Contracts Flashcards

Question

gift vs. consideration

Answer 1

NOTE: The test to distinguish a gift from valid consideration is whether the offeree could have reasonably believed that the intent of the offeror was to induce the action. If yes, there is consideration, and the promise is enforceable.

Answer 2

A party’s promise to make a gift is enforceable under the doctrine of promissory estoppel if the promisor/donor knows that the promise will induce substantial reliance by the promisee, and the failure to enforce the promise will cause substantial injustice

Answer 3

At common law, a promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform (i.e., there is no legal detriment). Note that if the promisor gives something in addition to what is already owed (however small) or varies the preexisting duty in some way (however slight), most courts find that consideration exists. 3P EXCEPTION: There is an exception to the preexisting-duty rule when a third party offers a promise contingent upon performance of a contractual obligation by a party. Under the exception, the third party’s promise is sufficient consideration. PAST CONSIDERATION: Under the common law, something given in the past is typically not adequate consideration because it could not have been bargained for, nor could it have been done in reliance upon a promise.

Answer 4

At common law, modification of an existing contract must be supported by consideration. Agreements to modify a contract may still be enforced if: i) There is a rescission of the existing contract by tearing it up or by some other outward sign, and then the entering into of a new contract, whereby one of the parties must perform more than she was to perform under the original contract; ii) There are unanticipated difficulties, and one of the parties agrees to compensate the other when the difficulties arise if the modification is fair and equitable in light of those difficulties; or iii) There are new obligations on both sides. The modification must rest in circumstances not anticipated as part of the context in which the contract was made but need not have been completely unforeseeable. When such a reason is present, the relative financial strength of the parties, the formality with which the modification is made, the extent to which it is performed or relied on and other circumstances may be relevant

Answer 5

Unlike under the common law, under Article 2, no consideration is necessary to modify a contract; however, good faith is required. Thus, if one party is attempting to extort a modification, it will be ineffective under the UCC. Good faith requires honesty in fact and fair dealing in accordance with reasonable commercial standards. UCC § 1-201(20). The definition of “good faith” no longer limits the fair dealing prong of the rule to merchants. The same definition of good faith applies to all parties, both merchants and nonmerchants alike. Generally, a party benefited by a condition under a contract may orally waive that condition without new consideration. However, in installment contracts, the waiver may be retracted by providing the other party with reasonable notice that strict performance is required. The retraction is allowed unless it would be unjust because of a material change of position by the other party in reliance on the waiver.

Answer 6

1) Accord Under an accord agreement, a party to a contract agrees to accept a performance from the other party that differs from the performance that was promised in the existing contract, in satisfaction of the other party’s existing duty. Restatement (Second) of Contracts § 281. a) Dispute of a monetary claim When a party agrees to accept a lesser amount in full satisfaction of its monetary claim, there must be consideration or a consideration substitute for the party’s promise to accept the lesser amount. For example, consideration can exist if the other party honestly disputes the claim or agrees to forego an asserted defense (see i. Settlement of a legal claim, below), or if the payment is of a different type than called for under the original contract A “satisfaction” is the performance of the accord agreement; it will discharge both the original contract and the accord contract. However, there is no satisfaction until performance, and the original contract is not discharged until satisfaction is complete. Therefore, if an accord is breached by the party who has promised a different performance, the other party can sue either on the original contract or under the accord agreement.

Answer 7

If a claim is unliquidated or otherwise subject to dispute, it can be discharged if (i) the person against whom the claim is asserted in good faith tenders a negotiable instrument (e.g., a check) that is accompanied by a conspicuous statement indicating that the instrument was tendered as full satisfaction of the claim (e.g., “Payment in full”), and (ii) the claimant obtains payment of the instrument. The addition of a restriction by the claimant to his indorsement of the check, such as “under protest,” does not operate to preserve his right to seek additional compensation. When the claimant is an organization, the discharge is not effective if the instrument is not tendered to a person, place, or office designated by the organization. If no such designation is made, or if the claimant is not an organization, the discharge is not effective if the claimant returns the payment within 90 days. However, regardless of the type of claimant, these exceptions do not apply and the claim is discharged when the claimant, or the claimant’s agent who has direct responsibility with respect to the disputed obligation, knew, within a reasonable time before collection was initiated, that the instrument was tendered in full satisfaction of the claim. The burden to establish such knowledge is on party seeking discharge.

Answer 8

An illusory promise is one that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. Such a promise is not legally binding. A promise that is based on the occurrence of a condition within the control of the promisor may be illusory, but courts often find that the promisor has also promised to use her best efforts to bring about the condition. Similarly, a promise to purchase goods upon the promisor’s satisfaction with the goods is not illusory because the promisor is required to act in good faith.

Answer 9

A promise that is voidable or unenforceable by a rule of law (e.g., infancy) can nevertheless constitute consideration.

Answer 10

A requirements contract is a contract under which a buyer agrees to buy all that he will require of a product from the other party. An output contract is a contract under which a seller agrees to sell all that she manufactures of a product to the buyer. There is consideration in these agreements because the promisor suffers a legal detriment. The fact that the party may go out of business does not render the promise illusory. Because a covenant of good faith and fair dealing is implied in all contracts (common law and UCC), any quantities under such a contract may not be unreasonably disproportionate to any stated estimates, or if no estimate is stated, to any normal or otherwise comparable prior requirements or output.

Answer 11

A promise not to assert or a release of a claim or defense that proves to be invalid does not constitute consideration, unless the claim or defense is in fact doubtful due to uncertainty of facts or law, or the party promising not to assert or releasing the claim or defense believes in good faith that it may be fairly determined to be valid.

Answer 12

A new promise to pay a debt after the statute of limitations has run is enforceable without any new consideration. When the new promise is an express promise, most states require that the new promise be in writing and signed by the debtor. In addition, a new promise may be implied when the obligor (i) voluntarily transfers of something of value (e.g., money, negotiable note) to the obligee as interest on, part payment of, or collateral security for the prior debt, (ii) voluntarily acknowledges to the obligor the present existence of the prior indebtedness, or (iii) states to the obligee that the statute of limitations will not be pled as a defense. A new promise made to pay a debt discharged in bankruptcy is enforceable without any new consideration. While there must an express promise to pay rather than a mere acknowledgment or partial payment of the discharged debt, the new promise need not be in writing.

Answer 13

A new promise to perform a duty that is voidable will be enforceable despite the absence of consideration, provided that the new promise does not suffer from an infirmity that would make it, in turn, voidable.

Answer 14

Under the material benefit rule, when a party performs an unrequested service for another party that constitutes a material benefit, the modern trend permits the performing party to enforce a promise of payment made by the other party after the service is rendered, even though, at common law, such a promise would be unenforceable due to lack of consideration. This rule is not enforced when the performing party rendered the services without the expectation of compensation (e.g., as a gift). In addition, the promise is enforced only to the extent necessary to prevent injustice, and it is not enforceable to the extent that the value of the promise is disproportionate to the benefit received, or the promisor has not been unjustly enriched.

Answer 15

If one party requests another party to perform a service but does not indicate a price, and the service is performed, this generally creates an “implied-in-fact” contract. The party who performed the requested service is generally entitled to recover the reasonable value of her services in a breach-of-contract action in which the party who enjoyed the benefit of the services refused to pay. An exception applies, however, when the services were rendered without the expectation of payment.

