Contracts Flashcards
Valid contract formation
1) mutual assent (offer + acceptance)
2) consideration
3) no defenses to formation
Unilateral contract
Offeror requests performance rather than a promise
once act is complete = acceptance
Offer
Must create a reasonable expectation in the offeree that offeror is willing to contract
Requirements for an offer
1) promise or commitment to enter into a K
- objective intent = RP standard
2) certain and definite essential terms
3) communication to offeree
Advertisements
NOT offers, but invitations for offers
Exceptions:
1) promise
2) certain/definite terms
3) offeree identified
Essential terms for an offer
Must be definite and certain, including:
1) offeree’s name
2) offer’s subject matter
3) price
Land sale offers must include:
1) price
2) adequate description of land (some particularity)
No offer if price is missing!
Sale of goods offers must include:
quantity being offered
Requirements contract
B promise to buy from a certain S all of the goods the B requires and S agrees to sell that amount to B
Cannot be a tender or demand for a quantity unreasonable disproportionate
Outputs contract
S promises to sell to B all the goods that S produces
Cannot be a tender or demand for a quantity unreasonable disproportionate
Termination of offer
Offer cannot be accepted after it has been terminated
- termination by act of either party OR operation of law
Termination of offer by offeree
1) lapse of time = offer terminated if not accepted within time specified or reasonable period of time (usually 1 month)
2) rejection = express or counteroffer
- counteroffer = offer made by offeree to offeror - same subject matter but differs in terms
- mere bargaining or inquiry ≠ counteroffer
3) conditional acceptance = rejection + new offer
- new terms only included if offeror expressly accepts them
Rejection of an option
Rejection or counteroffer does NOT constitute a termination –> offeree can still accept within option period UNLESS offeror detrimentally relied on rejection
Termination be offeror (revocation)
Offeror’s retraction of offer
- can revoke any time until acceptance
Indirect revocation
Offeree receives:
1) correction information
2) from a reliable source
3) of offeror’s acts indicating revocation
Direct revocation
offeror indicates to offeree directly that they have changed their mind
Revocation and rejection are effective
when received
Limitations on power to revoke
1) options = offeree gives consideration for offeror not to revoke for period of time
2) Merchant’s Firm Offer = merchant offers to buy or sell goods in a signed writing, giving assurances that it will be held open during time stated (or reasonable time)
3) detrimental reliance = foreseeable that offeree will rely to her detriment on the offer
4) beginning performance in response to unilateral K offer ≠ preparations to perform
Termination by operation of law
1) death or insanity of either party
2) destruction of proposed K’s subject matter
3) supervening illegality
To accept an offer…
Offeree must:
1) know of offer
2) accept in manner stated in offer
3) communicate acceptance
4) accept unequivocally
Offers to buy goods for current or prompt shipment
Construed as inviting acceptance by a promise to ship or current or prompt shipment of goods
Mirror image rule
CL = acceptance must consist of exact terms as offer
- otherwise = rejection and counteroffer
Acceptance of offer for unilateral K
1) completion of performance = once offeree beings performance, offer becomes irrevocable BUT not ACCEPTED until completion
2) notice = must notify within reasonable time after performance has been completed unless:
- offeror waived notice or
- completion would normally come to offeror’s attention
Acceptance by shipment of nonconforming goods
Acceptance creating a contract AND a breach, unless buyer is notified that the shipment of nonconforming goods is offered as an accommodation
- if buyer rejects = no acceptance by seller and no K –> no breach
Battle of the Forms
Inclusion of additional or different terms is an acceptance UNLESS acceptance is expressly conditioned on assent
Additional terms included if:
1) both parties are merchants
2) term is not material and
3) offeror doesn’t object within reasonable time
Different terms:
- some courts = treated as additional terms
- other courts = knock-out rule (conflicting terms if offer and acceptance are knocked out an UCC fills in any gaps left)
Merchant’s confirmatory memo
Merchant’s memo confirming an oral agreement that contains different or additional terms is subject to battle of the form provisions
