Contracts Flashcards
Learn contracts
Battle of forms: two merchants, offeree responds and adds new terms, including clause disclaiming warranties. Offeror does not respond. What terms are in the contract?
All the added terms are part of the contract, EXCEPT for the disclaimer of warranty.
In BOF, additional terms will be part of the agreement unless they materially change the offer. Material changes include changing a party’s risks or remedies. A disclaimer of warranties changes a party’s risk or remedies. The clause that materially changes an offer will not automatically be included in the agreement. It must be specifically assented to.
When mailing correspondence re: an option contract, when is acceptance effective?
When the acceptance is received by the offeror. The normal mailbox rule does not apply to option contracts.
When offers, revocations, acceptances effective by mail?
For non-option contracts, all correspondence is effective when received by the other party EXCEPT acceptances, which are effective when mailed (mailbox).
To accept an option contract, the acceptance is effective when received by the offeror.
Definition merchant
A merchant is one who deals with the goods in the contract, or who holds himself out as having special knowledge or skill.
Definition offer
An offer is (1) an expression of willingness to enter into a contract, (2) with certain and definite terms, and (3) communicated to the offeree.
Manifestation of assent is judged by an objective standard of whether a reasonable person would have understood the conduct to manifest assent.
Definition acceptance
An acceptance is a manifestation of assent to the terms of an offer. Acceptance must be communicated to the offeror in any reasonable manner.
Manifestation of assent is judged by an objective standard of whether a reasonable person would have understood the conduct to manifest assent.
Definition consideration
Consideration is a bargained-for exchange involving legal value. An agreement is not enforceable unless there is consideration on both sides.
Promissory estoppel
A promise is enforceable without consideration (1) if necessary to avoid injustice, (2) the promisor could reasonably expect to induce the promisee’s detrimental reliance on the promise, and (3) the promisee did in fact detrimentally rely on the promise.
The promisee is entitled to RELIANCE damages.
Statute of Frauds definition, what contracts are within it, and how is the Statute of Frauds satisfied?
When is a writing NOT required?
When is the SOF not applicable even though it normally would apply?
To be enforceable, agreements within the Statute of Frauds must be evidenced by a writing, with essential terms of agreement, signed by the party against whom enforcement is sought. “Signature” and “writing” are liberally construed. Signature can be letterhead, and writing can mean multiple writings.
Sometimes writing not required: (1) specially manufactured goods, (2) admissions in court/pleadings, (3) partial performance/payment/delivery.
UCC’s version of Statute of Frauds, requires only a signed writing indicating quantity.
MY LEGS = Marriage, (more than one) Year, (interests in) Land, Executor (of estate), Goods over $500, Suretyship
Sometimes situations that WOULD be within SOF are NOT: (1) land sale where any 2 of 3 are present: (a) payment for the land, (b) possession of the land, (c) improvements to the land. (2) sale of goods that have been paid for, or accepted, or specially manufactured. (3) service contract that has been fully performed.
Definition breach
If a party is under an absolute duty to perform and fails to perform in accordance with the contract, then the contract is breached.
Common law requires a breach to be “material.” Material means the party did not receive a substantial benefit of the bargain.
UCC does not require a breach to be material.
What may an obligee do when an obligor breaches agreement?
If only MINOR breach, then obligee must still perform but may sue for damages.
If breach is MATERIAL, then obligee may suspend performance and immediately sue for damages. A breach is material if the obligee fails to receive a substantial benefit of the bargain.
Effect of anticipatory repudiation
If an obligor communicates an anticipatory repudiation, then obligee:
(1) May sue either immediately or at end of performance period
(2) May suspend performance
When can an anticipatory repudiation be retracted?
An anticipatory repudiation may be retracted before next performance is due unless the other party has (1) somehow indicated she considers repudiation final, or (2) materially changed her position in reliance on the repudiation.
Effect of prospective inability or unwillingness to perform
When obligor manifests some prospective inability or unwillingness to perform, the obligee may suspend performance and seek adequate assurances that the obligor can still perform.
If assurances don’t come after a reasonable time, the innocent party is excused and may treat it as a repudiation.
Definition unilateral contract
Offeror-promisor requests performance rather than a promise, and a contract is formed at the completion of performance. Once the offeree-promisee begins performance, the offer is irrevocable and the offeree-promisee is allowed a reasonable amount of time to complete performance.
