CONTRACTS Flashcards
Applicable Law: Common Law vs. UCC
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. The Common Law applies to all other contracts.
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.
Requirements to Form a Valid Contract
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.
Mutual Assent: Offer & Acceptance
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.
Consideration: Bargained for Exchange
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.
Mutual Mistake
A contract is voidable (it may be rescinded or reformed) when there is a mutual mistake.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).
Unilateral Mistake
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.
Statute of Frauds–General Types of Contracts
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);
(5) Promises to pay an estate’s debt from the personal funds of the Executor/Administrator; AND
(6) 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).
Statute of Frauds–Requirements to Satisfy SOF
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.
Modification of Contracts–Common Law
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).
Modification of Contracts–UCC
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.
Parol Evidence Rule–General Rule/Exceptions
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 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; and
(5) to prove a condition precedent.
The Parol Evidence Rule DOES NOT apply to subsequent agreements.
Parol Evidence Rule–Define A “Partially Integrated Agreement”
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.
Parol Evidence Rule–Define A “Fully Integrated Agreement”
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.
Performance/Breach–Frustration of Purpose
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.
Performance/Breach–Impossibility (General Rule)
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.
