Contracts

Question 1

Common Law vs. UCC

Answer 1

• Article 2 of the Uniform Commercial Code (UCC) governs all contracts for the sale of goods. Goods are defined as all things that are movable at the time of identification to the contract (other than the money), including crops and the unborn young of animals.
• For mixed contracts, the predominant purpose of the contract determines which law governs. If the predominant purpose is the sale of goods, the UCC will apply. In some states, when a contract divides payment between services and goods, the UCC is applied to the goods section and the common law is applied to the services section

Question 2

Valid Contract

Answer 2

• A valid contract is formed when there is: (1) mutual assent (an offer and acceptance of that offer by the other party); (2) adequate consideration or a substitute; AND (3) no defenses to formation that would invalidate an otherwise valid contract entered into by the parties

Question 3

Mutual Assent

Answer 3

• An offer is (1) a manifestation of intent to contract by one party, (2) with definite or reasonably certain terms, (3) that is communicated to an identified offeree.
• Acceptance is a manifestation of assent to the terms of the offer, which indicates a commitment to be bound. Silence generally DOES NOT manifest acceptance, but performance may be adequate. For bilateral contracts, the start of performance manifests acceptance. For unilateral contracts, the start of performance only makes an offer irrevocable, and the offer is accepted only when performance is complete

Question 4

Termination/Revocation of Offer

Answer 4

• Offers can be terminated before acceptance by: (a) rejection or counter-offer by the offeree; (b) lapse of time; (c) revocation by the offeror; OR (d) death/incapacity of either party.
• Most offers may be revoked at any time before acceptance through unambiguous words or conduct by the offeror to the offeree indicating an unwillingness or inability to contract. A revocation of an offer is effective when received. An offer can also be terminated when communicated indirectly – when (1) the offeror takes definite action inconsistent with an intention to enter into the proposed contract; AND (2) the offeree acquires reliable information to that effect.
• However, some offers are irrevocable including: (1) Option contracts (when consideration is given for a promise to keep an offer open); (2) a Merchant’s firm offer; AND (3) Offers that were relied on to the offeree’s detriment

Question 5

Merchant’s Firm Offer

Answer 5

• A Merchant’s Firm Offer is: (1) an offer to buy or sell goods; (2) by a merchant (a person who deals in goods of the kind); (3) in a signed writing; (4) which states that the offer will be held open and is not revocable during the time stated (or if no time is stated for a reasonable time), but not to exceed three months; AND (5) that the assurance to keep the offer open must be separately signed by the offeror if the form is supplied by the offeree (such as initialing the specific paragraph). A merchant’s firm offer is enforceable without consideration.

Question 6

Advertisements

Answer 6

• Advertisements are generally NOT considered offers, but instead are deemed invitations for offers. However, an advertisement MAY be an offer if it includes sufficiently clear and definite terms so that the reasonable person would understand how performance or acceptance may be completed

Question 7

Timing of Acceptance/Revocation & the Mailbox Rule

Answer 7

• Unless the offeror states otherwise, acceptance of an offer is deemed accepted once the acceptance is sent or communicated (i.e. placed in the mail). However, revocation of an offer is deemed effective when received by the offeree. A communication is received when it comes into the possession of that person. An offer CANNOT be accepted after it is revoked (unless there is an agreement to the contrary). However, once a valid contract has been created by acceptance of the offer, revocation is no longer possible.
• Under the Mailbox Rule, if the offeror mails a letter to the offeree revoking the offer, but the offeree sends a letter to the offeror accepting the offer before receiving the revocation letter, a valid contract has been created. This is because the acceptance was effective before the revocation became effective. This rule DOES NOT apply to option deadlines (when an offer is only open until a certain date or time)

Question 8

Battle of the Forms

Answer 8

• The common law mirror image rule holds that an acceptance must exactly mirror the offer. Acceptance with any additional terms or variations constitutes a counteroffer, which revokes the initial offer.
• Under Article 2 of the UCC (which governs contracts for the sale of goods) the mirror image rule DOES NOT apply. The UCC states that acceptance does not have to mirror the offer and the acceptance may include different or additional terms, without revocation of the offer and thus constituting a valid contract. However, the offeree’s different or additional terms are deemed included in the contract ONLY IF: (1) both parties are merchants; (2) the term is not a material change; (3) the offer does not expressly limit acceptance to the exact terms of the offer; AND (4) no objection was made within a reasonable time. A material change is any change that is likely to cause hardship or surprise to the offeror (i.e. a disclaimer of warranties, an arbitration clause, payment of shipping/handling charges)