Answer 16

i) The promisor should reasonably expect it to induce action or forbearance on the part of the promisee or a third person; ii) The promise does induce such action or forbearance; and iii) Injustice can be avoided only by enforcement of the promise. Note that, in general, the promisee must actually rely on the promise, and such reliance must have been reasonably foreseeable to the promisor. See below, however, for an exception regarding charitable subscriptions. The remedy may be limited or adjusted as justice requires. Generally, this results in the award of reliance damages rather than expectation damages.

Answer 17

Courts often apply the doctrine of promissory estoppel to enforce promises to charitable institutions. In some cases, they presume that the charity detrimentally relied on the promised contribution. A charitable subscription (i.e., a written promise) is enforceable under the doctrine of promissory estoppel without proof that the charity relied on the promise.

Answer 18

In the construction industry, it would be unjust to permit a subcontractor to revoke a bid after inducing justifiable and detrimental reliance in the general contractor. Thus, an agreement not to revoke a sub-bid offer can be enforceable under the theory of promissory estoppel. Because the sub-bid is only an outstanding offer, the general contractor is not bound to accept it upon becoming the successful bidder for the general contract. A general contractor can enter into a subcontract with another subcontractor for a lower price.

Answer 19

1. Void Contracts A void contract results in the entire transaction being regarded as a nullity, as if no contract existed between the parties. 2. Voidable Contracts A voidable contract operates as a valid contract, unless and until one of the parties takes steps to avoid it. 3. Unenforceable Contracts An unenforceable contract is a valid contract that cannot be enforced if one of the parties refuses to carry out its terms.

Answer 20

Mutual mistake occurs when both parties are mistaken as to an essential element of the contract. In such a situation, the contract may be voidable by the adversely affected party upon proof of the following: i) Mistake of fact existing at the time the contract was formed; ii) The mistake relates to a basic assumption of the contract; iii) The mistake has a material impact on the transaction; and iv) The adversely affected party did not assume the risk of the mistake. When reformation of the contract is available to cure a mistake, neither party can avoid the contract. 1) Conscious ignorance A party may bear the risk of a mistake, however, when she is aware at the time of the contract that she has only limited knowledge of the facts to which the mistake relates, and she accepts her limited knowledge as sufficient. Note that the risk created by conscious ignorance rests on the party being aware of her limited knowledge. Restatement (Second) of Contracts § 154. 2) Mistaken party’s negligence When the mistake is attributable to a party’s failure to know or discover facts before entering into the contract, the party may nonetheless assert the defense of mistake, unless the party failed to act in good faith and in accordance with the reasonable standards of fair dealing. The mistaken party’s negligence with regard to the mistake is not sufficient to prevent the mistaken party from avoiding the contract. Restatement (Second) of Contracts § 157.

Answer 21

When only one of the parties was mistaken as to an essential element of the contract at the time the contract was formed, either party can generally enforce the contract on its terms. However, the mistaken party can void the contract if the elements for a mutual mistake exist and either: i) The mistake would make enforcement of the contract unconscionable; or ii) The non-mistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken. For a unilateral mistake to form the basis for rescission, there must be an absence of serious prejudice to the other party.

Answer 22

Reformation of a writing for mistake is available if: i) There was a prior agreement (either oral or written) between the parties; ii) There was an agreement by the parties to put that prior agreement into writing; and iii) As a result of a mistake, there is a difference between the prior agreement and the writing. Note that if one party, without the consent of the other party, intentionally omits a term from the writing that had been agreed upon by the parties, reformation would be available on the grounds of misrepresentation.

Answer 23

a. Neither party knows or should know of the misunderstanding If the misunderstanding involves a material term, and neither party knows or has reason to know that there is a misunderstanding, then there is no contract. b. One party knows or should know of the misunderstanding If a material term in the offer and acceptance is ambiguous, and only one party knows or has reason to know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract formed based on the meaning of the term as understood by the unknowing party. c. Both parties know of the misunderstanding There is no contract if both parties at the time of contracting knew or had reason to know that a material terms was ambiguous, unless both parties intended the same meaning. d. Waiver of the misunderstanding Even if there is a misunderstanding, one party may waive the misunderstanding and choose to enforce the contract according to the other party’s understanding. e. Subjective determination of misunderstanding In determining the existence of a misunderstanding, it is each party’s knowledge or reason to know of the misunderstanding that governs, not what a reasonable person would know. In this regard, the objective theory of contracts does not apply. In addition, in determining what a party knows or has reason to know, the principles regarding conscious ignorance and negligence apply.

Answer 24

Fraudulent misrepresentation requires proof of the following: i) The misrepresentation is fraudulent; a) A false assertion of fact made knowingly, or recklessly without knowledge of its truth; and b) With intent to mislead the other party; ii) The misrepresentation induced assent to the contract; and iii) The adversely affected party justifiably relied on the misrepresentation.

Answer 25

Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist. In addition, mere nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that: i) Disclosure is necessary to prevent a previous assertion from being a misrepresentation or fraudulent or material; ii) Disclosure would correct a mistake of the other party as to a basic assumption, and the failure to disclose would constitute lack of good faith and fair dealing; iii) Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or iv) The other party is entitled to know the fact because of a confidential or fiduciary relationship.

Answer 26

1) Fraud in the factum Fraud in the factum (or fraud in the execution) occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction. In such a case, no contract is formed, and the apparent contract is void (i.e., not enforceable against either party), unless reasonable diligence would have revealed the true terms of the contract. 2) Fraud in the inducement Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. Such a contract is voidable by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.

Answer 27

Even if nonfraudulent, a misrepresentation (innocent or negligent) can still render a contract voidable by the adversely affected party if: i) The misrepresentation is material (i.e., information that would cause a reasonable person to agree or that the person making the misrepresentation knows would cause this particular person to agree); ii) The misrepresentation induced assent to the contract; and iii) The adversely affected party justifiably relied on the misrepresentation.

Answer 28

A party’s fault in not knowing or discovering facts before entering into the contract does not prevent the party’s reliance on the misrepresentation from being justified unless it constitutes a failure to act in good faith and in accordance with the reasonable standards of fair dealing. The party’s negligence with regard to learning about the falsity of the misrepresentation is not sufficient to prevent the party from avoiding the contract.

Answer 29

A party to a contract who is a victim of undue influence can void the contract. The key is whether a party has been able to exercise free and competent judgment or whether the persuasion of the other party has seriously impaired that judgment. Relevant factors can include the fairness of the bargain, the availability of independent advice, and the susceptibility of a party to being persuaded. When a confidential relationship between contracting parties is established, the burden of proving that the contract is fair may be placed upon the dominant party. The dominant party to the contract may also be held to a higher standard of disclosure than she would be in a contract between arms-length parties. When the undue influence is caused by the person who is not a party to the contract, the victim may void the contract, unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.

Answer 30

If, following a misrepresentation but before the deceived party has avoided the contract, the facts are cured so as to be in accord with the facts that were previously misrepresented, then the contract will no longer be voidable by the deceived party.

Answer 31

When one party misrepresents the content or legal effect of a writing to another party, the other party may elect to avoid the contract or to reform it to express what had been represented.

