Contracts

Question 1

Applicable Law

Answer 1

Art. 2 of the UCC governs all Ks for the sale of goods. The Common Law governs all other Ks. Goods are all things that are movable.

Question 2

Contract Formation

Answer 2

A valid K is formed when there is (i) an offer, (ii) acceptance, and (iii) consideration.

Question 3

Offer

Answer 3

An offer is a manifestation of intent to enter into a K with definite and reasonably certain terms communicated to an identified offeree.

Question 4

Acceptance

Answer 4

• An acceptance is a manifestation of assent to the terms of the offer.
• For bilateral Ks, the start of performance manifests acceptance.

Question 5

Revocation of Offer

Answer 5

• Offers can be terminated before acceptance by (a) revocation by the offeror, (b) rejection or counter-offer by the offeree, or (c) lapse of time.
• An offeror may revoke his offer before acceptance through unambiguous words or conduct.

Question 6

Advertisements

Answer 6

• Ads are usually a mere invitation for offers, not an offer.
• However, an ad may be an offer if it includes sufficiently clear and definite terms.

Question 7

Timing of Acceptance/Revocation & the Mailbox Rule

Answer 7

• Acceptance of an offer is deemed effective once the acceptance is dispatched (mailbox rule).
• Revocation of an offer is deemed effective when received by the offerree.

Question 8

Mirror Image Rule & UCC Exception

Answer 8

• The Common Law mirror image rule holds that an acceptance must exactly mirror the offer; any variations constitute a counteroffer.
• Under Art. 2 of the UCC, the mirror image rule does not apply. However, additional or different terms are included only if (i) both parties are merchants; (ii) the term is not a material change; (iii) the offer does not expressly limit acceptance to the exact offer; and (iv) no objection was made within a reasonable time.

Question 9

Output and Requirement Contracts

Answer 9

• An output K requires a seller to sell all of the output of the particular goods to the buyer.
• A requirement K requires a buyer to purchase all of the particular goods that the buyer requires from the seller.

Question 10

Consideration

Answer 10

Consideration is something of legal value bargained for exchange. Ks are not enforceable without consideration by both parties.

Question 11

Consideration Substitutes (Promissory Estoppel)

Answer 11

• Ks that lack consideration may be enforced under the doctrine of promissory estoppel.
• It applies when:
  1. a party reasonably and foreseeably relied to his detriment on the other party’s promise;
  2. the promisor reasonably expected a change in position in reliance, and
  3. it’s necessary to avoid injustice.

Question 12

Defenses to Enforceability

Unconscionability

Answer 12

Unconscionability occurs when the K contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power. If a K/term is found unconscionable, a court may refuse to enforce the term or entire K.

Question 13

Defenses to Enforceability

Mutual & Unilateral Mistake

Answer 13

• A K is voidable if (i) both parties are mistaken; (ii) as to a basic assumption of fact; (iii) the mistake is material; and (iv) the person asserting the mistake did not bear the risk of the mistake.
• A unilateral mistake is generally not a valid defense to formation of a K. However, if one party knew or had reason to believe that the other party was mistaken, or the mistake makes the K unconscionable, the K is voidable by the mistaken party.

Question 14

Defenses to Enforceability

Statute of Frauds (SOF)

Answer 14

• (1) Land Ks, (2) Ks that cannot be fully performed within 1 year, and (3) sale of goods for $500 or more; are subject to the SOF.
• To be enforceable, they must be in a writing signed by the party to be charged. The writing must state the essential terms (the parties, quantity, price, time of performance etc.).
• Marriage Ks, and promise to pay debt of another, are also subject to the SOF.

Question 15

SOF Exceptions (Common Law)

Answer 15

• Under the Common Law, a K that violates the SOF may still be enforceable in the following situations:
  1. full performance;
  2. partial performance in land Ks - if two of the following is satisfied: (a) payment for land, (b) possession of land, and/or (c) valuable improvements to land; or
  3. estoppel - reasonable and foreseeable detrimental reliance (some jurisdictions).

Question 16

SOF Exceptions (UCC)

Answer 16

• Under Art. 2 of the UCC, the following exceptions exist:
  1. merchant’s confirmatory memorandum - a writing, in a sale of goods, signed only by the party enforcing it, and other party did not object within 10 days;
  2. goods accepted or paid for - but only applies for those goods, not the whole K; or
  3. custom made goods - seller made a substantial start and the goods are not suitable for sale in the ordinary course of seller’s business.

Question 17

Modification of Contracts

Modification of Contracts

Answer 17

• Under the Common Law, K modification must be supported by consideration. When modifying an agreement, past performance or performance of a pre-existing duty is not treated as adequate consideration (pre-existing duty rule).
• Under the UCC, there is no consideration requirement for K modifications made in good faith.