Question 9

Implied-in-Fact Contracts

Answer 9

• Contracts can be created by the conduct of the parties, without spoken or written words. Conduct by both parties will create a contract if: (1) the conduct is intentional; AND (2) each party knows (or has reason to know) that the other party will interpret the conduct as an agreement to enter into a contract

Question 10

Output and Requirement Contracts

Answer 10

• Output or requirement contracts are those in which the quantity is measured by the output of the seller or the requirements of the buyer. An output contract requires a seller to sell all of the output of the particular goods to the buyer, and a requirement contract requires the buyer to purchase all of the particular goods that the buyer requires from the seller

Question 11

Bargained for Exchange

Answer 11

• Contracts are NOT enforceable without consideration by BOTH parties. Consideration is a bargained for exchange of a promise for a return promise or performance that benefits the promisor or causes detriment to the promisee. For example, the money paid for goods is consideration for the seller, and the goods sold is consideration for the buyer. Generally, past or moral consideration is NOT sufficient to support a contract.

Question 12

Promissory Estoppel/Detrimental Reliance

Answer 12

• Contracts that lack consideration may be enforced to avoid injustice under the doctrine of promissory estoppel. Promissory estoppel applies when: (1) a party reasonably and foreseeably relied to his detriment on the promise of the other party; (2) the promisor should have reasonably expected a change in position in reliance of the promise; AND (3) enforcement of the promise is necessary to avoid injustice

Question 13

Incapacity

Answer 13

• A party MUST have capacity in order to enter into a contract. Contracts entered into by a person who DOES NOT have capacity are voidable by the person who lacked capacity. Minors (persons under 18 years old) and those who lack mental capacity (persons who cannot understand the meaning and effect of the contract) generally lack capacity to enter into a contract. However, minors may be bound for contracts for necessities (i.e. food, shelter, clothing)

Question 14

Unconscionability

Answer 14

• Unconscionability occurs when a contract or term shocks the conscience of the court. Unconscionability usually occurs if the contract/term is BOTH substantively and procedurally unconscionable. o Procedural unconscionability occurs when one party to the contract (usually the party who wrote the contract) has a superior bargaining position over the other party and uses that power to their advantage. An example is engaging in unfair pressure or bargaining practices to force the other party to enter into the contract. o Substantive unconscionability occurs when the contract contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power.
• If a contract or term is found unconscionable a court may: (a) refuse to enforce the contract; (b) enforce the contract without the unconscionable term; OR (c) limit the application of any unconscionable term

Question 15

Mutual Mistake & Unilateral Mistake

Answer 15

• A contract is voidable (it may be rescinded or reformed) when there is a mutual mistake. Mutual mistake occurs when: (1) both parties are mistaken as to a basic assumption on which the contract is made; (2) the mistake is material to the contract; AND (3) the person asserting the mistake did not bear the risk of the mistake (by agreement or by a party treating their limited knowledge as sufficient).
• A unilateral mistake is (1) a mistake made by one party, (2) that is unknown to the other party, (3) concerning a basic assumption, (4) that has a material effect. 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 OR the mistake would make enforcement of the contract unconscionable, the contract is voidable by the mistaken party. When the mistake involves price or value, the equitable remedy of rescission or reformation will NOT be allowed because price/value is NOT considered material.

Question 16

Statute of Frauds: Requiring a Signed Writing

Answer 16

• Under the Statute of Frauds, the following contracts are not valid UNLESS they are in a writing signed by the party to be charged: (1) Marriage contracts; (2) Suretyships (where a guarantor promises to take on the debt of another if that person fails to pay) unless the main purpose exception applies (the surety’s main purpose in making the promise was to benefit himself); (3) Contracts that Cannot be fully performed in 1 year from the date the contract is entered into (there must be no possible way the contract can be performed within 1 year); (4) Contracts for the Sale of real property or creating an interest in real property (i.e. easements, leases over one year); AND (5) Contracts for the Sale of goods for $500 or more (the writing must state the parties, quantity and nature of the goods, and be signed).
• In order to satisfy the Statute of Frauds, a writing MUST: (1) be signed by (or on behalf of) the party to be charged; (2) reasonably identify the subject matter of the contract; (3) indicate that a contract has been made by the parties; AND (4) state the essential terms with reasonable certainty. The statute of frauds DOES NOT require that an agreement be contained in one signed document; it may consist of several writings.