Mailbox rule
Acceptance by mail is effective at the moment of dispatch UNLESS:
1) offer stipulates otherwise
2) option K is involved (only upon receipt)
3) rejection and then acceptance = which arrives first is effective
4) acceptance and then rejection = acceptance, unless rejection arrives first and offeror detrimentally relies
Consideration
1) bargained-for exchange and
2) legal value
- anything of value can be exchanged
- only needs to be valuable to the parties
- promises can be consideration
Past consideration
Promise given in exchange for something already done does NOT count for consideration
Preexisting legal duty
Performing an existing legal obligation is insufficient consideration
Exceptions to preexisting legal duty rule
1) new or different consideration is given
2) promise is to ratify a voidable obligation
3) preexisting duty owed to a third person
4) honest dispute as to duty
5) unforeseen circumstances
Modification for sale of goods Ks
A good faith agreement to modify does NOT require consideration
Modification for CL contracts
Must be supported by new consideration
Modern view = no consideration required if:
1) unanticipated circumstances
2) fair and equitable
Discharge of debts
partial payment of debt that is due and undisputed is NOT enforceable consideration
Promissory estoppel
Substitute for consideration
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
Ambiguous contract language
Neither party aware = no contract unless both parties intended same meaning
both parties aware = no contract unless both parties intended same meaning
one party aware = binding contract based on what ignorant party reasonably believes to be the meaning
Mutual mistake as to existing facts
Voidable by adversely affected party if:
1) mistake concerns basic assumption on which K is made
2) mistake has a material effect AND
3) party seeking avoidance did not assume the risk of mistake
Mutual mistake is NOT a defense if…
the party asserting mistake defense bore the risk that assumption was mistaken
Mutual mistake in value of K’s subject matter
Both parties assume risk that their assumption as to value is wrong
NOT a defense –> K enforced
Unilateral mistake
Mistake does not prevent K formation BUT if non-mistaken party knew or had reason to know of the mistake made by other party, contract is voidable by mistaken party
1) must be material
2) mistaken party must not have borne the risk of mistake
3) exception to rule = obvious mistake –> other party cannot take advantage
Fraudulent misrepresentation (fraud in the inducement)
One party induces another to enter into a K by using fraudulent misrepresentation
- voidable by innocent party if they justifiable relied on fraud
When there is misrepresentation by one party, the K is voidable by innocent party if:
1) they justifiably relied on misrepresentation AND
2) misrepresentation was material
Material misrepresentation
1) would induce a reasonable person to agree OR
2) maker knows that for some special reason it is likely to induce particular person to agree
Unconscionability
A court can modify or reuse to enforce K or a provision if:
1) unfair surprise
2) oppressive terms
Statute of Frauds
Written K required for:
- promises in consideration of marriage
- performance not capable of being performed within one year
- interests in land
- executor promises to personally pat estate debts
- goods price at $500 or more
- promises to pay another’s debt (surety)
SOF exceptions
1) contract modifications (if mod is not within SOF)
2) part performance of real estate K
3) full performance of service K
4) sale of goods if:
- specially manufactured or
- paid for or accepted
Contract modifications and SOF
Written K may be modified orally, but modification must be in writing if K as modified falls within SOF
Merchant’s confirmatory memo rule
Memo with only one signature satisfies SOF if:
1) both parties are merchants
2) they agree to K
3) one party sends writing containing quantity terms
4) no written objection by recipient within 10 days
Writing requirement for SOF (UCC and CL)
UCC:
1) quantity term
2) D’s signature (party to be charged with breach)
CL:
1) all material terms:
- named parties
- subject matter of K
2) D’s signature
Parole evidence rule
Excludes evidence of prior or contemporaneous agreements (oral or written) that contradict the final writing
- final writing = more reliable
- does not apply to oral contracts
Integrated writing
Writing intended as the final expression of the agreement
- complete integration = writing cannot be contradicted or supplemented (parol evidence rule applies)
