a nullity, as if no contract existed between the parties; the contract is unenforceable.

A voidable contract operates as a valid contract unless and until one of the parties takes steps to avoid it.

Question 46

What types of contracts are governed by the UCC?

Answer 46

Any contract involving the sale of goods

Question 47

What’s the difference between duress and undue influence?

Answer 47

Duress arises when a party’s asset is induced by physical coercion or an improper threat that leaves no reasonable alternative but to assent or face irreparable harm. Undue influence arises when a party assents to a contract due to unfair or excessive persuasion by someone who dominates or holds a special relationship of trust and confidence with the assenting party.

Question 48

If a shipment contract authorizes the seller to ship the goods by carrier, when does the risk of loss shift from the seller to the buyer?

Answer 48

Once the goods are delivered to the carrier

Question 49

What are the three requirements for a promise to be binding under promissory estoppel?

Answer 49

(i) The promisor should reasonably expect it to induce action or forbearance on the part of the promisee or a third person;

(ii) The promise does induce such action or forbearance; and

(iii) Injustice can be avoided only by enforcement of the promise.

Question 50

If an offeree should know that the offeror has no convenient way of learning within a reasonable time that performance has begun, must the offeree notify the offeror (if accepting by performance)?

Answer 50

Yes

Question 51

If an order includes a right to cancel at any time before a certain date, is a contract created if the other party accepts?

Answer 51

No, such a promise is illusory.

Question 52

Does the perfect tender rule apply to installment contracts?

Answer 52

No, installment contracts follow the substantial-impairment rule– only allowing buyers to reject tender of nonconforming goods when the nonconformity substantially impairs the value of that shipment to the buyer and cannot be cured.

Question 53

What are the rights of the assignee?

Answer 53

An assignee takes all of the rights of the assignor as the contract stands at the time of the assignment, but she takes subject to any defenses that could be raised against the assignor.

Question 54

What happens if a minor partially ratifies a contract after they reach the age of majority?

Answer 54

Enforcement is limited only to the promise to partially perform.

Question 55

What is the difference between course of performance and course of dealing?

Answer 55

Course of performance – sequence of conduct relevant to understanding the current transaction between the parties if (1) the agreement involves repeated occasions for performance by a party and (2) the other party accepts performance without objection

Course of dealing – sequence of conduct concerning previous transactions between the parties that establishes a common basis of understanding for interpreting their conduct

Question 56

Under the common law, why was something given in the past not considered adequate consideration for a new contract?

Answer 56

Under the common law, past consideration is typically not adequate consideration because it could not have been bargained for, nor could it have been done in reliance upon a promise.

Note: there is a modern trend toward enforcing such promises under the material benefit rule.

Question 57

What are the two scenarios in which the warrant of merchantability is disclaimed for defects that an examination would have revealed?

Answer 57

1) If the buyer examined the goods as fully as desired before entering the contract

2) If the buyer refused to examine the goods before entering the contract

Question 58

What three conditions must be met for the defense of impracticability to be available?

Answer 58

(i) An unforeseeable event has occurred;

(ii) Nonoccurrence of the event was a basic assumption on which the contract was made; and

(iii) The party seeking discharge is not at fault.

Question 59

Define acceptance.

Answer 59

An acceptance is an objective manifestation by the offeree to be bound by the terms of the offer.

Question 60

Can one party to an illegal contract recover if they lacked an illegal purpose and substantially performed under the contract?

Answer 60

Yes, they may recover expectation damages for breach– even if they knew of the other party’s illegal purpose (e.g., selling rifle to turkey hunter who says they’re going to start hunting turkeys before the season starts). This is true unless the performing party took action to further the other party’s illegal purpose or the illegal purpose involves grave social harm (e.g., threat to human life).

Question 61

What is a gratuitous death escrow and how does it become valid?

Answer 61

A deed is delivered through a valid death escrow when (1) the deed is given to an escrow agent with instructions to transfer it to the grantee upon the grantor’s death and (2) the grantor relinquishes the right to take back the deed.

Question 62

How are damages measured in construction contracts?

Answer 62

In construction contracts, the general measure of damages for a contractor’s failure is the difference between the contract price and the cost of construction by another builder, plus any progress payments made to the breaching builder and compensation for delay in completion of the construction. When a breach results in a defective or unfinished construction, if the award of damages based on the cost to fix or complete the construction would result in economic waste, then a court may instead award damages equal to the diminution in the market price caused by the breach.