Answer 32

Duress is an improper threat that deprives a party of meaningful choice. a. Improper threat Examples of improper threats include threats of a crime, a tort, or criminal prosecution, or the threat of pursuing a civil action (when made in bad faith). In addition, it is improper to threaten to breach a contract if doing so would violate the duty of good faith and fair dealing. Restatement (Second) of Contracts §176. 1) Threat of criminal prosecution The threat of criminal prosecution is an improper means by which to induce a person to enter into a contract. It does not matter that the person making the threat honestly believes that the person who would be subject to criminal prosecution is guilty. Nor does it matter that the person threatened with prosecution is in fact guilty of the crime. 2) Threat of civil action Unlike the threat of criminal prosecution, the threat of a civil action is generally not improper. The lack of success in pursuing a civil action does not make the threat improper unless the civil action is pursued in bad faith. b. Deprivation of meaningful choice A person is deprived of meaningful choice only when he does not have a reasonable alternative to succumbing to the threat. Thus, with regard to the threat of a civil action, a person generally has the reasonable alternative of defending against the action. However, if the threat also involves the seizure of property in conjunction with the civil action, or if it causes the person to be unable to fulfill other contractual obligations, then the person may be deprived of a meaningful choice. Restatement (Second) of Contracts § 175. EFFECT: When a party’s agreement to enter into a contract is physically compelled by duress, such as the threat to inflict physical harm, the contract is void. In other instances when a party is induced to enter into a contract by duress, such as when the threat is a breach of the duty of good faith and fair dealing, the contract is voidable. When the duress is caused by the person who is not a party to the contract, the victim may void the contract, unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.

Answer 33

- INFANCY - Voidable by infant, not other party. Disaffirmance must happen before reaching age of majority or w/in reasonable time thereafter. If not, ratified. - Still liable when K is based on necessities (recovery limited to reasonable value of services/goods) - Statute: student loans may be fully enforceable. MENTAL ILLNESS: If adjudicated MI, purported K is VOID. If no adjudication, VOIDABLE if - (i) couldn't understand the nature of the transaction, or (ii) act in a reasonable manner re: transaction AND other party has reason to know of this fact. - K is fully enforceable if made during lucid period unless adjudication. - May be liable for reasonable necessities furnished. GUARDIANSHIP: if under G by reason of an adjudication, individual has no capacity to K and purported K is void. - May be liable for reasonable necessities furnished, INTOXICATION: Voidable by intoxicated party if person unable to understand nature and consequences AND other party had reason to know. Must PROMPTLY DISAFFIRM and return any value received. May be liable on QUASI-K for value furnished.

Answer 34

If the consideration or performance that is to occur under a contract is illegal, then the contract itself is illegal and is unenforceable. If a contract contemplates illegal conduct, it is void. If a contract becomes illegal after it is formed, the duty to perform under the contract is discharged. EFFECT: Illegal transactions are not recognized or enforceable, restitution is not awarded for consideration, and no remedy is available for partial performance. b. Exceptions 1) Ignorance of illegality When one party is justifiably ignorant of the facts that make the contract illegal, that party may recover if the other party to the contract acted with knowledge of the illegality. Restatement (Second) of Contracts § 180. 2) Lack of illegal purpose If a contract does not involve illegal consideration or the performance of an act that is illegal, and a party has substantially performed, then that party may recover if she is unaware of the illegal purpose that the other party intends to make of that performance. DIVISIBLE Ks: If a contract can be easily separated into legal and illegal parts, then recovery may be available on the legal part(s). LICENSING Ks: When a party fails to comply with a licensing or similar requirement and is prohibited from performing an act, the party may not enforce the contract if the requirement has a regulatory purpose and the public policy for the requirement clearly outweighs the interest in enforcing the promise. Where the purpose of the requirement is only to raise revenue, the requirement does not have a regulatory purpose. In weighing the policy for the requirement against the interest in enforcing the promise, the nature of the interest protected (e.g., health and safety vs. economic) and magnitude of the penalty should be taken into account as well as whether the violation was intentional or inadvertent.

Answer 35

When the parties are not equally at fault (not in pari delicto), the less guilty party may be able to recover restitutionary damages. Restatement (Second) of Contracts § 198. b) Withdrawal A party to an illegal contract who withdraws from the transaction before the improper purpose has been achieved may be entitled to restitution for a performance that the party has rendered when the party has not engaged in serious misconduct. Restatement (Second) of Contracts §199.

Answer 36

A contract (or part of a contract) is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would have agreed to it. The contract or part of the contract at issue must have been offensive at the time it was made. Unconscionability may also be applied to prevent unfair surprise. Factors rendering a contract unconscionable are often categorized as either procedural unconscionability or substantive unconscionability. Procedural unconscionability occurs when a party is induced to enter the contract without a meaningful choice due to deception, compulsion, or significantly unequal bargaining positions. Examples of procedural unconscionability may include boilerplate contract provisions that are inconspicuous, hidden, or difficult for a party to understand, or contracts of adhesion (a take-it-or-leave-it contract) when there is greatly unequal bargaining power between the parties. Substantive unconscionability occurs when the substance of the contract itself is unduly unfair. The question of whether a contract is unconscionable is a question of law for the court to decide; the issue does not go to the jury.

Answer 37

Even if a contract is neither illegal nor unconscionable, it may be unenforceable if it violates a significant public policy, such as a contract in restraint of marriage, a contract for the commission of a tort, or a contract that unreasonably restrains trade. NOTE: When a contract violates a policy that was intended for the benefit of the contracting party seeking relief, the contract may still be enforceable to avoid frustrating the purpose behind the policy.

Answer 38

When a person verbally expresses assent to an offer, the resulting agreement is characterized as an express contract. When a person’s assent to an offer is inferred solely from the person’s conduct, the resulting agreement is typically labeled an “implied-in-fact” contract. To be contractual bound, a person must not only intend the conduct but also know or have reason to know that his conduct may cause the offeror to understand that conduct as assent to the offer.

Answer 39

When a plaintiff confers a benefit on a defendant and the plaintiff has a reasonable expectation of compensation, allowing the defendant to retain the benefit without compensating the plaintiff would be unjust. In this case, the court can permit the plaintiff to recover the value of the benefit to prevent the unjust enrichment. Although this type of action is often characterized as based on an implied-in-law contract or a quasi-contract, quantum meruit recovery does not depend on the existence of a contract. A court may allow restitutionary recovery if: i) The plaintiff has conferred a measurable benefit on the defendant; ii) The plaintiff acted without gratuitous intent; and iii) It would be unfair to let the defendant retain the benefit because either (i) the defendant had an opportunity to decline the benefit but knowingly accepted it, or (ii) the plaintiff had a reasonable excuse for not giving the defendant such opportunity (e.g., because of an emergency).

Answer 40

- Promise, affirmation, sample that is part of the basis of the bargain UNLESS merely seller's opinion. - Can be made subsequent to sale (modification) - Words and conduct relevant to creation of express warranty are construed as consistent w/ each other.

