Contracts

Question 1

Contract Formation (Common Law) - “TACO”

Answer 1

Under the common law, a contract is formed where there is:

1. An Offer,
2. An acceptance,
3. Consideration, AND
4. Definite terms

Question 2

Consideration

Answer 2

Under the common law, consideration is a bargained-for exchange, a benefit to the promisor (person who makes the promise), or a detriment to the promisee (party to whom the promise is made.

Question 3

Unilateral Contract

Answer 3

Under New York law, a unilateral contract is a promise for an act. Under New York law, an offer to form a unilateral contract can be revoked until performance is complete.

Under the common law (MBE), however, an offer to form a unilateral contract becomes irrevocable when performance begins.

Question 4

Bilateral Contract

Answer 4

Under New York law, a bilateral contract is a promise for a promise.

Question 5

Past or Executed Consideration

Answer 5

Under New York General Obligations Law, a promise in writing signed by the promisor or by his agent is a valid contractual obligation even if consideration is past or executed, if the consideration is expressed in writing and is proved to have been given or performed and would otherwise be a valid consideration.

Question 6

Modification or Discharge

Answer 6

Under New York General Obligations law, sec 5-1103, an agreement to change or modify, or to discharge in whole or in part, any contract, shall not be invalid because of the absence of consideration, provided that the agreement is in writing and signed by the party to be charged, or by his agent.

Question 7

UCC Merchant’s Firm Offer

Answer 7

Under the UCC, sec 2-205, an offer by a merchant to buy or sell goods in a signed writing, which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months. Any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Question 8

UCC Merchant’s Memorandum Rule

Answer 8

Under the UCC, sec. 2-201(2), when both parties are merchants, if within a reasonable time a writing in confirmation of the contract, and sufficient against the sender, is received by the party to be charged, and he has reason to know its contents, the statute of frauds will be satisfied if the party to be charged does not object in writing within 10 days.

Question 9

Traditional Statute of Frauds (MYLEGS)

Answer 9

Under the traditional statute of frauds, in order to be enforceable, the following contracts must be in writing and signed by the party to be charged with the breach:

1. Contracts in contemplation of Marriage,
2. Contracts that cannot be performed within one Year,
3. Land contracts,
4. Executor contracts if the executor is going to pay the debts of the estate out of his own pocket,
5. Goods of $500 or more, and
6. Surety contracts.

Question 10

Statute of Frauds - UCC

Answer 10

Under the UCC, sec 2-201(1) statute of frauds, in order to be enforceable, a contract for the sale of goods of $500 or more must be:

1. In writing and
2. Signed by the party to be charged with the breach.

Question 11

Exceptions to the UCC Statute of Frauds (JUMPS)

Answer 11

1. Judicial admission,
2. Waiver,
3. Merchants Memorandum Rule,
4. Part performance, OR
5. Specially manufactured goods on which a substantial beginning has been made.

Question 12

Parol Evidence Rule

Answer 12

Under the parol evidence rule, where there is an integrated contract, the court will not admit testimony about a prior oral or written agreement or contemporaneous oral agreement to contradict or vary the terms of the contract except:

1. A condition precedent to the contract,
2. Fraud,
3. Mutual Mistake,
4. Illegality,
5. No consideration or failure to pay money, OR
6. Explain ambiguous terms of the contract.

Question 13

Condition Precedent

Answer 13

Under the common law of contracts, a condition precedent is an event that must occur, unless excused, before a contractual duty arises.

Question 14

Intended Beneficiary

Answer 14

Under the Restatement of Contracts (2nd), an intended beneficiary is a third party with the right to enforce the contract. An incidental beneficiary is a beneficiary who is not an intended beneficiary.

Question 15

UCC 2-207

Answer 15

“Battle of the Forms”

Under the UCC §2-2-7, where both parties are merchants, additional or different terms become part of the contract unless:

1. The terms are objected to within a reasonable time,
2. Terms materially alter the contract, OR
3. The offer is expressly conditioned on the acceptance of these additional, exact terms.