Question 17

Exceptions when Writing is Not Required

Answer 17

• Under the Common Law, a contract that violates the statute of frauds may still be enforceable in the following situations: (1) Full Performance (partial performance is allowed in land sale contracts if a party has done at least two of the following: (i) made payment for land; (2) took possession of land; (iii) made valuable improvements to land); (2) Judicial Acknowledgement – the party admits to the agreement in pleadings or testimony; (3) Estoppel – reasonable and foreseeable detrimental reliance on a promise.
• Under Article 2 of the UCC, four exceptions exist: (1) Merchant’s Confirmatory Memorandum – In a sale of goods contract between two merchants (two people carrying on a business or trade), a writing that confirms an agreement is sufficient even if it is signed by only the party enforcing it (not the party whom it is enforced against), as long as the party against whom it is enforced did not promptly object; (2) Goods Accepted or Paid For – A seller may enforce the contract price of any goods accepted or paid for by the buyer, but NOT the whole contract price if only a portion of the total quantity of goods to the contract are accepted; (3) Custom Made Goods – A seller may enforce the contract price for custom made goods, which are goods in which the seller has made a substantial start AND are not suitable for sale in the ordinary course of the seller’s business; (4) Admission During Judicial Proceeding – A sale of goods contract for $500 or more is enforceable without a writing when the party to be charged admits that there was a contract during a judicial proceeding (i.e. in a deposition or courtroom testimony)

Question 18

Pre-Existing Duty Rule

Answer 18

• Under Common Law, contract modifications MUST be supported by consideration. When modifying an agreement, past performance or performance of a preexisting duty owed to a party is NOT treated as adequate consideration. o However, several exceptions exist: (1) an addition or change in the performance or promise; OR (2) a fair and equitable modification due to unanticipated changed circumstances and the contract is NOT yet fully performed by either party (usually the unanticipated circumstances must be severe or far beyond what was foreseen).
• Under the UCC, there is NO consideration requirement for contract modifications made in good faith. However, modifications must be in writing if: (a) they fall within the Statute of Frauds; OR (b) the original contract states that modifications must be made in writing. Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.

Question 19

Parol Evidence Rule

Answer 19

• Under the Parol Evidence Rule, a party CANNOT introduce evidence of a prior or contemporaneous agreement (either oral or written) that contradicts a later writing.
• However, there are four exceptions where a court will permit such evidence: (1) to correct a clerical error or typo; (2) to establish a defense against formation (that the contract wasn’t valid in the first instance); (3) to interpret vague or ambiguous terms, but courts will interpret words to represent their ordinary or plain meaning (the plain meaning rule); and (4) to supplement a partially integrated writing. The Parol Evidence Rule DOES NOT apply to subsequent agreements.
• A partially integrated writing DOES NOT contain a complete statement of all the terms the parties agreed to. As such, proof of additional terms is allowed if the terms DO NOT contradict the writing. Under the UCC, ALL writings are presumed to be partial integrations, unless the writing is fully integrated.
• A fully integrated writing is a complete and exclusive statement of the terms, and discharges prior agreements to the extent that they are within its scope. A merger clause is evidence that the writing is complete on its face (fully integrated) and cannot be supplemented with additional consistent terms.

Question 20

Condition Precedent

Answer 20

• A condition precedent in a contract makes performance conditional upon the completion of the condition. Usually, a condition precedent is expressly stated in a contract. If a condition fails, no obligation of performance arises, and thus no breach has occurred.
• However, occurrence of a condition may be excused by the later action or inaction of the person who is protected by the condition. This occurs in 2 instances: (1) A Protected Party’s Failure to Cooperate or Make a Good Faith Effort – the protected party can lose protection of the condition if he does not make a good faith effort to satisfy the condition (this implied duty of good faith will be satisfied when reasonable steps to satisfy the condition are taken); and (2) Waiver – waiver occurs when a protected party voluntarily gives up the protection of the condition. The protected party can retract waiver for future conditions to the extent that the other party has not relied on the waiver

Question 21

Frustration of Purpose

Answer 21

• The Frustration of Purpose Doctrine discharges performance under a contract if the purpose of the contract no longer exists. Performance is excused if: (1) a party’s principal purpose is substantially frustrated without his fault (the contract is virtually worthless to the party); (2) by an unforeseeable supervening event outside of the parties’ control (the event’s non-occurrence was a basic assumption of the contact); AND (3) both parties knew the purpose at the time of formation

