Contracts Flashcards
Elements needed to form a valid contract
- Mutual assent (offer + acceptance);
- Consideration (bargained for legal detriment); and
- No defenses to formation
Define
bilateral contract
Contract made by both sides; i.e. mutual promises
Define
unilateral contract
Requires full performance as the method of acceptance
Define
offer
- An outward, objective manifestation of willingness to enter into a bargain;
- That creates the power of acceptance in the offeree (i.e. nothing left to do except say “yes”)
Under common law, what terms must be included in the offer?
- Parties
- Subject matter
- Price
- Quantity
How can an offer be terminated?
- Counter-offer;
- Death;
- Incapacity;
- Lapse;
- Rejection; or
- Revocation
What types of offers are irrevocable?
- Option contracts;
- Firm offers;
- When there is detrimental reliance;
- When offeree has started performance on a unilateral contract
What does a counteroffer function as?
rejection + new offer
Define
mirror image rule
(common law)
Acceptance must be a mirror image of every single term of the offer
If any part of the terms are different, it will function as a counter-offer and rejection
Under UCC §2-207, what happens if an acceptance contains “additional or different” terms from the original offer if both parties are merchants?
The terms will automatically become part of the contract, unless:
- the terms materially change the contract;
- the offeror objects; or
- the offer explicitly limited the offer to the original terms
How does a merchant accept an offer to buy goods?
- Promise to ship the goods; or
- Shipping the goods within a reasonable time period
Does shipment of nonconforming goods qualify as acceptance?
Yes, but also constitutes breach
What is the mailbox rule?
Acceptance is effective upon DISPATCH
What happens if both an acceptance and rejection is sent by the offeree when the:
- Rejection is sent first?
- Acceptance is sent first?
- Acceptance will be effective if received BEFORE the rejection
- Acceptance effective upon dispatch (regardless of whether rejection is received before)
Define
consideration
- Detriment to promisee (promisee forgoes something of value); or
- Bargained-for exchange (must not be nominal)
Is consideration required to modify a contract under common law?
Yes, unless:
- New obligations on both sides; or
- Existence of circumstances unforeseen by either party
Does the UCC require consideration for modification?
No, as long as both parties are acting in good faith
Define
void contract
Entire contract is void and non-existent
Define
voidable contract
Valid contract unless one party seeks to void it
Define
unenforceable contract
A valid contract that cannot be enforced if one party halts performance
What are the 10 defenses to contract formation and enforceability?
- Duress
- Incapacity
- Illegality
- Misrepresentation
- Misunderstanding
- Mistake
- Public Policy
- Statute of Frauds
- Undue Influence
- Unconscionability
What actions can a court take upon finding a contract unconscionable?
- Declare the entire contract void;
- Strike the unconscionable clause while leaving the rest; or
- Rewrite the offending clause to make it conscionable
What are examples of procedural unconscionability?
- Adhesion contracts (“take it or leave it”)
- Contracts with boilerplate terms
- Contracts with hidden terms that are vague or confusing
What are examples of substantive unconscionability?
- Grossly excessive price
- Disproportionate consequences for minor breach
- Provisions unreasonably limiting warranties or remedies
Differentiate K’s that have illegal subject matter vs. illegal purpose
Illegal Subject Matter: Illegal and completely void & unenforceable
Illegal Purpose: Voidable by party who:
- Did not know of the purpose; or
- Knew but did not facilitate the purpose and the purpose does not involve “serious moral turpitude”
⚠️ Note: If both parties knew of the illegal purpose, K is void and unenforceable
When can a contract be voided for mutual mistake?
By the adversely affected party if:
- Both parties had a mistake of fact when the contract was formed;
- About a material assumption of the contract;
- Adversely affected party did not assume risk of the mistake; and
- Mistake cannot be fixed by reformation
When can a party void for unilateral mistake?
The adversely affected party can void if:
- There was a mistake as to basic assumption when K was formed;
- About material effect of K; and
- Adversely affected party did not assume risk of the mistake
AND either:
- Mistake would make K unenforceable; or
- Other party had reason to know of mistake; or
- Mistake was the other party’s fault
When can a party seek reformation for a mistake?