Question 16

UCC Anticipatory Repudiation (“RATS”)

Answer 16

Under the UCC §2-610, when a party repudiates the contract with respect to a performance not yet due, the loss of which will substantially impair the value of the contract to the other, the aggrieved party may:

1. Resort to any remedy for breach, even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction; or
2. Await performance for a commercially reasonable Time by the repudiating party, and
3. In either case Suspend his own performance or proceed in accordance with the provisions of the UCC on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (sec 2-704)

Question 17

UCC Remedies for Breach, including Anticipatory Repudiation

Answer 17

Under the UCC, in the case of anticipatory repudiation, remedies for the non-breaching and/or non-repudiating party are:

1. Cancel the contract,
2. Buyer may cover,
3. Seller may resell the goods and sue for the difference between the contract price and resale price, plus incidental and consequential damages,
4. Seller may recover the goods,
5. Buyer may obtain specific performance, AND
6. Either party may sue on the contract for money damages.

Question 18

UCC Rights of the Buyer on Receipt of Non-Conforming Goods

Answer 18

Under the UCC, absent other conditions, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may:

1. Reject the entire shipment,
2. Accept the entire contract, OR
3. Accept any commercial unit or units and reject the rest.

Question 19

UCC Revocation of Acceptance

Answer 19

Under the UCC, sec. 2-608, the buyer may revoke acceptance of non-conforming goods when the non-conformity substantially impairs the value to the buyer, and:

1. The buyer reasonably believed that the seller would cure, and the seller has not,
2. The non-conformity was difficult to discover, OR
3. Seller’s assurances induced acceptance.

Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the non-conformity, and before any substantial change in the condition of the goods. Revocation is not effective until the buyer notifies the seller.

Question 20

UCC Seller’s Remedy of the Difference Between Contract Price and Resale Price

Answer 20

Under UCC 2-706, 708, or 709, where the buyer breaches, the seller may resell the goods in good faith in a commercially reasonable manner and recover from the buyer the difference between the contract price and the resale price, plus incidental or consequential damages, less expenses saved in consequence of buyer’s breach.

Question 21

UCC Seller’s Remedy of Lost Profits

Answer 21

Under UCC 2-708, where no other remedy will put the seller in as good a position as if buyer had performed, then the measure of damages is the profit that seller would have made from full performance by the buyer, plus incidental and consequential damages.

Question 22

UCC Buyer’s Remedy of Cover

Answer 22

Under UCC 2-712, where the seller is in breach, the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of goods in substitution for those due from the seller. Damages are the difference between the cover price and the contract price together with any incidental and consequences of damages, less any expenses saved in consequence of the seller’s breach.

Question 23

UCC Right to Adequate Assurance of Performance

Answer 23

Under UCC 2-609, when reasonable grounds for insecurity arise with respect to the performance of a contract, either party may make a written demand requesting adequate assurance of performance. If commercially reasonable, the demanding party may suspend performance until such assurance is received.

Question 24

UCC Seller’s Right to Cure

Answer 24

Under the UCC, if the goods or tender of delivery fail in any respect to conform to the contract, the buyer may reject the goods and sue seller for breach, unless:

1. Time for performance has not expired and seller can cure, OR
2. Seller has reasonable grounds to believe the goods would be acceptable to the buyer; if notified by buyer, seller can express intent to cure.

Question 25

UCC Installment Contract

Answer 25

Under UCC 2-612, the buyer may reject any non-conforming installment:

1. If the non-conformity substantially impairs the value of that installment and cannot be cured,
2. If the non-conformity of one or more installments substantially impairs the value of the whole contract, then there is a breach of the entire contract.

However, the buyer reinstates the contract if:

1. If the buyer accepts a non-conforming installment without notifying the seller of cancellation,
2. If the party accepts a nonconforming installment without seasonably notifying of cancellation,
3. If the party brings an action with respect only to past installments, or demands performance as to future installments.

Question 26

UCC Sale or Return Contract

Answer 26

Under a UCC Sale or Return Contract, the goods are delivered with the understanding that the buyer can resell them, retain them, or can elect to return the goods to the seller even though the goods are conforming.

Under a sale or return contract, risk of loss and title vest immediately in the buyer, even though the buyer has the right to rescind the K.

Question 27

UCC Sale on Approval Contract

Answer 27

Under a UCC Sale on Approval Contract, goods are delivered primarily for use, not for resale. Risk of loss and title do not pass to the buyer until the buyer accepts title to those goods either in writing or by the buyer failing to timely return the goods under the contract terms.

Question 28

UCC Shipment Contract

Answer 28

Under a UCC Shipment Contract, the seller’s risk of loss transfers to the buyer when the seller puts the goods into a carrier’s possession.