Partial integration
Writing can not be contradicted, but CAN be supplemented with consistent additional terms
- all writings presumed partial integrations
Exceptions to parol evidence rule
1) partially integrated writing
2) defense against formation
3) explaining a vague term
4) correct a clerical error
Exceptions apply because they are not being used to contradict the writing
Validity issues outside scope of parol evidence rule
Extrinsic evidence allowed to prove that contract was never formed:
1) Formation defects
2) conditions precedent to effectiveness = all evidence of oral understanding
Effect of merger clause
Merger clause = recites that writing is complete agreement between parties
- large commercial contracts = integrated
- modern trend for most contracts = one factor in determining integration
Interpretation of vague terms
Parol evidence allowed to aid fact finder in reaching correct interpretation of terms
- plain meaning ≠ parol evidence
General rules of contract construction (intepretation)
1) course of performance = parties’ conduct under prior installments of current K
- good evidence to determine what a term means
2) course of dealing = parties’ conduct in prior Ks
- determine terms for K based on previous Ks
3) trade usage = industry norms parties are or should be aware of
UCC gap-fillers
Provisions to fill in missing terms in K:
1) price = reasonable at time for delivery
2) place of delivery = seller’s place of business
3) time for shipment or delivery = reasonable time
4) time for payment = at time and place B is to receive goods
5) assortment = B chooses
Express warranties
Seller describes the goods or promises facts about the goods such that B could have relied on it when they entered into K
- NOT puffing up the product
- NOT statements of value or opinion
Implied warranty of merchantability
Included in every K for sale by a merchant who deals in goods of the kind sold
- Merchantable = goods fit for ordinary, foreseeable purpose
- absolute liability = merchant’s knowledge of defect irrelevant
Implied warranty of fitness for a particular purpose
1) buyer comes in when special purpose, beyond ordinary purpose
2) seller knows of special purpose and B is relying on seller to pick out goods for that purpose and
3) seller picks out goods fit for B’s special purpose
Seller does NOT have to be merchant for this to apply
Disclaimers
sellers can disclaim implied warranties only, not express warranties
Limitations on damages for breach of warranty
Seller can limit liability for breach of any warranty as long as limitation is no unconscionable
- limitation for personal injury = unconscionable
Risk of loss
1) if agreement allocates risk, it controls
2) breaching party bears risk, even though breach was not related to reason goods were damaged or destroyed
Defective goods and risk of loss
If B has right to reject goods, risk of loss doesn’t pass to B until defects are cured or B accepts despite defects
Revocation of acceptance and risk of loss
If B rightfully revokes acceptance, risk of loss is treated as having rested on S from start
Noncarrier case and risk of loss
- If S is a merchant, risk passes to B only when they take physical possession of goods
- If S is not merchant, risk passes to B upon tender of delivery (made available to B)
Carrier case and risk of loss
Shipment K = S delivers goods to common carrier and arranges for delivery
- risk of loss passes to B upon delivery to CC
- Ks that don’t specify are presumed shipment Ks
Destination K = S must deliver goods to B’s location
- risk of loss passes to B when goods are tendered to B at destination
FOB
Free on board = risk of loss passes to B at noted location
- S bears risk and expense of getting goods to named location
FAS
Free alongside = used when goods are shipped by boat
- risk of loss passes to B once goods are delivered to the dock
Basic duty at common law
Substantially perform all that is called for in K
Performance duty under Article 2
Art 2 requires a perfect tender –> delivery and condition of goods must be exactly as promised in the K
- if not perfect, B has right to reject ALL the goods
Seller’s obligation of tender and delivery in non carrier cases
Tender of delivery = S must give B reasonable notice to enable B to take possession
Place of delivery = unless otherwise agreed, usually S’s place or business, or residence
Seller’s obligation of tender and delivery in carrier cases
Shipment Ks = unless otherwise agreed, S need only:
1) put goods into hands of reasonable carrier and make K for transportation to B
