Contracts Flashcards
Three Essential Questions
- Has an enforceable contract been formed?
- Has the contract been performed (or excused)?
- What are the remedies for breach?
What is a contract?
A legally enforceable agreement.
An agreement plus a special legal basis for enforcing the promise (e.g., bargained-for consideration)
Gateway Issue
What universe are you in?
Article 2 of the UCC applies to contracts for goods. Common law governs all other contracts, including for goods or real estate.
Mixed Contracts
A mixed contract cannot be governed by both the UCC and common law. The predominant purpose of the contract determines which law to follow.
If possible, the agreement may be divided into two separate contracts.
Has an enforceable contract been formed?
“All Contracts Don’t Stink”
- Agreement (Offer and Acceptance)
- Consideration (and other theories)
- Defenses to Formation
- Statute of Frauds
Offer
An offer is a manifestation of a willingness to enter into an agreement by the offeror that creates a power of acceptance in the offeree.
Objective test: whether an offeror displays a objectively serious intent to be bound
Term Specificity
Common law: All essential terms must be covered in the agreement (parties, subject, price, and quantity)
UCC: The law is more willing to fill the gaps and find a contract, even if the agreement leaves out some key terms (parties, subject, quantity, not price)
Requirements and Output Contracts
Either an agreement to supply all that is required or to buy all that is made.
Both are specific enough under the UCC even though they don’t state and exact quantity term.
Invitations to Deal
Preliminary communications that still reserve a final round of approval with the speaker are not offers.
Advertisements are usually understood as invitations to deal unless they are reward advertisements or they are very specific ad leave nothing up to negotiation.
Terminating an Offer
- Express Revocation: Offeror expressly revokes
- Constructive Revocation: Offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract
- Rejection by offeree
- Counter-offer by offeree
- Offeror dies
- Reasonable amount of time passes
Irrevocable Offers
- Option
- Firm Offer
- Offeree has started unilateral performance
- Detrimental Reliance
Option Contract
An agreement to keep an offer open for a set amount of time in exchange for consideration.
Firm offer
A merchant (someone who regularly deals in the type of goods at issue) provides an explicit, written promise not to revoke, signed by the merchant.
Lasts as long as stated or for a reasonable time period not to exceed 90 days.
Offeree Has Started Performance
A unilateral offer to contract cannot be revoked by the offeror if the offeree has started performance.
The law gives the promissee the right to finish, but the offeree need not complete the performance and can stop at any time.
What is a unilateral contract?
A contract that arises from a promise that requests acceptance by an action of the promisee, instead of a return promise of the promisee that creates a bilateral contract.
Detrimental Reliance
An offer cannot be revoked if the offeree reasonably and detrimentally relies on the offer in a forseeable manner.
Acceptance
An acceptance is a manifestation of a willingness to enter into the agreement by the offeree.
Acceptance is governed by the objective test.
What if the seller tries to accept an offer by shipping the wrong goods?
The UCC treats this as acceptance plus breach.
Specific Rules about Acceptance
- The offer must be specifically directed to the person trying to accept it
- One must know about an offer to accept it
- Acceptance must generally be communicated to the other party in order for it to become effective.
Mailbox Rule
An acceptance sent by mail is valid when the letter is sent.
Does not apply:
- if the offeree sends something else first (rejection, counteroffer)
- to other types of communication
- to option contracts
- it is unclear whether it applies to other media
Acceptance by Silence
There are some exceptions to the requirement that you must comminicate an accptance to the offeror:
- Unilateral reward offers or contests
- Unilateral offers in which the parties are geographically close such that the offeror will see that performance has occurred
- A past history of silence serving as acceptance such tat the offeree should reasonably notify the offeror if she does not accept
- The offeror says that acceptance must come via silence, and the offeree intends to accept the offer by silence
Implied-in-Fact Contracts
Communication by gestures or actions to communicate acceptance without writing or speaking.
Mirror Image Rule
At common law, the terms in the acceptance must match the terms of the offer exactly or it is not an acceptance, but a counteroffer.