Question 29

UCC Destination Contract

Answer 29

Under a UCC Destination Contract, the seller’s risk of loss only transfers to the buyer when the goods are tendered to the buyer at a particular destination.

Question 30

UCC Modification of a Contract

Answer 30

Under UCC 2-209, an agreement modifying a contract needs no consideration to be binding.

Question 31

UCC Implied Warranty of Merchantability

Answer 31

Under UCC 2-314 and 104, in the absence of an explicit disclaimer, an implied warranty of merchantability accompanies the sale of goods by a merchant. That is, the buyer can expect the goods to be of a quality comparable to that generally acceptable in the trade.

Question 32

UCC Disclaimer of Implied Warranty of Merchantability

Answer 32

Under UCC 2-316, to disclaim an implied warranty of merchantability:

1. The disclaimer must clearly disclaim the warranty. The seller my use language such as “as is,” “with all faults,”
2. The writing must be conspicuous, AND
3. It must mention the word merchantability.

Question 33

Mutual Mistake

Answer 33

Under the common law of contract, a contract may be rescinded or reformed when there is a mutual mistake, which occurs when:

1. both parties are mistaken as to a basic assumption on which the contract is made, AND
2. the mistake is material to the contract.

Question 34

Unilateral Mistake

Answer 34

Under the common law of contracts, a unilateral mistake is a mistake made by one party that is unknown to the other party.

A unilateral mistake is generally not a valid defense to formation of a contract.

However, if one party knew or had reason to believe that the other party was mistaken, the contract is voidable by the mistaken party. When the mistake involves price/value, the equitable remedy of rescission or reformation will not be allowed because price/value is NOT considered material.

Question 35

Quasi Contract

Answer 35

Under the common law of contracts, a quasi-contract arises when there is an unenforceable agreement and one party is unjustly enriched at the expense of the other party.

Courts may construe this otherwise unenforceable contract as a quasi-contract to allow the other party to recover the reasonable value of a benefit conferred to the party who received the benefit to avoid this unjust enrichment.

Question 36

Release/Waiver of the Right to Bring a Legal Claim

Answer 36

A release or waiver is the voluntary relinquishment or surrender of some known right or privilege. In order to constitute a valid release or waiver of legal claims, the contract must clearly state so on its face.

A release or waiver is governed by principles of contract law. As such, the release/waiver is enforceable if the agreement constitutes a valid contract.

Under the New York CPLR, a release/waiver is an affirmative defense that can be raised in a pre-answer motion to dismiss or in the answer.

A valid release prevents the party that signed the agreement from enforcing the specific legal claims against others as outlined by the terms of the agreement.

Question 37

Pre-Existing Duty Rule

Answer 37

Under the common law, for a contract to be enforceable there must be consideration. When modifying an agreement, past performance or performance of a preexisting duty owed to a party is not treated as adequate consideration.

However, in New York a promise made in a writing signed by the party to be charged is enforceable without new consideration.

Another exception exists in a sale of goods contract under Article 2 of the UCC, which states that a modification is valid without new consideration if the modification is made in “good-faith”.

Question 38

Part Performance Exception to the Statute of Frauds for Real Property

Answer 38

The “Part Performance” exception requires 2 out of 3 of the following:

(1) Buyer is in possession of the property;
(2) Buyer made some payment (a full payment is not required);
(3) Buyer made some improvement to the property.

Note: a payment alone, even full payment, is not enough to satisfy the Part Performance exception.

Question 39

UCC Definition of Merchant

Answer 39

Under the UCC, a merchant is:

1. One who deals in goods of the kind for which the transaction is made,
2. and is not a casual or one-time seller.

Question 40

UCC Gap Fillers - Open Price Term

Answer 40

In a contract for the sale of goods (in which Article 2 of the UCC applies), if both parties are merchants (merchant = one who deals in goods of the kind), the only essential term to a contract is the quantity term. A valid contract exists even if there is no agreement on price, because a reasonable price term will be supplied under Article 2 of the UCC.

Question 41

Risk of Loss - Effect of Breach

Answer 41

If a party breaches a contract, the breaching party ALWAYS bears the risk of loss, even if the loss is unrelated to the breach. If there is no breach, the risk of loss depends on if it is a common carrier or non- common carrier case.