2) obtain and promptly tender and docs required for B to take possession and
3) notify B of shipment
Destination Ks = S must, at destination, put and hold conforming goods at B’s disposition
Installment Ks and B’s obligation to pay
S may demand payment for each installment if the price can be apportioned, unless contrary intent appears
Delivery and payment are concurrent conditions
Noncarrier = Sale is for cash and price is due concurrently with tender of delivery
Carrier = price is due only at time and place at which B receives goods
- shipment = due when goods are put in hands of carrier
- destination = due when goods reach named destination
Buyer’s right of inspection
B has a right to inspect the goods before they pay unless the K provides for payment COD
Payment terms for sale of goods
1) cash unless otherwise agreed
2) checks generally okay
3) S can refuse check, but this gives B extra, reasonable time to get cash to pay
Contract with a condition
If a K provides that a party does not have duty to perform unless some condition is filled, failure to fulfill condition justifies party’s nonperformance
Distinction between promise and condition
Promise = commitment to do or refrain from doing something
- unconditional = failure to perform is a breach
- promises create obligations
Condition = event that must occur or fail to occur before party has a duty to perform
- promise modifier
- no breach until condition has occurred to and duty to perform is triggered
- conditions do NOT create obligations
Promisor’s satisfaction as condition precedent
Mechanical fitness, utility or marketability = reasonable person standard
personal taste or judgment = personal taste standard (subjective)
Condition precedent
event that must occur before performance is due
Conditions concurrent
parties must perform at the same time
Condition subsequent
Events after performance that can cut off an existing duty to pay
Constructive conditions of performance
Implied condition that the duty of each party to render performance is conditioned on the other party performing
Duty of immediate performance with respect to a conditional promise doesn’t become absolute until conditions:
1) have been performed or
2) are legally excused
Excuse of condition by hindrance or failure to cooperate
Wrongful prevention of condition by party waiting to perform until condition met
Excuse of condition by waiver or estoppel
Estoppel waiver = Person protected by condition indicates to other party they are waiving the condition and party detrimentally relies of waiver
- waiver may be retracted before reliance occurs
Election waiver = if condition doesn’t occur, beneficiary must elect to:
1) terminate their liability or
2) continue under the K (waiving condition)
- cannot be withdrawn, even before reliance
Anticipatory repudiation
Early statement of non-performance
- provides excuse for other party to not perform, unless it is retracted BEFORE relied upon
- gives rise to immediate claim for damages for breach
Requirements for anticipatory repudiation
1) bilateral K with unperformed duties on both sides
2) unequivocal repudiation
Nonrepudiating parties options
1) immediately sue
2) suspend their own performance and wait to use until performance date
3) treat as offer to rescind and treat K as discharged
4) ignore and urge promisor to perform
Excuse of condition by prospective inability or unwillingness to perform
Party has reasonable grounds to believe other party will be unable or unwilling to perform when due
Party may demand adequate assurances that other party will perform
- if assurance not received = anticipatory repudiation
Discharge of duty to perform
1) performance
2) occurrence of conditions subsequent
3) illegality
4) rescission
5) partial discharge by modification of K
6) cancellation
7) release
8) substituted K
9) accord and satisfaction
10) novation
11) impossibility, impracticability or frustration
Mutual rescission
Mutual agreement to cancel the K
- both parties excused from obligations to perform
- must be unperformed duties on both sides
Unilateral rescission
To be granted, party requesting rescission must have adequate legal grounds
Discharge by modification of K
Modification replaces existing K terms with new terms immediately
- excuses original K obligations
Accord and satisfaction
Accord = agreement to accept different performance to satisfy existing duty
- merely suspends right to enforce K in accordance with the terms
- must be supported by consideration
Satisfaction = performance of the new obligation (accord agreement)
- discharges accord K and original K