Answer 41

A warranty of merchantability is implied whenever the seller is a merchant. To be merchantable, goods must be fit for their ordinary purpose and pass without objection in the trade under the contract description. A breach of this warranty must have been present at the time of the sale. If the buyer, before entering into the contract, has examined the goods or a sample or model as fully as the buyer desires, or has refused to examine the goods, then there is no implied warranty with respect to defects that an examination ought to have revealed to the buyer. DISCLAIMER: "as is," "with all faults," CAN be oral, but MUST USE "merchantability." If in writing, must be CONSPICUOUS.

Answer 42

A warranty that the goods are fit for a particular purpose is implied whenever the seller has reason to know (from any source, not just from the buyer) that the buyer has a particular use for the goods, and the buyer is relying upon the seller’s skill to select the goods. DICLAIMER: In writing, conspicuous

Answer 43

A party’s duty to perform can be dismissed by impracticability. AVAILABILITY: The defense of impracticability is available if: i) Performance becomes illegal after the contract is made; ii) The specific subject matter of the contract (e.g., the goods) is destroyed; iii) In a personal services contract, the performing party to the contract dies or becomes incapacitated; or iv) Performance becomes impracticable. DELEGABILITY: If the contract is a contract to perform services that can be delegated, it is not discharged by the death or incapacity of the party who was to perform the services. (Note that the death or incapacity of a person whose existence is required for the performance of a duty can give rise to the defense of impracticability, even though the person is not the performing party, such as the death of one party’s child who is to receive lessons from the other party.)

Answer 44

1. ) Unforeseeable event has occurred 2. ) Nonoccurrence of this event was a basic assumption on which K was made, 3. ) Party SEEKING DISCHARGE is not at fault. - NOTE: In sale of goods, seller must notify buyer. - ASSUMPTION OF THE RISK: If party assumes risk of an event happening, defense does not apply. - PARTIAL IMPRACTICABILITY: When some goods can be delivered, goods actually produced must be apportioned among the buyers. Buyer MAY refuse goods and cancel K. FAILURE OF PARTICULAR SOURCE OF SUPPLY: If the contract provided that a specific source of supply be used, and that source of supply fails, performance is discharged. This is so even when other sources are readily available. Courts will excuse performance when the parties have specifically identified the source in the contract. FAILURE OF AGREED-UPON TRANSPORTATION METHOD: Delivery or payment may be made by any commercially reasonable method (MUST be accepted)

Answer 45

- Applies when: unexpected event DESTROYS entire purpose of making the K (even if not rendered impossible!). - must not be FAULT of party seeking rescission. - Nonoccurrence of event must have been assumption of the agreement. - Doesn't have to be completely unforeseeable, but does have to be unexpected/not realistic. - Must be sufficiently severe that it wasn't an assumed risk. RESULT: Can rescind, does not have to pay damages.

Answer 46

- Occurs by mutual agreement of parties - Cannot be rescinded by mutual agreement if there is a 3P beneficiary and the 3P beneficiary's rights under the K have already vested.

Answer 47

- CL: Must be supported by consideration to discharge duty. - UCC: Claim or right can be discharged by WRITTEN WAIVER OR RENUNCIATION signed and delivered by aggrieved party; no Consideration needed.

Answer 48

- If K calls for goods identified at time of K, and they are destroyed by no fault of either party before risk of loss shifts to buyer, K is VOIDED. If goods are damaged but not destroyed, buyer may choose to take goods at reduced price. If RoL has shifted to buyer, K is not avoided and the seller may enforce.

Answer 49

If performance would satisfy duty of promisee to 3P and promisee did not intend to make a gift to 3P, then 3P is a CB and may sue either Pr or Pe to enforce.

Answer 50

In general, an intended beneficiary is one to whom the promise of the performance will satisfy the obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. In addition, recognition of the right to performance in the beneficiary must effectuate the intent of the parties to the contract. WHO CAN 3P SUE? Generally a beneficiary of a "gift promise" can sue only the Pr. But if Pe tells them about the K and they justifiably and foreseeably rely on it, may also sue Pe. Intended beneficary to whom Pe owes money or to whom Pe is under an oblgiation may sue either Pr or Pe, but only ne recovery is allowed.

Answer 51

The rights of an intended beneficiary vest when the beneficiary: i) Materially changes position in justifiable reliance on the rights created; ii) Manifests assent to the contract at one party’s request; or iii) Files a lawsuit to enforce the contract. Once the beneficiary’s rights have vested, the original parties to the contract are both bound to perform the contract. Any efforts by the promisor or the promisee to rescind or modify the contract after vesting are void, unless the third party agrees to the rescission or modification.

Answer 52

- Pe can raise any D against 3P that they can raise against Pr. - The promisor generally may not assert any defenses that the promisee has against the intended beneficiary. - However, if the promisor’s promise is one to assume the promisee’s obligation, then the promisor can raise the promisee’s defense. - When the promisor fails to pay the third-party beneficiary, the promisee, on behalf of the third-party beneficiary, can sue the promisor for specific performance of the promise. In addition, when the promisee has paid a creditor beneficiary pursuant to their agreement, the promisee can directly sue the promisor for reimbursement to the extent of the promise and, if the creditor beneficiary’s claim is fully satisfied, by subrogation to the beneficiary’s claim against the promisor.

Answer 53

Almost all contract rights can be assigned. Partial assignments are permissible, as is the assignment of future or unearned rights. LIMITATIONS: - Not if increases risk or duty of obligor or materially reduces obligor's chance of obtaining performance. - Contract provisions can render some assignments void. (BUT if just prohibits, not voiding, then can give rise to breach but doesn't invalidate the assignment) MUST HAVE: Present intent to transfer the right immediately. No consideration needed, but IF CONSIDERATION IS GIVEN, IT IS IRREVOCABLE.

Answer 54

- If consideration is given, the assignment is irrevocable. - If no consideration, geneerally revocable unless obligor has already performed or PE applies. - if document evidences/symbolizes the right being assigned is delivered, makes assignment irrevocable. So does written assignment signed by assignor to the assignee.

Answer 55

- takes ALL rights as the K stands at time of assignment, SUBJECT TO ANY DEFENSES that could be raised by the assignor.

Answer 56

- Revokes any prior REVOCABLE assignment. - If 1st Assignment was irrevocable, then 1st assignee has priority over 2nd assignee unless 2nd assignee is BFP for value w/o notice of 1sst assignment. If 2nd has notice, then estopped from asserting claim.

Answer 57

- NOT ALLOWED: When substantial interest in having delegating party perform or delegation is PROHIBITED BY K. - Unless circumstances indicate the contrary, the prohibition on the assignment of a contract (e.g., “this contract may not be assigned”), bars the delegation of duties, even though it does not affect the assignment of rights. - EFFECT: When obligations are delegated, delegator is NOT RELEASED from liability, unless other party to K agrees to release and substitute (NOVATION). But mere consent to delegation does NOT create a novation. - EFFECT ON DELEGATEE: Promise enforceable against delegatee IF received consideration or there is a consideration substitute. - EFFECT ON OTHER PARTY: May demand assurances, but must accept if the delegation was permitted

Answer 58

- May be EXPRESS or IMPLIED if (i) obligor repudiates liability to original promisee and obligee subsequently accepts performance of the original agreement from the delegatee without reserving rights against the obligor.

Answer 59

An assignment of a contract that is not limited to contractual rights (e.g., “this contract is assigned to”) is typically treated as both an assignment of rights and a delegation of duties.