Question 22

Impossibility

Answer 22

• Performance is discharged when it is objectively impossible to perform a contract because of: (1) death or physical incapacity of the person necessary to effectuate the contract (if the person can easily be replaced, performance is NOT excused); (2) unanticipated destruction of the subject matter necessary to fulfill the contract; OR (3) a new law or regulation that was unanticipated makes performance extremely and unreasonably difficult or expensive.
• Under Common Law, if the risk of loss is on the buyer, then destruction of the subject matter does NOT excuse performance.
• Under the UCC, performance is excused ONLY IF: the destroyed goods were special AND were destroyed before the risk of loss shifted to the buyer

Question 23

Impracticability

Answer 23

• Performance is discharged as impractical when (1) an event occurs after contract formation, (2) that is unanticipated by both parties at contract formation (the event’s nonoccurrence was a basic assumption of the contact), (3) making performance extremely and unreasonably difficult or expensive. This doctrine is interpreted narrowly by the courts. Generally, an increased cost to perform a contractual obligation is NOT sufficient to render the contract excused due to impracticability

Question 24

Waiver

Answer 24

• A waiver is a voluntary and intentional relinquishment of a contract right by words or conduct. Performance is excused when it is waived. Conditions are waived when: (1) a party indicates through words or conduct that a condition does not need to be satisfied; AND (2) the other party detrimentally relies on that waiver.

Question 25

Accord and Satisfaction

Answer 25

• A party is excused from their obligations under a contract when there has been an accord and satisfaction. An accord is an executory contract between the parties promising to relieve a party of his contractual obligations in return for a specific act. Upon satisfaction of that act, that person is excused from further performance under the contract. If the debtor party fails to satisfy the accord, the creditor party may sue either under: (a) the original contract; OR (b) the accord terms

Question 26

Minor Breach vs. Material Breach

Answer 26

• Under the Common Law, a material breach will excuse the non-breaching party’s performance. A minor breach, however, will NOT excuse performance, and the nonbreaching party must still perform (though he may bring a separate action for damages resulting from the breach). A material breach occurs when a party DOES NOT render substantial performance (the party did not perform major parts of the contract).
• To determine whether a breach is material, courts will consider: (1) the extent of the benefit deprived to the injured party (what was the extent of performance); (2) the adequacy of compensation for loss to the non-breaching party; (3) the extent the breaching party will suffer forfeiture (hardship); (4) the likelihood that the breaching party will cure; and (5) absence of good faith or fair dealing by the breaching party (was the breach intentional, negligent, or innocent

Question 27

Time is of the Essence Clause

Answer 27

• The failure to perform by a specified date is generally NOT deemed to be a material breach of the contract. If the time for performance passes, and no party seeks enforcement, the clause may be considered waived. However, if the contract contains an explicit “time of the essence” clause which requires performance by a specific date, then the failure to preform by said date is deemed a material breach

Question 28

UCC Perfect Tender Rule and Exceptions

Answer 28

• Under Article 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. 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.
• A seller has a right to cure in 2 situations: (a) If the time for performance has NOT yet expired, the seller can cure within the contract time period remaining; OR (b) The seller is allowed additional reasonable time to substitute tender if it had reasonable grounds that the goods would be accepted (i.e. when the same type of non-conforming goods were accepted by the buyer in the past).
• Special rules apply when a seller provides non-conforming goods under an installment contract. Installment contracts may only be cancelled where an installment is so defective that it substantially impairs the value of the entire contract. Similarly, a buyer may reject an installment only if the non conformity substantially impairs that installment and the time to cure has past.
• Under Article 2 of the UCC, a rejection of non-conforming goods must be made within a reasonable time after their delivery or tender.

Question 29

Anticipatory Repudiation & Adequate Assurances

Answer 29

• Generally, a party must wait for the other party to breach before bringing an action to demand performance or for damages. However, a non-breaching party may seek damages before the time of performance is due if there is an anticipatory repudiation by the other party. An anticipatory repudiation occurs when a party unequivocally communicates that he is unable or unwilling to perform UNLESS there has been a material change in the other party’s position. A party that anticipatorily breaches a contract may retract its repudiation and restore the contract UNLESS the aggrieved party has: (a) cancelled; (b) materially changed his position; OR (c) indicated that he considers the repudiation final.
• In addition, a party with reasonable grounds for being insecure about the other party’s performance may demand in writing adequate assurances from the other party that it will perform in accordance with the contract. If a party DOES NOT give adequate assurances within a reasonable time after it is asked to do so, the asking party may treat that as an anticipatory repudiation. In sales of goods contracts, the time given to respond cannot exceed 30 days.
• When an anticipatory repudiation occurs, the non-breaching party may do any of the following: (a) treat the contract as repudiated and sue for damages; (b) treat the contract as discharged; (c) wait until performance is due and sue when performance does not occur; OR (d) urge the party to perform.