- original obligation not discharged until satisfaction
Modification vs accord and satisfaction
Modification = debt excused immediately and new debt arises
Accord and satisfaction = debt not excused until new performance completed
- “if…then…”
Discharge by novation
New K substitutes a new party to receive benefits and assume duties belonging to an original party under the terms of the old K
1) previous valid K
2) agreement among all parties to new K
3) immediate extinguishment of K duties as between original parties
4) valid and enforceable new K
Discharge by impossibility/impracticability
K duties discharged if it becomes objectively impossible to perform them
- nonoccurence of event was basic assumption of the K
- neither party assumed the risk of event occurring
- death or incapacity of essential person
- supervening illegality
- destruction of K’s subject matter or means of performance
Discharge by impossibility and sale of goods (risk of loss)
- Discharge not available if risk of loss has already passed to Buyer
- goods destroyed without fault by either party and risk has not yet passed to B = K is discharged
- shortage of raw materials or inability to convert them into product because of war strike, embargo, unforeseen shutdown of supplier
- catastrophic local crop failure
- increase in cost ≠ sufficient for discharge
Discharge by frustration
Purpose of K has become valueless because of a supervening event no fault of party seeking discharge
1) supervening act causing frustration
2) act not foreseeable by either party
3) purpose of K has been destroyed
4) both parties agreed to purpose when making K
Breach of contract
Failure to perform absolute duty no excuses or defenses are available
Materiality of breach (CL)
Breach under CL must be:
1) material breach or
2) substantial performance has occurred
If breaching party has substantially performed…
nonbreaching party cannot avoid performance
- must instead perform, then pursue remedies for beach
- applies with minor breach
Effect of minor breach
Minor = obligee gains substantial benefit of their bargain despite defective performance
- aggrieved party not relieved of duty to perform
Material breach
- no performance/substantial performance
- no benefit of bargain to nonbreaching party
- K treated as ended
- counter-performance discharged and promisee has immediate right to remedies for breach
minor breach coupled with anticipatory repudiation treated as…
a material breach
To determine substantial performance, court looks to:
- benefit received by nonbreaching party
- part performance by breaching party
- hardship to breaching party
Timeliness of performance
Failure to perform within stated time is NOT material breach unless:
- time is of the essence
- courts look to all circumstances (not just the dates)
Perfect tender rule for sale of goods
If goods don’t conform, B may:
1) reject entire shipment
2) accept entire shipment or
3) reject in part, accept in part
Buyer’s right to reject is cut off by
acceptance of nonconforming goods:
- B indicates goods conform to K
- B indicates they’ll keep nonconforming goods
- B fails to reject within a reasonable time
- B fails to notify seller of rejection
- B acts inconsistent with S’s ownership of goods
Buyer can revoke acceptance if:
goods have a defect that substantially impairs their value to B and
- they accepted goods on reasonable belief that the defect would be cured OR
- they accepted goods because defects were hard to discover of S assured conformity of goods
Exceptions to perfect tender rule
1) seller has right to cure nonconforming goods within time for performance, provided they provide B with intent to cure
- seller has no right to cure after original K time, unless S reasonably believed goods would be conforming
2) installment Ks = installment can be rejected only if:
- nonconformity substantially impairs value of that installment and can’t be cured or
- nonconformity substantially impairs value of entire K
Nonmonetary remedies
Breach = expectation damages
Promissory estoppel = reliance damages
Restitution
Specific performance available in these kinds of Ks
1) real property
2) sale of goods if:
- goods are unique or
- buyer unable to cover (artwork, antiques, custom made goods)
Expectation damages
Put injured party in position they’d be in had K been performed
- compensation for expectations
- sufficient damages to buy substitute performance
Reliance damages
Damages P would have suffered based on reliance on K
- Available if expectation damages are uncertain
- award P cost of their performance