UCC § 2-207(1)
A definite and seasonable expression of acceptance which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms.
cf. Mirror Image Rule
UCC § 2-207(2)
The new term in the purported acceptance may control, but only if all the following are true:
- Both parties are merchants;
- The new term does not materially alter the deal;
- The initial offer did not expressly limit acceptance to its terms; and
- The offeror does not object within a reasonable time to the new term.
Consideration
Consideration in the law means a deal in which the parties exchange promises involving a legal detriment or benefit.
Adequacy of Consideration
A pretense of consideration is insufficient; there must be some adequacy of consideration.
Illusory promise
A promisor must clearly commit to the deal or there is no consideration.
Satisfaction contracts are NOT illusory.
Past Consideration
Past consideration is not consideration
Promising Not To Sue
Will act as consideration as long as there is an honest belief in the validity of the claim and a reasonable basis for that belief
Preexisting Duty Rule
Common law has historically followed the preexisting rule, which means that a promise to do something that you are already legally obligated to do (by prior contract or otherwise) is not consideration.
Exceptions: change in performance, third party promising to pay, unforseen difficulties that would excuse performance
Promising Partial Payment for Release from a Debt Obligation
A modification is not binding if the debt is currently due and undisputed?
Modification Under the UCC
The UCC universe does not follow the preexisting duty rule. Modifications can be made without new consideration so long as they are in good faith.
Consideration Substitutes
- Promissory Estoppel
- Quasi-Conract
- Moral Obligation Plus Subsequent Promise
- The Seal
Promissory Estoppel
- A promise is made that would be reasonably expected to induce reliance;
- The promisee does indeed take detrimental action in reliance on the promise; and
- Injustice can be avoided only by enforcement of the promise
Quasi-Contract
- The plaintiff confers a measurable benefit on the defendant;
- The plaintiff reasonably expected to get paid; and
- It would be unfair to let the defendant keep the benefit without paying
aka “contract implied-in-law”
Moral Obligation Plus Subsequent Promise
(the “Half Theory”)
A few jurisdictions have some case law suggesting that a moral obligation plus a subsequent promise can be binding.
Normally, this would be past consideration and thus nonbinding.
The Seal
In most jurisdictions a seal on a document does not act as a consideration substitute.
Defenses to Contract Formation
- Misunderstanding
- Incapacity
- Mistake
- Fraud/Misrepresentation/Nondisclosure
- Duress
- Illegality
- Unconscionability
Misunderstanding
- The parties use a material term that is open to two or more reasonable interpretations;
- Each side attaches a different meaning to the term; and
- Neither party knows, or should know, of the confusion
Incapacity
- Minors
- The mentally ill: either cannot understand the nature and consequences of their actions or cannot act in a reasonable manner in relation to the transaction (and the other side knows this)
- Very Intoxicated Persons (if the other side knows)
What happens if you make a contract with a person who lacks capacity?
The contract is voidable by the incapacitated party (they can disaffirm)
For necessities, the party without capacity must still pay fair value (something you need to live, like food, clothing or shelter)
Incapacity Ratification
A party without capacity can ratify the deal by keeping the benefits of the contract after capacity is obtained.
Mutual Mistake
The adversely affected party may rescind the contract if:
- there is a mistake of fact existing at the time that the deal is made;
- the mistake relates to a basic assumption of the contract and has a material impact on the deal; and
- The impacted party did not assume the risk of the mistake
Unilateral Mistake
The adversely affected party may rescind of she can prove all of the elements of mutual mistake; plus
- the mistake would make the contract unconscionable; or
- the other side knew of, had reason to know of, or caused the mistake
Misrepresentation
A misrepresentation is a statement at the time of contracting that is not true. It can be intentional (fraudulent) or accidental.
To assert this defense, the party must show:
- A misrepresentation of a present fact (not opinion)
- That is material or fraudulent (intentional); and
- That is made under circumstances in which it is justifiable to rely on the representation
Fraud in the Execution
Fraud in the execution is when you trick someone into signing something that she doesn’t even know is a contract.
Nondisclosure
Normally one party does not need to tell the other party about all material facts related to the deal, but they may be obligated to disclose if there is a special (fiduciary) relationship or active concealment.
Duress
Duress is an improper threat that deprives a party from making a meaningful choice to contract.