Question 30

Implied Obligation of Good Faith and Fair Dealing

Answer 30

• Every contract contains an implied obligation of good faith and fair dealing, which requires the parties to act honestly and fairly.
• Under the UCC, an implied duty of good faith and fair dealing is imposed upon each party’s performance to a contract. Good faith is defined in the UCC as honesty in fact AND the observance of reasonable commercial standards of fair dealing. In the case of a merchant, good faith extends even further to observance of reasonable commercial standards of fair dealing in the trade

Question 31

Implied Warranty of Merchantability

Answer 31

• Under Article 2 of the UCC, the Implied Warranty of Merchantability is implied in all sales of goods contracts, and requires that all goods sold by a merchant (a person dealing in goods of the kind) MUST be fit for their ordinary purpose. Once a buyer discovers the breach of a warranty, he may sue for breach of contract.
• To disclaim the implied warranty of merchantability, a merchant must do so expressly in a conspicuous writing

Question 32

Third-Party Beneficiaries

Answer 32

• Generally, a party who is not in privity of contract with another party cannot assert a claim for breach against that party. However, when the party asserting the claim is an intended third-party beneficiary, the party has the same rights as those in privity of contract, and can assert a claim for breach. o An intended third-party beneficiary is not a party to the contract, but has rights under the contract because the contracting parties contemplated that their respective performances were intended to benefit an identified third-party.
o An incidental beneficiary is a person that just happens to benefit from the contract, but has NO legal rights because the purpose of the contract was not intended to benefit them.
• Enforcement of an Intended Third-Party Beneficiary’s Rights: An intended third-party beneficiary may enforce rights under a contract ONLY IF the rights have vested. Rights vest when the third-party beneficiary has: (a) manifests assent to the promise under the contract; (b) detrimentally relied on the contract; OR (c) brings suit to enforce the contract. Once rights have vested, a contract CANNOT be changed or modified without the third-party’s consent. A suit may only be brought against the promisor (when the third-party is a creditor, a suit may also be brought against the promise).

Question 33

Delegable Duties

Answer 33

• All contract duties are delegable UNLESS: (a) the contract prohibits delegations or assignments; (b) the delegation is against public policy; (c) the contract is for personal services that calls for the exercise of personal skill or discretion; OR (d) the delegation materially alters the expectancy of the obligee (the party to which the duty is owed). An assignment generally includes a delegation of the unperformed duties under a contract. Generally, the obligor (the delegating/assigning party) remains liable for nonperformance of the contract, UNLESS all the parties agree otherwise (known as a novation)

Question 34

Assignment

Answer 34

• Rights and benefits under a contract may be transferred to a third-party if: (1) the assignor manifests his intent to transfer the rights; AND (2) the assignee assents to the assignment. Consideration is NOT required for an assignment, BUT if consideration is provided, the assignment becomes irrevocable. Gratuitous assignments may subsequently be revoked.
• Limitations: An assignment is valid UNLESS: (a) it materially alters what is expected under the contract; (b) it is prohibited by law or public policy; OR (c) it is precluded by contract. Materially altering what is expected under the contract occurs when the assignment: (a) materially changes the duty of the obligor; (b) materially increases the burden or risk imposed on the obligor; (c) materially impairs the obligor’s chance of obtaining return performance; OR (d) materially reduces the value of the return performance.
• Parties may attempt to prevent assignments in the original contract through either: (a) Prohibitions: Terms in a contract that prohibit the transfer of rights. If the rights are assigned, the assignor is liable for damages, BUT the assignment is still valid and enforceable by the assignee; OR (b) Invalidations: Terms in a contract that void all assignments. If the rights are assigned in this case, the assignment is void.
• Rights of Assignee and Assignor: An assignee may sue the obligor for non-performance. Any defense to enforcement that could be used against the assignor may also be used against the assignee. An assignee may also sue the assignor for wrongful revocation of an assignment or for breach of an implied warranty.
• Multiple Assignments: Where there are multiple gratuitous assignments, the last assignee prevails. Where there are multiple assignments for consideration, the first assignment prevails UNLESS the later assignment: (1) has no notice of the earlier assignment; AND (2) is the first to obtain payment or indicia of ownership

Question 35

Novation

Answer 35

• A novation occurs when (1) all parties to a contract, (2) agree to discharge an original party to the contract, and (3) substitute a third-party in the original party’s place