Question 63

What is the substantial impairment rule?

Answer 63

In installment contracts, the substantial impairment rule only allows buyers to reject tender of nonconforming goods when the nonconformity substantially impairs the value of that shipment to the buyer and cannot be cured.

Question 64

Define the parol evidence rule.

Answer 64

The parol evidence rule generally prevents a party to a written contract from presenting extrinsic evidence of a prior or contemporaneous agreement that contradicts the terms of the contract as written.

Question 65

What is an illusory promise?

Answer 65

An illusory promise is one that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. Such a promise is not legally binding (i.e., void).

Question 66

Under the UCC, what is required by the “perfect tender rule”?

Answer 66

The perfect tender rule requires perfect goods and perfect delivery. “Perfect” means in accordance with the contract provisions or in accordance with the UCC if the contract is silent on tender.

Question 67

Under the common law, what terms must be covered in order for a contract to be formed?

Answer 67

All essential terms (i.e., the parties, subject matter, price, and quantity)

Question 68

When is restitution recoverable for illegal contracts?

Answer 68

restitution damages may be recoverable if the claimant conferred a benefit on the other party and:

• was justifiably ignorant of the facts that made the contract illegal*
• was less culpable than the other party (i.e., was not in pari delicto) or
• withdrew before the contract’s illegal purpose was achieved and did not engage in serious misconduct (e.g., shockingly immoral, unethical, or unjust behavior).

Question 69

Under the UCC, what key term(s) must typically be specified for a contract to be formed?

Answer 69

Quantity

Note: The UCC “fills the gap” if other terms are missing.

Question 70

What duty is implied in all contracts?

Answer 70

The duty of good faith and fair dealing

Question 71

What are consequential damages?

Answer 71

Consequential damages arise out of special circumstances unique to the parties to the contract, rather than arising necessarily from the transaction itself.

Question 72

When a preexisting duty is at issue, what two options does a promisor have to create valid consideration?

Answer 72

The promisor can:

1. Give something in addition to what is already owed
2. Vary the preexisting duty in some way

Question 73

What requirements must be met to allow an adversely affected party to void a contract based on mutual mistake?

Answer 73

(i) Mistake of fact existing at the time the contract was formed;

(ii) The mistake relates to a basic assumption of the contract;

(iii) The mistake has a material impact on the transaction; and

(iv) The adversely affected party did not assume the risk of the mistake.

Question 74

Under the UCC, even if the terms of a written contract for the sale of goods appear to be unambiguous, what evidence can be presented to explain or supplement the contract?

Answer 74

Course of performance, course of dealing, and trade usage.

Note: If the express contract terms are inconsistent with the course of performance, or trade usage, priority is given to the express terms, followed by course of performance, course of dealing and trade usage.

Question 75

How is a bilateral offer accepted?

Answer 75

An offer requiring a promise to accept can be accepted either with a return promise or by starting performance.

Question 76

What is temporary impracticability?

Answer 76

Temporary impracticability merely suspends the party’s duty to perform until the circumstances giving rise to the impracticability cease to exist– with one exception. If the delay makes performance materially more burdensome, the party’s duty to perform is dismissed.

Question 77

When is the doctrine of anticipatory repudiation applicable, and in what manner must the repudiation be made?

Answer 77

The doctrine of anticipatory repudiation is applicable when a promisor repudiates a promise BEFORE the time for performance is due. The repudiation must be clear and unequivocal, may be by conduct or words, and, if a statement, must be made to the promisee or a third-party beneficiary or assignee of the promise.

Question 78

Define consideration.

Answer 78

Consideration is evidenced by a bargained-for exchange in legal position between the parties. Most courts conclude that consideration exists if there is a detriment to the promisee, irrespective of the benefit to the promisor.

Question 79

?

Answer 79

(i) The time for performance under the contract has not yet elapsed; or

(ii) The seller had reasonable grounds to believe that the buyer would accept despite the nonconformity.

Note: The seller must give notice of the intent to cure and make a new tender of conforming goods.

Question 80

How is a unilateral offer accepted?

Answer 80

Acceptance of an offer for a unilateral contract requires complete performance.

Note: Once performance has begun, the unilateral offer is irrevocable for a reasonable period of time to allow for complete performance unless there is a manifestation of a contrary intent.

Question 81

Define constructive condition of exchange.

Answer 81

When a party’s performance can be rendered at the same time as the other party’s performance, each party’s performance is conditioned on the other party’s performance; both parties’ performances are due simultaneously, unless the language or circumstances indicate otherwise.