- Parties had a prior agreement;
- Parties agreed to put the prior agreement in writing; and
- There is a difference in the prior agreement and the writing due to mistake
What three factors do courts consider when deciding the enforceability of non-compete clauses?
- Is there a significant business justification (e.g. access to trade secrets);
- Is the scope reasonable in duration and geographical reach; and
- Is there an express provision of a covenant not to compete?
⚠️ Note: Courts can choose to enforce only reasonable provisions of a non-compete
What is required to satisfy the SOF?
-
Writing
- K must be signed in writing & contain essential elements of the deal
-
Performance
- Service K’s (full performance satisfies SOF)
- Specially manufactured goods (delivery satisfies SOF)
- Real estate K’s if buyer does 2 of the 3 following acts:
- Full or part payment of the purchase price
- Possesses the property; or
- Improves the property
What 6 types of K’s are subject to the Statute of Frauds?
- Marriage;
- Contracts that cannot be performed within a year;
- Land interests (real estate sales and leases > 1 year);
- Executor (contracts for an executor or administrator to answer for the duty of a decedent);
- Suretyship for another’s debts; and
- Contracts for the sale of goods for a price of $500 or greater
When goods are worth $500 or more, what is needed to satisfy the SOF under the UCC?
A memorandum of the sale that includes:
- Indication that K has been made;
- Identity of the parties;
- Quantity; and
- Be signed by the party asserting the SOF defense
Under the UCC, is quantity an essential term to satisfy the SOF?
Yes, unless:
- There is language providing a basis for measuring quantity; or
- K is an output or requirements K
When does part performance satisfy the SOF for real property contracts?
When the buyer completes 2 of the 3 following acts:
- Full or part payment of the purchase price;
- Possesses the property; or
- Improves the property
Rank the following from most important to least important for K interpretation:
- Course of dealing
- Trade usage
- Course of performance
- Express terms
- Express terms (most important)
- Course of performance
- Course of dealing
- Trade usage (least important)
What is the UCC’s approach to extrinsic evidence?
Presumption that K’s are partially integrated; allows addition of non-contradictory terms unless the parties would have “certainly” included them (UCC § 2-202)
When does the parol evidence rule not apply? (i.e. when you can introduce extrinsic evidence?)
- K was only partially integrated
- To show that K does not exist/was never formed (evidence of misunderstanding, mistake, etc)
- As defense to enforceability (duress, illegality, etc)
- To resolve ambiguities
- To prove condition precedent
- To supplement or explain terms w/ evidence of trade usage/past dealings (UCC § 2-202 - sale of goods only)
- To help court intrepret K by showing parties’ subjective understanding of terms
What happens if a UCC K is missing essential terms such as time or price?
UCC § 2-305 “fills the gap” with the missing term because it is presumed the parties intended to include the term
Define
condition subsequent
Performance is not excused until after event occurs
(e.g. Max will continue taking the bar exam until he passes it)
Define
condition precedent
Condition must take place before performance/another event is triggered
(e.g. Max will take Kathy on a trip to Europe if he passes the bar exam)
At common law, if one party’s performance is subject to an express condition, what is the result if that condition does not occur?
The party who would have benefited from the condition is discharged from their performance obligations, unless there was waiver, bad faith conduct, or forfeiture/great loss may result to one of the parties.
At common law, under what 3 circumstances can a failed express condition be excused?
- Waiver: The party who would have been discharged by the condition’s failure may waive that right and perform anyway, making their obligations absolute.
- Bad Faith Conduct: bad faith conduct will excuse a condition if the benefitting party fails to take steps necessary for the condition to obtain, or interferes with the fulfillment of the contract.
- Avoiding Forfeiture: a court may excuse a condition if fulfillment of that condition would cause one of the parties great loss or forfeiture.
At common law, what type of compliance with contractual duties is required for discharging duties flowing from an implied condition?
Substantial performance will satisfy the party’s obligations, and the aggrieved party will not be discharged from their performance obligations.
The doctrine of substantial performance applies to contracts for services, often construction contracts.