Answer 60

The writing must: i) Be signed by the party against whom enforcement is sought; and ii) Contain the essential elements of the deal. - writing need not be formal - may be in more than one writing if they reference each other - need not be delivered to party trying to enforce - if lost or destroyed, still may operate to satisfy S/F (prior existence may be proved by oral evidence)

Answer 61

- Marriage (prenups etc., NOT the promises to marry themselves) - Suretyship - Cannot be performed < 1 year - Real Property (any interest, so includes leases or easements unless under a year) - UCC, sale of goods > 500

Answer 62

Suretyship is a three-party contract, wherein one party (the surety) promises a second party (the obligee) that the surety will be responsible for any debt of a third party (the principal) resulting from the principal’s failure to pay as agreed. A suretyship induces the second party to extend credit to the third party. A promise to answer for the debt of another must generally be in writing to be enforceable. A contract of an executor (or administrator) of an estate may fall into this category insofar as the executor promises the creditor of the decedent that if the estate does not have the funds to pay the debt, he will assume personal liability for that debt. The statute applies only to debts incurred by the decedent, not to new debts incurred by the estate after his death. Because the executor undertakes to answer for the debt of the decedent, such contracts fall under the suretyship provision.

Answer 63

An indemnity contract (i.e., a promise to reimburse for monetary loss) does not fall within the Statute of Frauds as a suretyship provision. If the main purpose of the surety in agreeing to pay the debt of the principal is the surety’s own economic advantage, rather than the principal’s benefit, then the contract does not fall within the Statute of Frauds, and an oral promise by the surety is enforceable.

Answer 64

Even if an oral contract for the transfer of an interest in real property is not enforceable at the time it is made, subsequent acts by either party that show the existence of the contract may make it enforceable, even without a memorandum. Such acts include: i) Payment of all or part of the purchase price; ii) Possession by the purchaser; or iii) Substantial improvement of the property by the purchaser. Most jurisdictions require at least two of the above three acts to establish sufficient part performance. FULL PERFORMANCE: When a party to an oral contract who has promised to convey real property performs, that party can enforce the other party’s oral promise unless the promise is itself the transfer of a real property interest.

Answer 65

Full performance by either party to the contract will generally take the contract out of the Statute of Frauds. Although part performance would not take the contract out of the Statute of Frauds, restitution would be available to the party who performed.

Answer 66

a. Sufficiency of the writing When the price of goods is at least $500, the UCC requires a memorandum of the sale that must: i) Indicate that a contract has been made; ii) Identify the parties; iii) Contain a quantity term; and iv) Be signed by the party to be charged. A signature includes any authentication that identifies the party to be charged, such as a letterhead on the memorandum. 1) Type of writing required To satisfy the Statute of Frauds, the above terms must be in writing, but that writing need not be an actual contract. It does not even need to be contained on one piece of paper—a series of correspondence between the parties may suffice. 2) Mistake in writing A mistake in the memorandum or the omission of other terms does not destroy the memorandum’s validity. An omitted term can be proved by parol evidence. However, enforcement is limited to the quantity term actually stated in the memorandum.

Answer 67

) Specially manufactured goods No writing is required if (i) the goods are to be specially manufactured for the buyer, (ii) the goods are not suitable for sale to others, and (iii) the seller has made “either a substantial beginning of their manufacture or commitments for their procurement.” UCC § 2-201(3)(a). 2) Payment and acceptance by seller A contract is outside the UCC Statute of Frauds to the extent that payment has been made and accepted. UCC § 2-201(3)(c). When a portion of the purchase price for a single item has been paid, most courts treat the contract as enforceable. 3) Receipt and acceptance by buyer A contract is outside the UCC Statute of Frauds to the extent that goods are received and accepted. UCC § 2-201(3)(c). Acceptance of a part of a commercial unit is acceptance of the entire unit. UCC § 2-606(2). 4) Failure to respond to a memorandum (when both parties are merchants) If both parties are merchants and a memorandum sufficient against one party is sent to the other party, who has reason to know its contents, and the receiving party does not object in writing within 10 days of receipt of the memorandum, then the contract is enforceable against the receiving party even though he has not signed it.

Answer 68

Under UCC § 2-209(3), the requirements of the Statute of Frauds must be satisfied if the contract as modified is within its provisions. Any of the above exceptions would apply, though, to take a modification out of the Statute of Frauds. The UCC would also enforce a provision in a contract for the sale of goods that required a modification to be in writing. Thus, even if the contract was for a sale of goods valued at less than $500 or involved one of the exceptions discussed above, if the contract specifically provided that any modification be in writing, then the UCC would enforce that requirement. Note that under a common-law contract, a provision requiring a modification to be in writing even though the modification would not otherwise fall within the Statute of Frauds would not be enforceable.

Answer 69

- Only applies to contemporaneous/earlier writings. - either COMPLETE or PARTIAL INTEGRATION - - Look for merger clause. - - If partial, previous discussions permissible if CONSISTENT w/ K - - Some courts will ask if "naturally omitted" term and if it is, it can be introduced so long as it does not CONTRADICT. Others use Four Corners Rule to determine intent. INTENT: a. Common-law four-corners rule Under the common law, a court was permitted to look only to the writing itself (within the “four corners” of the document) for evidence of intent. If the written contract appeared to be detailed, then a court would likely conclude that it was totally integrated. A merger clause is evidence of complete integration, and it usually states: “This contract is the final and complete expression of the parties’ agreement and supersedes all prior contracts, agreements, understandings, negotiations, assurances, guarantees, or statements.” b. Second Restatement rule The Second Restatement adopts a different approach to the parol evidence rule. If, under the circumstances, an extrinsic term of an agreement would “naturally be omitted” from a writing, then that term can be introduced, so long as it does not contradict the writing. Restatement (Second) of Contracts § 213. c. UCC rule In contrast to the common law and Second Restatement parol evidence rules, the UCC rule is much more lenient. The UCC essentially presumes that a written contract is only a partial integration and allows any additional consistent terms unless a court concludes that the parties “certainly” would have included the term in the written contract. UCC § 2-202. Because that standard is difficult to establish, parties usually can bring in outside evidence.

Answer 70

- PRESUME partial integration unless parties would have CERTAINLY included. COURSE OF PERFORMANCE: Evidence is admissible to show course of performance if (i) the agreement involves repeated occasions for performance by a party, and (ii) the other party accepts performance without objection and with knowledge of the course of performance.

Answer 71

1. Raising a Defense to the Formation of a Contract The parol evidence rule does not apply when a party is raising a defense to the formation of a contract, such as mistake, misunderstanding, or misrepresentation. Parties may always introduce evidence that would show that no valid contract exists or that the contract is voidable. 2. Establishing a Defense to the Enforcement of the Contract Similarly, the parol evidence rule does not apply to evidence offered to establish a defense such as mistake, misrepresentation, incompetence, illegality, duress, or lack of consideration. If the evidence would make the contract void or voidable, then the parol evidence rule will not apply. 3. Separate Deal Even when there is full integration, evidence may be offered if it represents a distinct and separate contract. 4. Condition Precedent Parol evidence may also be admitted to prove a condition precedent to the existence of the contract. 5. Ambiguity and Interpretation Evidence may be admitted for the purpose of interpreting or clarifying an ambiguity in the agreement. This can include evidence of trade usage or even local custom to show that a particular word or phrase had a particular meaning. Courts approach interpretation in two ways. a. Plain-meaning rule This rule provides that the objective definitions of contract terms control the meaning of the contract, regardless of whether the meaning corresponds with the actual intent of the parties. Sometimes, courts will go outside the document to clarify the ordinary meaning of terms that are ambiguous or overly vague. b. Context rule Some states permit courts to use a contextual approach to contract interpretation. Under the context rule, judges determine the contract’s meaning by considering all evidence of the facts and circumstances related to the transaction. The goal is to effectuate the parties’ actual contract objectives and purposes. 6. Subsequent Agreements The parol evidence rule does not apply to evidence of agreements between the parties subsequent to execution of the writing.