- put P in position he would have been in had K never been formed
Restitution damages
Measured by reasonable value of benefit conferred
Incidental damages
Costs incident to the breach
- always recoverable
- cost incurred in dealing with the breach
- part of lost expectation
- nothing to do with whether breach was foreseeable
Consequential damages
Recoverable IF foreseeable at time of formation
- indirect result of breach
- often lost profits of nonbreaching party
- breaching party must have known or had reason to know of special circumstances giving rise to damages
Punitive damages
unavailable in K cases
- no punishment for breaching K
- only seeking to make P whole
Liquidated damages
Remedy provided for as a provision in the K
Enforced if:
1) damages difficult to estimate at K formation
2) amount is reasonable
- cannot be a penalty
- no penalization for breach - just making parties whole
Buyer’s damages when seller breaches
1) cover damages = cover price – original K price
2) market damages = market price – original K price
- used where B doesn’t cover or doesn’t cover in good faith
3) loss in value = value in goods as promised – value of goods as delivered
- used where B keeps nonconforming goods
Seller’s damages if buyer breaches
1) resale damages = K price – resale price
- must resell goods in good faith
2) market damages = K price – market price
- used when S doesn’t resell in good faith or at all
3) full K price = if seller can’t resell goods
- often used with custom made goods
4) lost-volume seller = seller has unlimited supply of goods
- measure of damages = lost profits from sale
Breach of K for sale of land
K price – FMV of land = measure of damages for breach
Avoidable damages (duty to mitigate)
Damages that could have been avoided with reasonable effort are not recoverable
- limited to similar/comparable subject matter
- reduces recovery by amount that could have been avoided by mitigation
Entrustment
merchant who ordinarily deals in goods of kind sells entrusted goods to BFP
- owner has no rights against BFP
- BFP always wins
- must be bought from merchant dealer to apply
Intended third party beneficiary
Two parties K to benefit a third party, but third party is not part of K at all
1) identified in K
2) receives performance directly from promisor
3) has some relationship with promisee to indicate intent to benefit
Third party beneficiary rights
Intended = right to enforce K
Incidental = no rights
K benefitting a third party can be modified or rescinded until…
third party rights have vested = beneficiary learns of K and relies on it
K cannot be changed after beneficiary’s rights have vested unless:
1) beneficiary consents or
2) K provides otherwise
Assignment of K rights
1) two parties contract
2) one party (assignor) assigns rights to a third party (assignee)
3) assignee can enforce rights against party who owes the duty (obligor)
Most K rights can be assigned except:
1) assignment that would substantially change obligor’s duty or risk
2) assignment of future rights to arise from future Ks
3) assignment prohibited by law
For a valid assignment, must show:
language of present intent to transfer rights
Consideration for assignments
No consideration required = gifts are okay
IF consideration is given though, assignment cannot be revoked
Restrictions on assignments in K
1) prohibition = assignments not permitted
- assignee without knowledge can still collect
2) invalidation = assignments null and void (no force and effect)
- assignee can’t collect
Multiple assignments
1) gifts = last gratuitous assignment in time wins
2) assignments with consideration = first assignee for consideration wins over all subsequent assignees and previous gift assignees
- limited exception = a later assignee for consideration prevails if he doesn’t know of the earlier assignments and is the first to get a payment from or a judgment against the obligor
Delegation
Party to K delegates duty to third party
- transfer of DUTIES not rights
- obligates third party to do the work
- obligor can delegate without obligee’s consent
Most duties can be delegated except:
1) duties involve personal judgment and skill
2) delegation would change obligee’s expectancy
3) special trust was reposed to delegator by other party
4) contractual restriction on delegation
Delegation vs novation
Delegating party remains liable to obligee
- novation = party no longer liable and requires mutual agreement by both original parties
- delegation = consent of obligee not required
Delegations for consideration create…
intended third party beneficiary obligations