Economic duress arises when one party makes threats to induce another party to contract or modify a contract.
Undue influence arises when a party puts very intense sales pressure on another party that is weak minded or susceptible to high-pressure sales tactics.
Illegality
Illegal contracts are unenforceable, but a contract entered in furtherance of an illegal act that is not itself illegal will still be enforced.
Contracts against public policy will not be enforced
Unconscionability
It shocks the conscience.
Procedural: A defect in the bargaining process itself, such as a hidden term or an absence of meaningful choice
Substantive: A rip-ff in some term of the contract
Statute of Frauds
The Statute of Frauds is a barrier that some contracts must meet in order to become legally binding.
The basic goal of the Statute of Frauds is to prevent false assertions about a contract that was never really created.
Contracts to Which the Statute of Frauds Applies
M. SOUR
- Marriage
- Suretyship
- One year
- UCC ($500 or more)
- Real Property interest
Main Purpose Exception
If the main purpose in agreeing to pay the debt of another is for the surety’s own economic advantage, then the Statute of Frauds does not apply
One-Year Rule
Interpreted very narrowly. The Statute of Frauds applies if there is any possible way that the contract could be performed within one year.
Satisfying the Statute of Frauds
Performance
Having a writing
Statute of Frauds: Service Contracts
Full performance of a services contract by either side satisfies the Statute of Frauds.
Part performance of a services contract does not satisfy the Statute of Frauds
Statute of Frauds: Writing
Need a writing signed by the party against whom it is asserted. Must cover the fundamental facts by:
- indicating that a contract has been made;
- identifying the parties; and
- containing the essential elements of the deal
Statute of Frauds: Real Estate
Part performance of a real estate contract can satisfy the Statute of Frauds if any two of the following three elements are met:
- Payment
- Possession
- Improvements to the land
Statute of Frauds: Goods
A signed writing will satisfy the Statute of frauds, but no mention or price is required and there must be mention of quantity.
Part performance on a goods contract satisfies the Statute of Frauds, but only for the quantity delivered or accepted.
Custom-Made (or Specially Manufactured) Goods
Exempted from the Statute of Frauds.
A maker can satisfy the Statute of Frauds as soon as it makes a substantial beginning toward the manufacturing of the goods.
Failure to Object
Failure to object to a confirming memo within 10 days will satisfy the Statute of Frauds, but only if both parties are merchants
Statute of Frauds: Agency Law
A signed writing is needed to authorize an agent to form a contract that is in Statute of Frauds world
Statute of Frauds: Modification
You do not necessarily need a signed writing to modify a deal that is in Statute of Frauds world.
Has the contract been performed (or excused)?
“Pizza With Crawling Escargot”
- Parol-Evidence Rule
- Warranties
- Conditions
- Excuse of performance obligations
Parol-Evidence Rule
Complete integration: the contract expresses all terms of the agreement (Merger clause)
Partial integration: there is a writing but some terms are not included.
Extrinsic evidence may be used to complete writing or to show a naturally omitted term.
The UCC presumes only partial integration unless the parties would have certainly included a disputed term in the writing.
Situations Where Parol-Evidence Does Not Apply to Bar Earlier Evidence
PER does not bar:
- evidence relevant to a defense against contract formation
- evidence of a second, separate deal
- evidence of a prior communication designed to interpret an ambiguous term
Warranty
A warranty is a promise about a term of the contract that explicitly shifts risk to the party making the promise.
Note: you can disclaim all warranties
- Express
- Implied Warranty of Merchantability
- Implied Warranty of Fitness for a Particular Purpose
Express Warranties
A promise that affirms or describes the goods and that itself is part of the basis of the bargain (unless it is merely the seller’s opinion)
The use of a sample or model good creates an express warranty that the goods sold will be like the sample.