Answer 72

a. Course of performance A course of performance is a sequence of conduct that is relevant to understanding an agreement between the parties if: (i) the agreement involves repeated occasions for performance by a party, and (ii) the other party accepts performance without objection and with knowledge of the course of performance. UCC § 1-303(a). A course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance. UCC § 1-303(f). b. Course of dealing A course of dealing is a sequence of conduct concerning previous transactions between the parties that can reasonably establish a common basis of understanding for interpreting their conduct. UCC § 1-303(b). c. Trade usage Trade usage is any practice or method of dealing in the particular business or industry that is practiced with such regularity so as to justify an expectation that it will be practiced in the instant case. UCC § 1-303(c).

Answer 73

Express conditions must be complied with fully unless excused; substantial performance will not suffice. Arbitration clauses are enforceable, except when a consumer might be waiving an important substantive right. An express condition is enforceable even when the failure to meet the condition results in the denial of compensation.

Answer 74

The most common types of court-supplied implied conditions are called “constructive conditions of exchange” and arise most frequently in construction and employment contracts. A court will imply that the builder or employee must perform first (at least “substantially”) before the other side’s performance (the payment of money) becomes due. In addition to good faith, the UCC implies a duty of cooperation on the parties when performance of one party is dependent upon the cooperation of the other party. If a party fails to cooperate, the other party may suspend her own performance without being in breach.

Answer 75

Performance by one or both of the parties may be made expressly conditional in the contract, and the condition may precede the obligation to perform (condition precedent) or may excuse the duty to perform after a particular event occurs (condition subsequent). A condition subsequent exists only with respect to a duty that is absolute. (Note: Under the Restatement (Second) of Contracts, a condition subsequent is treated as a discharging event rather than as a condition.

Answer 76

he approach to determine whether a condition is satisfied is usually an objective standard based upon whether a reasonable person would be satisfied. In most contracts, it is easy to conclude that all conditions have been satisfied. In contracts based upon aesthetic taste, however, the occurrence of the condition may be more difficult to determine. When the aesthetic taste of a party determines whether the other party’s performance is satisfactory (e.g., painting a family portrait), satisfaction is determined under a subjective standard. Under this standard, if the party is honestly dissatisfied, even if the dissatisfaction is unreasonable, the condition has not been met. However, the party’s dissatisfaction must be in good faith, or a claim of dissatisfaction can be a breach, such as when a party is asserting dissatisfaction merely to avoid its own contractual obligation. There is a preference for the objective standard when the matter subject to a party’s satisfaction involves the quality of non-unique goods or workmanship, rather than aesthetic taste.

Answer 77

When only one party’s performance of his contractual duty requires a period of time, that party must complete his performance before the other party is required to perform, unless the language or circumstances indicate otherwise. By contrast, when a party’s performance can be rendered at the same time as the other party’s performance, each party’s performance is conditioned on the other party’s performance (known as “the constructive condition of exchange”); consequently, both parties’ performances are due simultaneously, unless the language or circumstances indicate otherwise. In such a case, the failure of one party to perform excuses the other party’s performance.

Answer 78

When parties expressly agree to a condition precedent (or a concurrent condition), they are generally held strictly to that condition; a party must fully comply with that condition before the other party’s performance is due. With an implied or constructive condition precedent (or an implied or constructive concurrent condition), a party who substantially complies with an implied or constructive condition can trigger the obligation of the other party to perform. This is known as the doctrine of “substantial performance.” The doctrine of substantial performance does not generally apply to a contract for the sale of goods. a. Effect on damages The doctrine of substantial performance permits a party who substantially performs to recover on the contract even though that party has not rendered full performance. In general, the party who substantially performed her contractual obligations can recover the contract price minus any amount that it will cost the other party to obtain the promised full performance. A party who has not substantially performed generally cannot recover damages based on the contract, but she may be able to recover through restitution (see VIII.D.1.a Benefit conferred pursuant to a contract, infra). The other side to substantial performance is material breach. A party who fails to substantially perform is in material breach. b. Willful breach Substantial performance is less likely to be found when a party intentionally furnishes services that are materially different from what he promised. Such a breach is more likely to be treated as a material breach.

Answer 79

A party’s delay in performing an obligation suspends the duty that is conditioned on that performance, but it does not necessarily prevent the performance of that duty from constituting substantial performance. Among the factors considered are the degree to which the delay deprives the other party of benefit for which he contracted and the extent to which that party can be compensated for that deprivation. Restatement (Second) of Contracts § 241.

Answer 80

Although generally the doctrine of substantial performance does not apply when the parties have expressly provided for a specific condition, stock phrases that appear in many contracts do not automatically prevent the application of this doctrine. For example, even though a contract for the sale of land contains the phrase “time is of the essence,” a slight delay in performance typically does not give the other party the right to refuse to perform.