Question 82

[UCC Firm Offer Rule] Under the UCC, what three requirements must be met for an offer to buy or sell goods to be an irrevocable firm offer?

Answer 82

(i) The offeror is a merchant;

(ii) There is an assurance that the offer is to remain open; and

(iii) The assurance is contained in a signed writing from the offeror.

Question 83

At what point can repudiation no longer be retracted?

Answer 83

Repudiation may be retracted until such time as the promisee (i) acts in reliance on the repudiation, (ii) signifies acceptance of the repudiation, or (iii) commences an action for breach of contract.

Question 84

Repudiation may be retracted until such time as the promisee (i) acts in reliance on the repudiation, (ii) signifies acceptance of the repudiation, or (iii) commences an action for breach of contract.

Answer 84

Once the goods are delivered to a particular place (specified in the contract)

Question 85

Does the parol evidence rule apply when asserting a condition precedent to effectiveness that failed to occur?

Answer 85

No, because the rule doesn’t apply when a party is attacking the validity of an argument.

Question 86

What is a buyer in the ordinary course?

Answer 86

A buyer in the ordinary course is someone who buys goods (1) in good faith, (2) without knowledge that the sale violates the owner’s rights to the goods, and (3) from a merchant in the business of selling goods of that kind.

Question 87

When a contract for the sale of assorted goods does not specify who will choose the assortment, who does the duty fall to under the UCC?

Answer 87

The UCC imposes a duty on the buyer to make that selection. If the buyer fails to specify the assortment of goods, then the seller can treat that failure as a breach—but only if the buyer’s failure to specify the assortment materially impacts the seller’s performance.

Question 88

If an assignment is not supported by consideration, what is it called and when can it be revoked?

Answer 88

A gratuitous assignment, which is generally revocable (and automatically revoked upon the death, incapacity, or bankruptcy of the assignor)

Question 89

Under the mailbox rule, when is acceptance effective?

Answer 89

An acceptance that is mailed properly (i.e., correct postage and address) within the allotted response time is effective when sent as opposed to on receipt, unless the offer provides otherwise.

Question 90

Define incidental beneficiary.

Answer 90

One who benefits from a contract even though there is no contractual intent to benefit that person

Note: An incidental beneficiary has no rights to enforce the contract.

Question 91

Define fraud in the factum, and state its effect on a contract.

Answer 91

Fraud in the factum (or fraud in the execution) occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction.

Effect: No contract is formed, and the apparent contract is VOID.

Question 92

What three factors does a court use to determine if restitutionary recovery is available in a quasi-contract situation?

Answer 92

A court may allow restitutionary recovery if:

1. The plaintiff has conferred a measurable benefit on the defendant;
2. The plaintiff acted without gratuitous intent; and
3. It would be unfair to let the defendant retain the benefit because either (i) the defendant had the opportunity to decline the benefit but knowingly accepted it, or (ii) the plaintiff had a reasonable excuse for not giving the defendant such opportunity.

Question 93

If a party has substantially complied or performed with a constructive condition, what can the party recover?

Answer 93

In general, the party can recover the contract price minus any amount that it will cost the other party to obtain the promised full performance.

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

Question 94

When is a plaintiff entitled to restitutionary recovery, and how is it measured?

Answer 94

When a defendant is unjustly enriched by the plaintiff, restitution generally allows the plaintiff to recover on the benefit conferred by the plaintiff upon the defendant. Generally, the benefit is measured by either (i) the reasonable value of the defendant obtaining that benefit from another source, or (ii) the increase in the defendant’s wealth from having received that benefit.

Question 95

What are the requirements of a writing for contracts that fall under the Statute of Frauds?

Answer 95

The writing must:

(i) Be signed by the party against whom enforcement is sought; and

(ii) Contain the essential elements of the deal.

Question 96

What factor makes substantial performance less likely to be found?

Answer 96

When a party intentionally furnishes services that are materially different from what he promised– such a breach is more likely to be treated as a material breach for which contract damages are recoverable.

Question 97

Name the types of contracts that fall within the Statute of Frauds.

Answer 97

Marriage - a contract made upon the consideration of marriage;

Suretyship - a contract to answer for the debt or duty of another;

One year - a contract that cannot be performed within one year from its making;

UCC - under the UCC, a contract for the sale of goods for a price of $500 or more; and

Real Property contract - a contract for the sale of an interest in real property.

(Acronym: Mr. SOUR)