Contracts

Question 1

Applicable Law

Answer 1

The UCC governs all contracts involving the sale of goods, and common-law rules govern contracts involving services. When a contract includes both goods and services, whichever one predominates will determine the governing law. In addition, special rules apply to merchants under the UCC. A merchant includes not only a person who regularly deals in the type of goods involved in the transaction, but also any business person when the transaction is of a commercial nature.

Question 2

Formation

Answer 2

A binding contract is created through the process of mutual assent (i.e., offer and acceptance) and consideration, and when no valid defenses to contract exist. Mutual assent occurs upon acceptance of a valid offer to contract.

Question 3

Formation - Offer

Answer 3

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. In other words, it is a communication that gives power to the recipient to conclude a contract by acceptance.

Question 4

Formation - Contract Terms

Answer 4

For a contract to exist, the terms of the contract must be certain and definite, or the contract fails for indefiniteness. Under common law, all essential terms (i.e., the parties, subject matter, price, and quantity) must be covered in the agreement.

Question 5

Formation - Acceptance by Silence

Answer 5

An acceptance is an objective manifestation by the offeree to be bound by the terms of the offer. Generally, silence does not operate as an acceptance of an offer, even if the offer states that silence qualifies as acceptance, unless: (i) the offeree has reason to believe that the offer could be accepted by silence, was silent, and intended to accept the offer by silence; or (ii) because of previous dealings or pattern of behavior, it is reasonable to believe that the offeree must notify the offeror if the offeree intends not to accept.

Question 6

Formation - Consideration

Answer 6

In addition to offer and acceptance, most courts require valuable consideration for an agreement to be enforceable. If either party has not given consideration, the agreement is not enforceable upon formation. Valuable consideration is evidenced by a bargained-for exchange in the legal position between the parties.

Question 7

Applicable Law - Merchants

Answer 7

In addition, under the UCC, there are sometimes special rules governing agreements between merchants. A merchant includes not only a person who regularly deals in the type of goods involved in the transaction, but also any business person when the transaction is of a commercial nature.

Question 8

Formation - UCC Contract

Answer 8

Under the UCC, a contract is formed if both parties intend to contract and there is a reasonably certain basis for giving a remedy. As long as the parties intend to create a contract, the UCC “fills the gap” when a contract is silent as to a term, such as the time or place for delivery, or even the price for the goods. In addition to identifying the parties and subject matter, an agreement to sell goods generally must specify the quantity to be sold, but requirements or output contracts satisfy UCC contract formation requirements even without naming specific quantities. The UCC also implies good faith as a contract term.

Question 9

Formation - Acceptance

Answer 9

An acceptance is an objective manifestation by the offeree to be bound by the terms of the offer. An offeree must know of the offer upon acceptance for it to be valid. In addition, the offeree must communicate the acceptance to the offeror.

Question 10

Formation - Revocation

Answer 10

In general, an offer can be revoked by the offeror at any time prior to acceptance, even if the offer states that it will remain open for a specific amount of time. A revocation may be made in any reasonable manner and by any reasonable means, and is not effective until communicated.

Question 11

Formation - Mailbox Rule

Answer 11

An acceptance that is mailed within the allotted response time is effective upon posting (not upon receipt), unless the offer provides otherwise. A revocation, on the other hand, is effective only upon receipt.

Question 12

Formation - UCC Firm Offer Rule

Answer 12

Under the UCC, an offer to buy or sell goods is irrevocable if: (i) the offeror is a merchant; (ii) there are assurances that the offer is to remain open; and (iii) the assurance is contained in an authenticated writing from the offeror. No consideration by the offeree is needed to keep the offer open under the UCC firm offer rule. If the time period during which the option is to be held open is not stated, a reasonable term is implied. However, irrevocability cannot exceed 90 days, regardless of whether a time period is stated or implied, unless the offeree gives consideration to validate it beyond the 90-day period.

Question 13

Formation - Option Contract & Promissory Estoppel

Answer 13

An option is an independent promise to keep an offer open for a specified period of time. Such promise limits the offeror’s power to revoke the offer until after the period has expired, while also preserving the offeree’s power to accept. When the offeree detrimentally relies on the offeror’s promise prior to acceptance, the doctrine of promissory estoppel may make the offer irrevocable. It must have been reasonably foreseeable that such detrimental reliance would occur in order to imply the existence of an option contract.

Question 14

Defenses - Statute of Frauds

Answer 14

The Statute of Frauds requires that any agreement for the sale of goods exceeding $500 must be in writing to be enforceable. Additionally, the memorandum must be signed by the party to be charged (i.e., the person against whom enforcement is sought), and contain the essential elements of the deal.

Question 15

UCC - Anticipatory Repudiation

Answer 15

According to the UCC, anticipatory repudiation occurs when there has been an unequivocal refusal of the buyer or seller to perform, or when a party creating reasonable grounds for insecurity fails to provide adequate assurances within 30 days of demand for assurances. Repudiation allows the nonrepudiating party to resort to any remedy given by the contract or code.

Question 16

Remedies - Expectation Damages

Answer 16

Expectation damages are intended to put the injured party in the same position as if the contract had been performed. They are those damages that arise naturally and obviously from the breach and are normally measured by the market value of the promised performance less the consideration promised by the non-breaching party. Expectation damages must be foreseeable and the non-breaching party must be able to prove them with reasonable certainty.