Note: mere preparations are different from beginning performance.
Definition void contract
A contract is “void” when it is totally without any legal effect from the beginning, and hence cannot be enforced by either party.
Definition voidable contract
A voidable contract is one where either party may elect to avoid by raising a defense that makes the contract voidable (e.g., mental illness or infancy).
Definition unenforceable contract
A contract is unenforceable when it would otherwise be valid but there’s a defense other than contract formation (e.g., Statute of Frauds).
Requirements of definite terms for offer
For real estate: description of land + price
For sale of goods: quantity term only
Requirements contracts versus output contracts
Requirements contract: buyer promises to buy from a seller all items it requires. Each order must be proportionate to what buyer ordered in the past.
Output contract: seller promises to sell to buyer all items it produced.
These are considered sufficiently definite quantity for an offer.
Revoking an offer
An offer may be revoked directly or indirectly.
Directly: “I revoke my offer”
Indirectly: The offeree receives (1) correct information, (2) from a reliable source, (3) of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make an offer.
Option contract
Option contract allows an offer to remain open for specific period of time, during which the offer cannot be revoked. Must be supported by consideration.
Rejecting an offer supported by consideration does not terminate the offer; the offeree can change her mind within the time period. The offer remains open for the duration of the time period.
Firm offer rule
(1) offer by merchant
(2) signed writing
(3) assures offer remains open for time specified.
NO CONSIDERATION NECESSARY. If time period not stated, “reasonable period of time” and in no case longer than 3 months.
But if there IS consideration, then the offer remains open for whatever time stated (even beyond 3 months).
Detrimental reliance on an offer
When the offeror could reasonably expect that the offeree would rely to her detriment on the offer remaining open, and the offeree does so rely, then the offer is considered to remain open as an option contract for a reasonable length of time.
An offer to buy goods for shipment may be accepted by…
A promise to ship or actual shipment. If the shipment is for conforming goods, it’s easy.
If the shipment (WITHOUT a promise) is for nonconforming goods, the offer is STILL accepted but it’s also an immediate breach, UNLESS the seller notifies the buyer that the nonconforming goods are an accommodation. The buyer can accept or reject, and if the buyer rejects it is not a breach.
Battle of Forms requirements
Two merchants
The additional terms are automatically part of the offer unless they materially alter the original terms of the offer (e.g., changing a party’s risk or the remedies available, which includes a disclaimer of warranties).
Different terms depend on jurisdiction, some treat different terms the same as additional terms. Other courts follow the knockout rule and knock the terms out.
Auction sale with reserve
An auction sale “with reserve” means the auctioneer may withdraw the goods at any time until he announces the completion of the sale.
This is the default for all auction sales, and the auctioneer must state the sale is “without reserve” to make the sale without reserve.
Preexisting legal duty and consideration
Promising to perform a preexisting legal duty is NOT adequate consideration. But some exceptions:
(1) the preexisting duty is owed to a third person other than the promisor
(2) there is an honest dispute as to the duty
(3) there are unforeseen circumstances that could discharge a party (like in the case of impracticability)
Contract modifications under the UCC do NOT need additional consideration.
List of defenses to contract formation
I Saw U Fuck the MAID
Incapacity Statute of Frauds Unconscionability Fraud Mistake of fact Ambiguity Illegality Duress
Mutual mistake of fact defense to contract formation
A contract may be voidable if there is a MUTUAL mistake about existing facts that (1) concern a BASIC ASSUMPTION on which the contract was made, (2) the mistake has MATERIAL EFFECT on the contract, (3) the party seeking avoidance did NOT ASSUME RISK of the mistake.
Unilateral mistake of fact defense to contract formation
Default rule: if only one party is mistaken about a fact, there is still a contract.
But if the non-mistaken party took advantage of the mistaken party, the contract IS VOIDABLE. If (1) the non-mistaken party knew or had reason to know of the mistake of the other party and (2) the mistake was material and (3) the mistaken party did not assume the risk.
Misunderstanding re: ambiguous contract language defense to formation
If both parties knew of the ambiguity or if both parties were ignorant of the ambiguity, there is not contract unless the parties intended the same meaning
If one party knew the meaning but the other didn’t, then there is a contract only according to the ignorant party’s meaning.
Fraudulent misrepresentation and misrepresentation defenses to contract formation
If a party fraudulently induces another party into a contract (i.e., knowingly lies) and the other party justifiably relied on the fraudulent misrepresentation, the contract is VOIDABLE.