Question 42

UCC Perfect Tender Rule

Answer 42

Under Article 2 of the UCC, a seller must deliver conforming goods. The smallest non-conformity is a breach and the buyer may reject the goods. However, two exceptions to this rule exist under the UCC:

(1) if the seller has the right to cure, and
(2) in the Installment contract context.

Question 43

Material Breach (distinguished from minor breach)

Answer 43

When there are constructive conditions of exchange (not express) the rule of substantial performance applies to determine if the breach is material.

Generally, a material breach will excuse the non-breaching party’s performance. A minor breach, however, will not excuse performance, and the non-breaching party must still perform (though he may bring a separate action for damages resulting from the breach). If there is substantial performance, the breach is NOT material and the party is owed the contract price less any damages for the minor breach. A court will be hesitant, however, to grant such relief where the breach was willful.

Substantial performance may include small breaches that do not materially impair the value of the contract to the other party.

Question 44

Doctrine of Waste (in construction contracts)

Answer 44

Generally, where a construction contract is breached by the builder, the land owner’s measure of damages will be the cost to complete the original contract between the parties.

However, where there would be great hardship and inequity in forcing demolition and reconstruction, a court will apply the waste doctrine and the measure of damages becomes the difference between the value of what was bargained for in the contract and the value of what the land owner received.

Question 45

Calculation of Damages

Answer 45

Under the common law of contracts, courts seek to provide the non-breaching party with its Expectation Damages, which place the non-breaching party in as good a position as if the breaching party had performed its obligations under the contract.

The General Formula is the value of the Promised Performance, minus the value of what the Plaintiff received, plus any incidental and consequential damages, less any costs that were or could have been avoided or mitigated.

Question 46

Contract law prohibits recovery for CAPS

Answer 46

CONSEQUENTIAL damages, unless they were within the contemplation of both parties (foreseeable) when the contract was executed.

Damages that party could have AVOIDED

Damages for PAIN & suffering or emotional distress from breach of contract, even if such damages were foreseeable

SPECULATIVE damages (all damages must be proven with reasonable certainty)

Question 47

Expiration of an Offer - TIRED

Answer 47

An offer expires when it gets TIRED:

Reasonable TIME after an offer is made or after expiration date expressly stated in the offer

Mental INCAPACITY or death of offeror or offeree

REVOCATION of an offer communicated to an offeree before acceptance

EXPRESS or implied rejection communicated to offeror

DESTRUCTION of the subject matter of the offer or intervening illegality terminates an offer by operation of law

Question 48

Expiration of Options - DIE

Answer 48

DESTRUCTION of the subject matter

Intervening ILLEGALITY

EXPIRATION of a stated option time extinguishes the option

Question 49

In NY, a signed writing takes the place of consideration for POP

Answer 49

PRE-EXISTING duty

Contract OPTIONS

PAST consideration (which must be recited in the signed writing)

Question 50

Authority of an Agent

Answer 50

A principal is liable for contracts entered into by its agent if the agent was authorized to contract on behalf of the principal. Authority may be actual (express or implied) or apparent.

Question 51

Express Authority of an Agent

Answer 51

Express authority means that the principal has explicitly told the agent that he is entitled to act.

Question 52

Implied Authority of an Agent

Answer 52

Implied authority occurs when:

(1) the agent believes he is entitled to act because the action is necessary to carry out his expressly authorized duties;
(2) the agent has acted similarly in prior dealings between the principal and agent; or
(3) it is customary for agents in that position to act in that way.

Question 53

Apparent Authority of an Agent

Answer 53

Apparent authority occurs when the principal cloaks the agent with the appearance of authority AND a third-party reasonably relies on the agent’s appearance of authority when dealing with the agent.

Question 54

Liability of Agent to Third Parties for Contracts Entered into for a Principal

Answer 54

As a general rule, an agent is not liable to third parties on the contracts entered into on behalf of the principal.

However, if the agent does not disclose the existence of a principal to the third-party OR only partially discloses the principal (the agent tells the third party that a principal exists, but not disclose the principal’s identity), the authorized agent may be liable and the third-party would be entitled to sue either the agent or the principal on the contract. In addition, if the agent did not have authority to enter into the contract, only the agent will be liable to the third party.

Question 55

Liability of Principal to Third Parties for Contracts Entered into by Agent

Answer 55

A principal is liable for ALL contracts entered into by its agent if that agent was authorized to enter into contracts on behalf of the principal.

However, a principal is liable only when the agent is acting within the scope of his authority.