Answer 81

Under the UCC, the basic obligations of a seller are to transfer ownership of the goods to the buyer and to tender goods conforming to the warranty obligations. The UCC requires “perfect tender,” and substantial performance will not suffice except for installment contracts or when the parties agree that it applies. The buyer has a right to inspect the goods, and once he accepts them, he has an obligation to pay. If a buyer rejects goods as nonconforming and time still remains to perform under a contract, the seller has a right to cure and tender conforming goods. a. Transferring ownership The UCC implies a warranty of title in all sales contracts, providing that the seller automatically warrants that (i) she is conveying good title, (ii) the transfer is rightful, and (iii) the goods are delivered free from any security interest of which the buyer has no knowledge at the time of the contract. Actual knowledge by the buyer of a security interest on the goods nullifies the warranty of title. UCC§ 2-312(1). The UCC permits disclaimer of the warranty of title, but such disclaimer must be by specific language or a circumstance that gives the buyer reason to know that the seller does not claim rightful title or that the seller is only purporting to sell such rights as the seller or a third person possesses. UCC § 2-312(2). b. Seller’s obligation to tender goods The seller must tender the goods in accordance with the contract provisions or in accordance with the UCC if the contract is silent on tender. UCC § 2-503. 1) Time of tender In the absence of a specific contract provision, the goods must be tendered within a reasonable time after the contract is made. UCC § 2-309. 2) Manner of tender The goods are to be delivered in one delivery, unless otherwise provided in the contract, or the circumstances give either party a right to make or demand delivery in lots (as when a party would clearly have no room to store the goods if they were delivered all at once). UCC § 2-307. 3) Place of tender Unless otherwise agreed, the place of tender is the seller’s place of business (or residence, if the seller has no place of business), unless the goods are identified and the parties know that they are at some other location, in which case that location will be the place of tender. UCC § 2-308. 4) Method of tender The four methods of tender are as follows. a) Seller’s place of business If the goods are tendered at the seller’s place of business, then the seller must place the goods at the disposition of the buyer and give the buyer notice, if notice is necessary to enable the buyer to take delivery. UCC§2-503. b) Shipment contract If the contract does not specify a place of delivery, it is a shipment contract (often identified by the words “F.O.B. (free on board) seller’s place of business”), and the seller must deliver the goods to the carrier, make a proper contract for their shipment, obtain and deliver any document necessary for the buyer to obtain possession of the goods, and give the buyer notice that the goods have been shipped. UCC §§ 2-319(1)(a), 2-504. c) Destination contract If the contract is a destination contract (often identified by the words “F.O.B. (free on board) buyer’s place of business”), then the seller must deliver the goods to a particular place (specified in the contract) and tender them there by holding the goods at the buyer’s disposition and giving the buyer notice. UCC § 2-319(1)(b). d) Goods in the hands of a bailee When goods are in the hands of a bailee and are to be transferred without being moved, the seller must obtain a negotiable document of title or acknowledgment from the bailee of the buyer’s rights in the goods. However, unless the buyer seasonably objects, the seller can supply the buyer with a nonnegotiable document of title or a written direction to the bailee to deliver the goods to the buyer. UCC § 2-503(4). A contract that requires the seller to ship goods to the buyer by a third-party carrier is either a shipment contract or a destination contract. When the contract is otherwise silent, a shipment contract is presumed when the contract requires shipment by a third-party carrier. UCC§2-503 cmt. 5. 5) C.I.F. (cost, insurance, and freight) and C & F (cost and freight) In a C.I.F. contract, the price includes the cost of the goods, the cost of transporting the goods, and the cost of insuring the goods during shipment. In a C & F contract, the price includes the cost of the goods plus the cost of shipment. 6) F.A.S. contracts When a contract specifies F.A.S. (free alongside ship), the seller is obligated to deliver the goods alongside a designated vessel in a manner that comports with the ordinary course of business of the port of delivery, or at a specified dock.

Answer 82

When a conforming tender is made, the buyer is obligated to accept and pay the price under the contract. UCC § 2-507. Rejection amounts to breach of contract. An agreement that is otherwise sufficiently definite will not be made invalid merely because it omits details regarding the performance to be specified by one of the parties. The UCC implies an obligation of good faith within the parameter of “commercial reasonableness.” UCC § 2-311(1). When a contract fails to specify the assortment of goods, the UCC imposes a duty on the buyer to specify, whereas arrangements relating to shipment are the seller’s duty to specify. UCC § 2-311(2). If the buyer fails to specify the assortment of goods, then the seller can treat the failure as a breach by failure to accept the contracted-for goods only if the buyer’s failure materially impacts the seller’s performance. UCC § 2-311(3). 1) Noncarrier cases versus carrier cases Unless otherwise specified in the contract, when goods are shipped by carrier, payment is due from the buyer at the moment the buyer receives the goods. In noncarrier cases, payment is due upon tender of delivery by the seller. 2) Shipment under reservation A seller who ships by carrier under a contract that does not specify the method or form of payment may send the goods under reservation, meaning that the carrier will hold the goods until the buyer pays. This is accomplished by the seller’s obtaining a negotiable or nonnegotiable bill of lading. 3) Tender of payment a) Delivery and tender concurrent conditions of exchange Unless otherwise agreed, tender of payment is a condition to the seller’s duty to tender and complete any delivery. b) Sufficiency of tender of payment Tender of payment is sufficient when made by any means or in any manner consistent with the ordinary course of business, unless the seller (i) demands payment in legal tender (i.e., cash) and (ii) gives any extension of time reasonably necessary to procure such legal tender. c) Payment by check If payment is made by check, payment is conditional until the check is paid or dishonored.

Answer 83

A buyer has a right to inspect goods that are tendered, delivered, or identified to the contract for sale, unless the contract provides otherwise. 1) Prior to payment A buyer’s right to inspect is a condition to payment. An inspection may occur at any reasonable time and place and in any reasonable manner, even when the goods are held under reservation. However, the parties can agree that inspection can occur in a particular form, time, or place. If the seller is required or authorized to send the goods to the buyer, then the inspection may be made after their arrival. 2) When not entitled to inspect Unless otherwise agreed, the buyer is not entitled to inspect the goods before payment of the price if the contract (i) provides for delivery “C.O.D.” or (ii) is on other terms that, under the applicable course of performance, course of dealing, or trade usage are interpreted to preclude inspection before payment. Similarly, the buyer is not entitled to inspect the goods before payment, unless otherwise agreed, if the contract provides for payment against documents of title, except when such payment is due only after the goods are to become available for inspection. 3) Expenses of inspection Expenses of inspection must be paid by the buyer, but they may be recovered from the seller if the goods do not conform and are rejected.

Answer 84

Recovery is limited to the performance promised for the corresponding portion of the contract that has been performed. Damages may be recoverable for breach of other obligations under other portions of the contract. b. UCC Special rules apply to installment contracts for the sale of goods. The most important difference between installment contracts and other contracts is that the perfect-tender rule does not apply; instead, the right to reject is determined by a “substantial conformity” standard. UCC § 2-612. 1) Multiple shipments Under the UCC, an installment contract is defined as one in which the goods are to be delivered in multiple shipments, and each shipment is to be separately accepted by the buyer. Parties cannot vary or contract out of this definition under the code. Payment by the buyer is due upon each delivery, unless the price cannot be apportioned. UCC § 2-612. 2) Nonconforming segment If the seller makes a nonconforming tender or tenders nonconforming goods under one segment of an installment contract, the buyer can reject only if the nonconformity: i) Substantially impairs the value of that shipment to the buyer; and ii) Cannot be cured. If the seller makes adequate assurances that he can cure the nonconformity, then the buyer must accept the shipment. UCC § 2-612(2). 3) Remaining segments When there is a nonconforming tender or a tender of nonconforming goods under one segment of an installment contract, the buyer may cancel the contract only if the nonconformity substantially impairs the value of the entire contract to the buyer.

Answer 85

A duty of good faith and fair dealing is imposed on each party in the performance and enforcement of any contract, whether governed by common law or by the UCC. Restatement (Second) of Contracts § 205; UCC § 1-304. “Good faith” means “honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC § 1-201(20). Note that while this duty is imposed on all contracts, there are situations, such as the modification of a contract, in which the existence of good faith can have a different effect, depending on whether the contract is governed by the common law or by the UCC (see I.E.3.b. Modification, supra). The implied duty to deal fairly and in good faith does not apply as such to the formation of a contract. While bad faith in negotiating may have consequences, such as enforcement of a promise made in bad faith under the doctrine of promissory estoppel or the denial of enforcement of a promise made in reliance on a fraudulent assertion, the implied duty to deal fairly and in good faith arises once a contract exists.