If (1) a party negligently induced another party into a contract (i.e., by not knowing if what they were saying was true or not) and (2) the other party justifiably relied on the misrepresentation, and (3) the misrepresentation was MATERIAL, then the contract is VOIDABLE. The representation MUST be material in this defense.
Duress defense to contract formation
Contracts induced by duress are VOIDABLE. Duress = assent secured by threat.
Undue influence defense to contract formation
Contracts induced by undue influence are VOIDABLE. Undue influence = (1) undue susceptibility to pressure by one party, and (2) excessive pressure by the other party. (e.g., a dominant and submissive relationship).
Situations where a contract would NORMALLY be within the SOF but are not.
Sometimes situations that WOULD be within SOF are NOT: (1) land sale where any 2 of 3 are present: (a) payment for the land, (b) possession of the land, (c) improvements to the land.
(2) sale of GOODS that have been paid for, or accepted, or specially manufactured.
(3) SERVICE contract that has been fully performed.
A modification where a contract, with the modification, would no longer be within the SOF.
Unconscionability defense to contract formation
Need procedural and substantive unconscionability.
Partial versus complete integration
Partial integration: The terms of the agreement as written cannot be changed, but NEW consistent terms can be ADDED by extrinsic evidence of other parts of the deal the parties didn’t include in the writing. *UCC presumes all writings are partial integrations by default.
Complete integration: Cannot look to extrinsic evidence to change the terms of the agreement at all.
Parol evidence rule
Basic rule: When parties to a contract express their agreement in writing with the INTENT that it embody the final expression of their bargain, the writing is an integration. Any evidence of anything else related to the terms of the agreement (such as prior to the writing or contemporaneous with the writing) is INADMISSIBLE to vary the terms of the writing. But extrinsic evidence CAN show any SUBSEQUENT modifications that happened AFTER the writing.
Validity issues: But if instead of varying the terms of a writing a party is arguing the agreement is invalid and therefore never came into being, then the court can look to extrinsic evidence on these issues.
Interpretation issues: If there is an ambiguity in the agreement, court can look at extrinsic evidence to aid in interpretation. But ONLY IF there’s an ambiguity.
Noncarrier case re: Delivery, risk of loss, payment
Contract for sale of goods where parties did not intend goods would be shipped.
If seller IS A MERCHANT, then risk of loss passes LATER, when buyer takes physical possession of the goods.
If seller IS NOT A MERCHANT, then risk of loss passes SOONER, upon tender of delivery.
IN BOTH cases, payment is due upon tender of delivery.
Carrier case re: Delivery and risk of loss
Two types: shipment contracts and destination contracts.
Shipment contract:
Parties contract for a carrier to deliver the items from seller to buyer. Seller must (1) make shipping arrangements, (2) make sure buyer has necessary documents, (3) notify buyer of shipment. Risk of loss passes to buyer when seller hands the goods to carrier. FOB indicates a shipment contract. If the goods don’t conform and buyer rejects, then risk does NOT pass on to buyer. If buyer accepts but later rightfully rejects, then risk never passed on to buyer in the first place (remained on seller from beginning). Payment is due when the seller hands goods to CARRIER.
Destination contract: Parties contract for seller to deliver the goods himself. Risk of loss passes to buyer when goods are tendered to the buyer at the destination. Payment is due when goods reach destination.
Automatically implied warranties in sale of goods
Warranty of title, warranty of merchantability.
Warranty of fitness for a particular purpose
Any seller (whether merchant or not) has reason to know of a particular purpose, buyer in fact relies on seller to select the goods to fit that purpose.
Express warranties
Includes any statement of fact or promise that was a basis of the bargain. Buyer need not show he actually relied on it. Includes models or samples.
How to properly disclaim warranties of merchantability and fitness for a particular purpose
(1) implied warranty of merchantability can ONLY be disclaimed by CONSPICUOUSLY and explicitly mentioning merchantability. Conspicuous means the text looks different from that around it.
(2) disclaimer of warranty of fitness for a particular purpose can ONLY be disclaimed by CONSPICUOUS WRITING. Conspicuous means the text looks different from that around it.
(3) “As is,” “with all faults,” or similar language can properly disclaim warranty of merchantability and fitness for a particular purpose.