Implied Warranty of Merchantability
Triggered only when the seller is a merchant dealing in the goods at issue
The merchant makes an implied warranty (unless disclaimed) that the goods are fit for ordinary commercial purposes
Can be disclaimed if very clearly done. Look for VERY CONSPICUOUS language that mentions the warranty of merchantability or words like “as is”
Implied Warranty of Fitness for a Particular Purpose
Triggered when a buyer relies on a seller’s expertise to select a special type of good that will be used for a special purpose
The seller makes an implied warranty that the goods will satisfy this special purpose
May be disclaimed, but must be in writing. Cannot be disclaimed orally
Condition
Shifts the risk by stating that one party’s contractual obligation will kick in only if some future event takes place
Most important implied condition is called the “constructive condition of exchange”
Express Conditions
Created by language in the contract
Must be satisfied exactly unless somehow excused
- objective standard
- subjective standard for contract involving aesthetic taste, such as art or tutoring services
May be waived by words or conduct, or through wrongful interference by the other party
Constructive Condition of Exchange
One party’s performance is conditioned on the other side’s performance
Common Law CCE
The doctrine of substantial performance states that a party will satisfy the CCE if there is not a material breach. Substantial performance works to satisfy the CCE only of the failure is not willful.
If payment needs to be made, non-breaching party can recover damages measured as to the cost to complete the performance
Divisibility and CCE
At common law, if a contract is clearly divisible, then it will be broken down into mini-contracts for the purposes of determining if there has been substantial performance
UCC CCE
The UCC requires perfect tender: perfect goods and perfect delivery (parties can contractually change the default)
Installment contracts do not have to satisfy perfect tender.
Revocation of Acceptance
(UCC)
The buyer may revoke an acceptance of the goods when the goods seem OK and are accepted at delivery but a defect is discovered within a reasonable time.
Seller Cure
If seller fails to tender perfect goods and time is left on the contract or seller had reasonable grounds to believe that the buyer would accept a replacement, then the buyer must give the seller a chance to cure.
Common Methods of Tender/Delivery for Goods Contracts
- Tender at Seller’s Place of Business
- Shipment Contract
- Destination Contract
Tender at Seller’s Place of Business
If the goods are tendered at the seller’s place of business, then the seller just needs to give the goods to the buyer
Shipment Contract
If the contract is a shipment contract, then the seller must:
- Get the goods to a common carrier;
- Make arrangements for delivery; and
- Notify the buyer
Destination Contract
Seller must get the goods to the buyer’s business and notify the buyer
Risk of Loss
- Agreement Controls
- If not, a breaching party bears the risk of loss
3a) if shipment contract, risk of loss rests with the buyer
3b) if destination contract, risk of loss rests with seller
4a) in all other cases, if the seller is a merchant, risk of loss stays with the seller until the buyer receives the goods
4b) if not, risk of loss moves to the buyer when the seller tenders the goods
Excuses to Performance
- Impossibility and Impracticability
- Death After Contract
- Frustration of Purpose
- Performance excused because initial contract has been modified or canceled
- Accord and Satisfaction
- Novation
Impossibility and Impracticability
Performance becomes illegal after contract is formed;
Subject matter is destroyed;
Services contract with a special person and the performing party dies or is incapacitated
Something that makes the performance more expensive than expected will not normally excuse a contract. Must be something that hinders the ability to perform.
Death After Contract
Dying does not normally excuse liability on a contract that has been made. The estate will normally be on the hook for any contractual obligations.
Unless there is something special about the person performing on the contract such that it makes no sense to continue if they die
Frustration of Purpose
Performance can still occur, but something has happened to undermine the entire reason for the creation of the contract
Performance Excused through Modification or Cancellation
Both parties can agree to walk away from a contract so long as there is some performance remaining from each side. Otherwise, there is no consideration for this modification.
Accord and Satisfaction
The parties to an earlier contract may agree that performance will be satisfied by the completion of a different promise.
The new performance is called the accord.
The excusing of the initial obligation is called the satisfaction.
If the accord is not performed then the other side can sue on either the original obligation or the new promise
Novation
When both parties agree that a substitute person will take over the contractual obligations.
A valid novation excuses the original promisor from performance.
A delegation is when one side asks someone else to do their work
Anticipatory Repudiation
When a party indicates that he will not perform on the contract (repudiates) before the performance isdue, the nonbreaching party may:
1) Treat the repudiation as a breach and sue immediately for damages; or
2) Ignore the repudiation, demand performance, and see what happens
A party can retract its repudiation as long as the other side has not commenced a lawsuit for breach or acted in reliance on the repudiation by materially changing its position
UCC Repudiation
Reasonable grounds for insecurity about the other side’s performance allows you to demand adequate assurances of performance
Money Damages
The typical remedy in contract law
- Expectation
- Reliance
- Restitution
Expectation Damages
The normal way to calculate damages, the goal is to put a party in the same economic position that it would be in if the contract had been performed as promised.