Question 18

Contract Content & Meaning

Parol Evidence Rule

Answer 18

• Evidence of a prior or contemporaneous negotiation or agreement is inadmissible to contradict or supplement a later writing. However, there are four exceptions:
  1. to correct a clerical error or typo,
  2. to establish a defense against formation,
  3. to interpret vague or ambiguous terms, and
  4. to supplement a partially integrated writing.
• For a partially integrated writing, evidence is allowed if it does not contradict the writing.
• A fully integrated writing discharges prior agreements. A merger clause is evidence that the writing is complete on its face.

Question 19

Performance, Breach, & Discharge

Condition Precedent

Answer 19

A condition precedent in a K makes performance contingent upon the completion of the condition. If a condition fails, no obligation of performance arises, and thus no breach has occurred.

Question 20

Performance, Breach, & Discharge

Frustration of Purpose

Answer 20

Frustration of purpose discharges performance under a K if the purpose the K no longer exists. It occurs when (i) a party’s principal purpose is frustrated, (ii) by an unforeseeable supervening event outside of the parties’ control, and (iii) both parties knew the purpose.

Question 21

Performance, Breach, & Discharge

Impossibility

Answer 21

Performance is discharged when it becomes physically or legally impossible to perform (cannot be performed by anyone).

Question 22

Performance, Breach, & Discharge

Impracticability

Answer 22

Performance is discharged when it becomes extremely and unreasonably difficult or expensive because of unanticipated events (mere increase in cost is not enough).

Question 23

Performance, Breach, & Discharge

Waiver

Answer 23

A waiver is a voluntary and intentional relinquishment of a K right by words or conduct. Performance is excused when it is waived.

Question 24

Performance, Breach, & Discharge

Material Breach vs. Minor Breach

Answer 24

• Under the Common Law, a material breach will excuse the non-breaching party’s performance. A minor breach, however, will not excuse performance (though the non-breaching party may bring a separate action for damages).
• A material breach occurs when a party does not render substantial performance.

Question 25

Performance, Breach, & Discharge

Time is of the Essence Clause

Answer 25

The failure to perform by a specified date is generally not a material breach unless the K contains an explicit “time of the essence” clause.

Question 26

Performance, Breach, & Discharge

Perfect Tender Rule

Answer 26

• Under Art. 2 of the UCC, a seller must deliver conforming goods. The smallest non-conformity is a breach and the buyer may reject all or a portion of the goods.
• Two exceptions to this rule exist:
  1. Right to Cure - A seller has a right to cure (a) if the time for performance has not yet expired; or (b) if the seller had reasonable grounds that substitute goods would be accepted.
  2. Installment Ks - A buyer can cancel installment Ks or reject an installment only if non-conformity substantially impairs the value of the entire K or that installment, and time to cure has passed.

Question 27

Performance, Breach, & Discharge

Acceptance of Goods

Answer 27

• Acceptance of goods occurs when the buyer, after a reasonable opportunity to inspect,
  1. signifies to the seller that the goods are conforming or that he will retain them despite the non-conformity,
  2. fails to reject the goods, or
  3. does any act inconsistent with seller’s ownership of the goods.
• The buyer is obligated to pay for the goods once accepted, but may still sue for breach.

Question 28

Performance, Breach, & Discharge

Anticipatory Repudiation

Answer 28

• Anticipatory repudiation occurs when a party unequivocally communicates that they are unable or unwilling to perform.
• When an anticipatory repudiation occurs, the non-breaching party may treat the K as repudiated and sue for damages (before time of performance is due).

Adequate Assurances
* If there are reasonable grounds for being insecure about performance, then a party may make a written request for assurance that the other party will perform in accordance with the K. If the other party does not give assurances after asked to do so, the requesting party may treat that as an anticipatory repudiation.

Question 29

Warranties in Sales of Goods Contracts

Implied Warranty of Merchantability

Answer 29

• The Implied Warranty of Merchantability is implied in all sales of goods Ks, and all goods sold by a merchant (a person dealing in goods of the kind) must be fit for their ordinary purpose.
• The warranty can be disclaimed with conspicuous language - i.e. goods sold “as is.”

Question 30

Third Party Issues

Assignment

Answer 30

• Rights and benefits under a K may be transferred to a third-party. An assignment is valid unless it materially changes the duty or risk of the obligor.
• Even if the K prohibits assignments, the assignment itself will still be valid and enforceable, but the assignor will be liable for damages.
• Any defense that could be used against the assignor may be used against the assignee.