How to properly modify a common law contract
Traditionally, modification requires new consideration. But modern trend will allow modification without new consideration if: (1) the modification is fair and equitable and (2) due to circumstance that were unforeseen by both parties.
Promisor’s satisfaction as condition precedent
When promisor’s satisfaction with promisee’s performance is a condition precedent for promisor’s performance…
(1) if MECHANICAL FITNESS, utility, etc., then the condition is satisfied if a reasonable person would be satisfied by the performance.
(2) if contract involves PERSONAL TASTE or judgment, then the condition is satisfied only if the promisor is actually personally satisfied.
Test for “Divisible contract”
Three conditions must be satisfied:
(1) the performance of each party is divided into two or more parts.
(2) the number of parts is the same for each party.
(3) each part is considered equivalent to the part.
Definition of “installment contract”
A divisible contract for sale of goods where delivery is in several lots.
List of ways a contractual duty can be discharged
PIICSII FRAN
Performance (normal situation), intervening illegality (the subject matter of the contract becomes illegal), a condition subsequent, impossibility, impracticability, frustration of purpose, rescission, accord and satisfaction, novation.
Test for discharge by impossibility
If (1) the non-occurrence on an event was a BASIC assumption of both parties, and (2) neither party has assumed the RISK, and (3) a duty has become IMPOSSIBLE to perform, then the duty is discharged.
Impossible means objectively impossible, i.e., no one could do it.
Test for discharge by impracticability
A party’s duty to perform is discharged if (1) an event’s non-occurrence was a BASIC assumption of both parties, and (2) the party has encountered “extreme and unreasonable difficulty” and/or expense.
Test for discharge by frustration of purpose
There is (1) a supervening event the parties did NOT REASONABLY FORESEE when they made the contract, (2) the purpose of the contract has been COMPLETELY destroyed, (4) that purpose was UNDERSTOOD by both parties when they made the contract.
When and how can parties mutually rescind a contract?
Parties may mutually rescind a contract at any time, UNLESS there is a third-party beneficiary whose rights have vested.
Rescission is itself a contract, and the consideration is the giving up of the previous contractual rights.
Default rule: Oral rescission okay, even when the written contractual language says otherwise. Two exceptions:
(1) If the contract was within SOF and therefore must have been in writing, then the rescission must also be in writing
(2) If the contract was for goods under UCC + there was a written contract specifying only written rescission, then the rescission must be in writing.
Novation: definition and test
Definition: a NEW CONTRACT replaces one of the old parties with a new party. This discharges the old contract.
Test for valid novation: (1) the OLD contract was valid, (2) the NEW contract is valid, (3) all parties (including the new one) agree to the novation, and (4) the old contract is immediately extinguishment of old contractual duties between original parties.
Accord and satisfaction definition
Accord: an agreement where parties agree for a new substitute performance. Must be supported by consideration.
Satisfaction: the performance of the accord agreement.
Often comes up in debtor/creditor situations where both agree to pay less amount in satisfaction of original debt.
If debtor breaches accord agreement before satisfaction…
If debtor breaches accord agreement before satisfaction, creditor may sue on either the original agreement or the accord agreement.
If creditor breaches accord agreement before satisfaction…
[This would happen if the creditor sued on the original contract]
Then debtor can (1) raise the accord as an equitable defense, or, (2) if the creditor is successful in their lawsuit on the original contract, sue for damages for breach of the accord agreement.
Definition and effect of minor breach
Minor breach: the non-breaching party still receives a substantial benefit of the bargain. Does not relieve non-breaching party of duty to perform. Non-breaching party may sue for damages.
Definition and effect of material breach
Material breach: the non-breaching party does NOT get a substantial benefit of the bargain. Immediately relieves duty to perform and may sue for damages.
Effect of minor breach + anticipatory repudiation
Minor breach + anticipatory repudiation = non-breaching party can treat it as a material breach (immediately relieves duty to perform and may sue for damages).
Perfect tender rule and effects of non-conforming goods: normal contract versus installment contract
Perfect tender rule: if the goods fail to conform to the contract in any way, the buyer may reject all, accept all, or any proportion.
If installment contract: More like common law substantial performance doctrine. An installment can only be rejected if the nonconformity substantially impairs the value of that installment and CANNOT be cured.
Sending a non-conforming installment only constitutes a BREACH if that one non-conforming shipment substantially impairs the value of the ENTIRE contract.