Define
impossibility defense
A defense available (under both common law and UCC) when performance has been rendered impossible by unexpected events that took place after the contract was formed. If the defense is successful, both parties are excused from performance.
What are five factors to determine whether there was a material breach?
- Extent to which the aggrieved party will be deprived of the benefit that she reasonably expected to receive under the contract;
- Likelihood that the breaching party will cure within a reasonable time and within the purposes of the contract;
- This factor is important for determining material breach vs. substantial performance
- Extent to which the aggrieved party can be compensated by damages to make up for the defective performance
- Extent to which the breach was willful or in bad faith rather than merely negligent or innocent
- Extent to which the breaching party will suffer great loss or forfeiture if a material breach is found
What is the duty of good faith and fair dealing?
Implied in all K’s:
- Duty to not wrongfully interfere with performance; and
- Duty to cooperate
Define
common law doctrine of substantial performance
As long as a party substantially performs (even if they did not meet every requirement), the other party is still obligated to perform their obligations
⚠️ Note: unless it is an express condition precedent, in which full performance is required, substantial performance will suffice
What are the 3 elements of the impracticability defense?
These three elements are required to show performance under the contract is impracticable:
- The impracticability arose out of an unforeseen contingency;
- The risk was not assumed nor allocated by the parties;
- The increased cost of performance is now far greater than either party had reasonably anticipated
What are the two elements of the doctrine of frustration of purpose?
- The party’s principal purpose of entering into the contract is substantially frustrated; and
- Non-occurrence of the event that caused the frustration of purpose was an implicit underlying assumption of the contract
What’s the risk of loss in carrier cases for:
- Shipment contracts?
- Destination contracts?
Risk of Loss in Carrier Cases:
- Shipment K’s → Risk of loss transferred to buyer once seller delivers goods to common carrier
- Destination K’s → Risk of loss transferred to buyer when goods are tendered at the destination
In non-carrier cases, who bears the risk of loss?
- If seller is not a merchant → ROL passes to the buyer upon tender of delivery
- Only tender of delivery is required, not actual receipt by the buyer
- If seller is a merchant → ROL passes to buyer when the buyer physically takes possession of the goods
Or
- As specified in the contract; or
- By the breaching party if one party has breached
What is the perfect tender rule?
Requires absolute perfect tender of goods as specified in the contract
⚠️ Does not apply to installment contracts or when parties agree otherwise
Upon receipt of nonconforming goods that violate the perfect tender rule, what are a buyer’s 3 options?
The buyer must inspect the goods, and “if the goods or tender of delivery fail in any respect to conform to the contract, the buyer may:
a. reject the whole; or
b. accept the whole; or
c. accept any commercial unit or units and reject the rest.”
UCC § 2-601
After delivering a shipment of nonconforming goods under the perfect tender rule, under what circumstances will the seller have a right to cure?
- Before the window for performance on the K has elapsed, so long as the seller gives the buyer notice of the intent to cure; or
- If the seller reasonably thought that buyer would accept the nonconforming goods, the seller may substitute a conforming delivery, so long as the seller gives the buyer notice of their intent to cure and cures within a reasonable time
What are the 3 UCC implied default warranties for the sale of goods?
Warranty of:
- Title
- Merchantability
- Fitness for a particular purpose
Define
creditor beneficiary
A 3rd party beneficiary of the contract; the promisee seeks performance by the promisor to fulfill an obligation owed to the third party creditor beneficiary.
More info: Third Party Beneficiaries, First Restatement
Define
donee beneficiary
A third party beneficiary to the contract; the promisee seeks performance from the promisor in order to make a gift to a third party donee beneficiary.
Define
incidental beneficiary
A third party who benefits from performance of the K, even though the benefit to them wasn’t the parties’ primary intent in forming the K
Define
intended beneficiary
Someone for whom the contracting party intended to benefit with the contract; can seek enforcement of K
What are the incidental beneficiary’s rights under the contract?
They do not have any rights to seek enforcement of the contract
When does an intended beneficiary have rights to seek enforcement of the contract against the:
- Promisor?
- Promisee?