Question 17

Quasi-Contract

Answer 17

When a plaintiff confers a benefit on a defendant and the plaintiff has a reasonable expectation of compensation, allowing the defendant to retain the benefit without compensating the plaintiff would be unjust. When this happens, the court can permit the plaintiff to recover the value of the benefit in order to prevent the unjust enrichment. A court may allow restitutionary recovery if: i) the plaintiff has conferred a measurable benefit on the defendant; ii) the plaintiff acted without gratuitous intent; and iii) it would be unfair to let the defendant retain the benefit because either (a) the defendant had an opportunity to decline the benefit but knowingly accepted it, or (b) the plaintiff had a reasonable excuse for not giving the defendant such opportunity.

Question 18

Accord and Satisfaction

Answer 18

Under an accord agreement, one party to the contract agrees to accept different performance from the other party than what was promised in the existing contract. Generally, consideration is required for an accord to be valid. By compromising, each party surrenders its respective claim as to how much is owed.

Question 19

UCC - Breach

Answer 19

Under the UCC, the seller generally must strictly perform all obligations under the contract or be in breach. The doctrine of material breach applies only in the context of installment contracts or when the parties so provide in their contract.

Question 20

Breach

Answer 20

A breach of contract occurs when a party to the contract does not perform after performance comes due. Therefore, if performance has not come due, then there cannot be a breach. Likewise, if the party substantially performs his obligations under the contract, then there is no breach. Performance only comes due after the occurrence of all conditions precedent to performance.

Question 21

Condition Precedent

Answer 21

Performance by one or both the parties may be made expressly conditional in the contract, and the conditions may precede the obligation to perform. This is known as a condition precedent.

Question 22

Parol Evidence Rule

Answer 22

Before signing a written agreement, parties typically negotiate their contract through a series of conversations, phone calls, letters, faxes, e-mails, etc. When the written contract is finally signed, it may or may not include all of the terms of these negotiations, or it may change the terms in some way. The parol evidence rule generally prevents a party to a written contract from presenting prior extrinsic evidence that contradicts the terms of the contract as written.

Question 23

Parol Evidence Rule - Integration

Answer 23

The first step is to determine whether the parties’ writing is integrated, meaning that the parties intended it to be their final agreement. The parol evidence rule only applies to integrated documents. This is accomplished by looking at the intent of the parties. An integration, or merger, clause in a contract indicates that the contract is a final integration of the agreement between the parties. This clause causes the parol evidence rule to apply. This rule states that no prior or contemporaneous extrinsic evidence is admissible that contradict the final integration between the parties. In the case at hand, there is a clause in the contract which states that the contract is a complete and final agreement between the parties, which effectively means that parol evidence will not be allowed in unless the parol evidence rule is inapplicable.

Question 24

Excused Performance

Answer 24

The promisor may not be liable for nonperformance if some supervening event or change in circumstances arises after the formation of the contract that discharges the promisor’s duty to perform. Failure of a condition precedent, discussed above, will also excuse performance.

Question 25

Excused Performance - Impracticability

Answer 25

A party’s duty to perform can be dismissed by impracticability. The defense of impracticability is available if: (i) performance becomes illegal after the contract is made; (ii) the specific subject matter of the contract (e.g., the goods) is destroyed; (iii) in a personal services contract, the performing party to the contract dies or becomes incapacitated; or (iv) performance becomes impracticable. For the defense of impracticability to be available, the following conditions must also be met: (i) An unforeseeable event has occurred; (ii) Non-occurrence of the event was a basic assumption on which the contract was made; and (iii) The party seeking discharge is not at fault. Traditionally, courts referred to this defense as “impossibility.” Under the modern view, adopted by the Restatement, “impracticability” better expresses the extent of the increased burden that is required.

Question 26

Excused Performance - Frustration of Purpose

Answer 26

The doctrine of frustration of purpose applies when unexpected events arise that destroy one party’s purpose in entering into the contract, even if performance of the contract is not rendered impossible. The frustrated party is entitled to rescind the contract without paying damages. 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. If this is the case, the party’s duty to render performance is discharged, unless the language of the agreement or the circumstances otherwise indicate. The occurrence need not be completely unforeseeable to the parties. It must, however, be unexpected and not a realistic prospect. For the doctrine of frustration of purpose to be applicable, the frustration must be so severe that it is not within the assumed risks inherent under the contract.

Question 27

Remedies

Answer 27

Remedies are meant to compensate the non-breaching party for actual economic losses. A plaintiff in a breach of contract claim can pursue expectation damages, incidental damages, and consequential damages, minus any mitigation available to the plaintiff.

Question 28

Remedies - Consequential Damages

Answer 28

Consequential damages are reasonably foreseeable losses to a non-breaching party that go beyond expectation damages, such as loss of profits. Damages are recoverable if they were the natural and probable consequences of breach, or if they were in the contemplation of the parties at the time the contract was made, or were otherwise foreseeable.

Question 29

Remedies - Incidental Damages

Answer 29

Incidental damages may be awarded to the non-breaching party as compensation for commercially reasonable expenses incurred as a result of the other party’s breach.

Question 30

Mitigation of Damages

Answer 30

A party to a contract must avoid or mitigate damages to the extent possible by taking such steps as to not involve undue risk, expense, or inconvenience. The non-breaching party is held to a standard of reasonable conduct in preventing loss.

Question 31

Formation - Offer Advertisements

Answer 31

Advertisements are generally considered invitations to receive offers from the public, unless associated with a stated reward. An advertisement that is sufficiently specific and limiting as to who may accept may also qualify as an offer.

Question 32

Formation - Counteroffers and the Mirror-Image rule

Answer 32

Acceptance must mirror the terms of the offer. Any modification of 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. Mere suggestions or inquiries, including requests for clarification or statements of intent, made in a response by the offeree do not constitute a counteroffer.

Question 33

Modification

Answer 33

At common law, modification of an existing contract must be supported by consideration. Agreements to modify a contract may still be enforced if there are new obligations on both sides.