Measured by the value of performance without the breach to the value of the performance with the breach.
Limitations on Expectation Damages
- Expectation damages must be proven with reasonable certainty
- Unforeseeable consequential damages are not recoverable unless the breaching party had some reason to know about the possibility of these unforeseeable consequential damages (Hadley Rule)
- Expectation damages may be reduced by a non-breaching party’s failure to take reasonable steps to mitigate damages
General Damages
The type of losses that almost anyone would suffer from a breach
Includes: Incidental damages, such as the cost of storing rejected goods, or finding a new buyer, or finding a replacement vendor
Consequential Damages
Damages that are unique or special to this plaintiff
Lost Volume Profits
If a seller is a retailer who sells a type of good, then the seller can argue for the profit lost on the sale, even if the seller is able to resell the goods or services to another person.
Incomplete Performance
If the paying party breaches a partially completed building contract, the builder cannot continue to work on the job.
Expectation = Contract Price - Amount Already Paid - Amount Needed to Finish the Job
Economic Waste and Diminution in Market Value
The normal measure of expectation damages is the cost to complete the job, but if these damages will overcompensate the plaintiff, then the court may award the diminution in value of the property instead
Reliance Damages
The goal is to put a party in the same economic position that it would be in if the contract had never been created.
A party cannot recover both expectation and reliance damages; must elect one or the other
Restitution Damages
The goal is to give the plaintiff an amount equal to the economic benefit that the plaintiff has conferred on the defendant
Liquidated Damages
Courts will only award liquidated damages if:
- The amount of liquidated damages was reasonable at the time of contracting; and
- Actual damages from breach would be uncertain in amount and difficult to prove
Punitive Damages
Almost never allowed in contract law unless a breach is also a tort (e.g., fraud)
Specific Performance/Injuction
The exception, not the norm, in contract law.
SP presumptively available for real estate. Not available for contracts of personal services.
Lumley Doctrine: A court might grant an injunction prohibiting a breaching party from performing services for a computer for a reasonable period of time/place.
Right of Reclamation
An equitable right of an unpaid seller to reclaim goods when the buyer is insolvent.
- Buyer is insolvent at the time of receipt of the goods
- Seller must demand the return of goods within 10 days or receipt (or within a reasonable time if the buyer misrepresented his solvency to the seller); and
- Buyer still has the goods
Intended beneficiaries
A party that the initial counter-parties intended to convey enforcement rights to in the event of breach
Has right to sue
Incidental Beneficiary
Original counter-parties did not intend to confer a benefit upon
No right to sue
Creditor Beneficiary
Arises when the promisee strikes a deal with the promisor in order to repay some earlier debt to the third party
Donee Beneficiary
Arises when there is no preexisting obligation, but the promisee clearly intends to confer a gift of enforcement on a third party
Revocation of Third-Party’s Enforcement Rights
Initial counter-parties may revoke or modify away a third-party’s right to enforce a contract unless:
- the beneficiary detrimentally relies on the rights;
- the beneficiary manifests assent to the contract/the rights; or
- the beneficiary files a lawsuit to enforce the contract
Assignment
An assignment is the transfer of rights under a contract
Delegation
A transfer of duties under a contract
Generally acceptable as long as the contract does not prohibit and as long as the other party does not have some specific interest in having a specific individual perform.
A delegatee is generally NOT liable for breach unless she receives consideration from the delegating party
Prohibition of Assignments
If a contract just PROHIBITS assignments, then the assigning party has breached the deal when he makes the assignment, but the third party can still recover from the guarantor.
If a contract INVALIDATES assignments, then the third party cannot recover
What happens when someone assigns the same right twice?
Without Consideration: the last assignment controls
For Consideration: first assignment for consideration will typically hold
- Exception: a later assignment will take priority if the second assignee does not know the initial assignment and is first to obtain payment or judgment