- Against the Promisor: always, because promisor is under an obligation to the beneficiary
- Against the Promisee: never concerning enforcement of the promised performance under the new contract; a 3rd party beneficiary will only have rights against the promissee if there was a prior obligation between promissee and third party beneficiary
What are the 4 circumstances under which an intended 3rd party beneficiary’s interests vest?
A third party intended beneficiary’s interest vests when any of the following are met:
- Beneficiary sues;
- Beneficiary justifiably changes her position of reliance on the K and notifies the parties;
- At the request of the parties, the beneficiary manifests assent to the contract; or
- The contract’s express terms state that the rights have vested
- In a contract with intended third party beneficiaries, when the promisor breaches their duties, what right does the promisee have against the promissor?
- What if the beneficiary is a donee beneficiary?
- What if the beneficiary is a creditor beneficiary?
- When the promisor does not perform, the promisee has a claim for breach of contract against the promisor, and may possibly seek specific performance or damages, BUT…
- If the promisor’s performance is intended to benefit a donee beneficiary, then the promisee has no damages, but specific performance may be appropriate.
- If the promisor’s performance is intended to benefit a creditor beneficiary, then the promisee may seek enforcement of the promisor’s obligation
What are the 4 situations where contract rights are not assignable?
Rights are not assignable when:
- Assignment would materially alter the risks or obligations with respect to the other party to the contract;
- Assignment would violate the law or public policy
- The obligor has a personal interest in providing their service to the obligee rather than a 3rd party
- The contract specifies that assignments are prohibited
When are assignments revocable and when are they irrevocable?
Revocable: all gratutious assignments unless:
- Assignee has collected the payment / received the gift / symbollically received the gift, or
- Assignee has detrimentally relied on the assignment
Irrevocable: assignments made with consideration
What are the two situations when duties are non-delegable?
Generally all contractual duties are delegable, unless:
- The performance of the service is personal, and the beneficiary of the performance values the unique service (character, reputation, taste, discretion, skill) of the intended performing party
- Examples: nanny service; tattoo artist;
- The contract specifies that delegation is prohibited
List the four situations in which the aggrieved party may not be able to fully recover expectation damages
- Where the cost to perform significantly exceeds the market value of such a performance
- Where the party cannot calculate expectation damages with reasonable certainty
- Where the damages are unforeseeable
- Where damages could have been mitigated or reasonably avoided
How do you calculate reliance damages?
Any expenditures made in preparation for performance or in actually performing
-minus-
Any loss the breaching party can prove the aggrieved party would have suffered had the contract been fully performed
How do you calculate restitutionary damages?
Calculation is within the court’s discretion, and as justice may require the court generally uses one or some combination of:
- The reasonable value or cost of benefits conferred
- The amount the other party’s property has increased in value due to the benefits received
What are the buyer’s remedies if the seller breaches (doesn’t deliver goods or buyer rejects noncomforming goods)?
- Cover
- Difference b/w market price & K price
- Incidental damages
- Consequential damages
What are consequential damages?
Consequential damages are losses to the buyer because of a particular need or use for the goods.
Only the buyer can get consequential damages against the seller (not the other way around), and only when the losses were reasonably foreseeable to the seller.
What is the duty to mitigate damages?
The nonbreaching party is expected to take reasonable steps to mitigate damages after a breach.
If they don’t, their damages can be reduced, but the breaching party can’t sue them for failing to take reasonable steps
What is reformation and when is it available?
Rewriting the contract to include the intent of the parties
Available if:
- Prior agreement existed; (oral or written)
- Agreement was put into writing; and
- Difference between prior agreement and written expression due to mistake
When can a seller recover lost profits?
When the seller is a lost volume seller.
Seller can recover if they resell the item to another buyer, and can show that they would have made the sale regardless of the breach (meaning they would have made 2 sales w/o breach but they only made 1 w/ breach)
For example, Max sells couches. Ian breached his K to buy a couch from Max. Max was able to sell the same couch to Carly, but since Max is a couch-dealer, he would have sold the couch to Carly regardless of whether Ian breached. Thus, he missed out on two sales b/c of the breach.