Answer 86

If a condition is suspended, then the condition is restored upon expiration of the suspension. If the condition is excused, then the party having the benefit of the condition can never raise it as a defense. 1. Waiver A party whose duty is subject to the condition can waive the condition, either by words or by conduct. The condition may be reinstated if: i) The waiving party communicates a retraction of the waiver before the condition is due to occur; and ii) The other party has not already suffered detrimental reliance. For contracts subject to the common law only a condition that is not a material part of the agreement may be waived without consideration. For contracts subject to the UCC, while a condition that is a material part of the agreement may be waived in good faith without consideration, the contract as modified may be subject to the Statute of Frauds if the price is $500 or more. 2. Wrongful Interference The duty of good faith and fair dealing, which is implied in any contract, includes the duty not to hinder the other party’s performance and a duty to cooperate, when necessary. In addition, if the party whose duty is subject to the condition wrongfully prevents or interferes with the occurrence of that condition, then, under the doctrine of prevention, the condition is excused and the party wrongfully interfering has an absolute duty to perform. 3. Election A party who chooses to continue with a contract after a condition is not met effectively elects to waive that condition as justification for the party’s own nonperformance of a contractual duty, although the party may be able to seek damages resulting from the non-occurrence of the condition. 4. Estoppel A party who indicates that a condition will not be enforced may be estopped from using that condition as a defense if the other party reasonably relied on the party’s words or conduct that the condition had been waived.

Answer 87

Under common law, a material breach of contract (i.e., when the nonbreaching party does not receive the substantial benefit of its bargain) allows the nonbreaching party to withhold any promised performance and to pursue remedies for the breach, including damages. If the breach is minor (i.e., the breaching party has substantially performed), then the nonbreaching party is entitled to any remedies that would apply to the nonmaterial breach. If a minor breach is accompanied by an anticipatory repudiation, then the nonbreaching party may treat the breach as a material breach. The party who commits a material breach of his contract obligations cannot sue for contract damages but would ordinarily be entitled to the fair value of any benefit conferred on the nonbreaching party. NOTE: Keep in mind that if a breach is minor, the nonbreaching party may be able to recover damages, but that party also still must perform under the contract. If the breach is material, the nonbreaching party does not need to perform.

Answer 88

Under the UCC, the seller generally must strictly perform all obligations under the contract or be in breach. The doctrine of material breach applies only in the context of installment contracts or when the parties so provide in their contract.

Answer 89

A party can demand assurance of performance if there are reasonable grounds for insecurity about the other party’s ability or willingness to perform. Once such assurances are requested, performance may be suspended until they are provided. Failure to give adequate assurances within a reasonable time can be treated as repudiation. (Under the UCC, the demand must be made in writing and a reasonable time in which to give adequate assurances is limited to 30 days.) UCC § 2-609; Restatement (Second) of Contracts § 251. Even then, the repudiating party can still retract his repudiation until his next performance is due, unless the other party has already materially changed his position or otherwise indicated that he considers the repudiation final. UCC § 2-611. a. Commercial standards for merchants Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered are determined according to commercial standards. Thus, for example, if a supplier writes to a manufacturer demanding assurances of financial solvency, and the manufacturer provides its latest audited financial statements as well as a satisfactory credit report from his banker, then that would likely constitute adequate assurances of his financial status. b. Effect of acceptance In an installment contract, the acceptance of any improper delivery or payment does not preclude an aggrieved party from demanding adequate assurance of future performance.

Answer 90

a. In general Expectation (benefit-of-the-bargain) damages are intended to put the nonbreaching party in the same position as if the contract had been performed. Expectation damages must be calculated with reasonable certainty. If expectation damages are too speculative, the plaintiff may instead seek reliance damages (see § VIII.D. Restitution and Reliance Recoveries, below). To calculate expectation damages, compare the value of performance without the breach (what was promised) with the value of the performance with the breach (what was received). CONSTRUCTION: In construction contracts, the general measure of damages for a contractor’s failure to begin or to complete the building or other structure is the difference between the contract price and the cost of construction by another builder, plus any progress payments made to the breaching builder and compensation for delay in completion of the construction. The general measure of damages for the owner’s failure to pay the contract price, in whole or in part, is the profits that the builder would have earned, plus any costs incurred by the builder, less the amount of any payments made by the owner to the contractor and any materials purchased by the contractor that are used by the contractor on another job. REAL ESTATE: Damages for failing to perform a real-estate sales contract also are measured by the difference between the contract price and the market value. In the case of late delivery, damages are measured by the fair market rental value of the property for the time that the buyer was denied possession. LENDING: The measure of damages for breach of a contract to lend money is the additional cost of obtaining a loan from another lender (e.g., the difference in cost over time between the interest rates of the original loan and the subsequent loan).

Answer 91

Expectation Damages = loss in value + other loss – cost avoided – loss avoided

Answer 92

A partially performing party can generally recover for work performed, plus expectation damages for the work not yet performed. If at the time of a breach the only remaining duties of performance are (i) those of the party in breach and (ii) for the payment of money in installments not related to one another, then breach by nonperformance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach and is a partial breach of contract only.

Answer 93

1) Construction contracts In construction contracts, damages for defective construction are generally measured by the cost of correcting the defect. 2) Sale-of-goods contracts By contrast, in contracts for the sale of goods, damages for nonconformity with the contract generally are measured by the difference between the value of the goods as warranted and the actual value of the tendered nonconforming goods. The purpose of both measures is to place the plaintiff in as good a position as if the defendant had performed the contract according to its specifications. d. Economic waste In a construction contract, when a breach results in a defective or unfinished construction, if the award of damages based on the cost to fix or complete the construction would result in economic waste, then a court may instead, at its discretion, award damages equal to the diminution in the market price of the property caused by the breach. Economic waste occurs when the cost to fix or complete the construction is clearly disproportional to any economic benefit or utility gained as a result. If the breach is willful, and only completion of the contract will give the nonbreaching party the benefit of its bargain, then a court may award damages based on the cost to fix or complete the construction even if that award would result in economic waste.

Answer 94

The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. UCC § 2-714(2). Repair costs often are used to determine this difference in value, but when repairs fail to restore the goods to their value as warranted, a further adjustment is required.

Answer 95

At common law, actual damages can be either direct or consequential. Direct damages are the necessary and usual result of the defendant's wrongful act. They are awarded to compensate the plaintiff for the loss, damage, or injury that is conclusively presumed to have been foreseen or contemplated by the breaching party, and are reflected in the difference between the value of the performance that the nonbreaching party should have received under the contract and what was actually received (i.e., “loss of value” calculation for determining expectation damages). Consequential damages, on the other hand, result naturally from the breach, but need not be the usual result of the breaching party’s conduct. Instead, consequential damages need only be a reasonably foreseeable result of the breach in the parties’ specific circumstances. a. Consequential damages Consequential damages are damages that arise out of special circumstances unique to the parties to the contract, rather than arising necessarily from the transaction itself. Consequential damages still result directly from the breach, but may not be foreseeable to one of the parties unless the special circumstances are known. b. Foreseeability Consequential damages must be reasonably foreseeable by the breaching party in order to be recoverable. Unforeseeable consequential damages are not recoverable unless the breaching party had some reason to know about the possibility of these unforeseeable consequential damages. Damages are considered foreseeable if they were the natural and probable consequences of breach, or if they were “in the contemplation of the parties at the time the contract was made,” or if they were otherwise foreseeable. Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854). For example, with regard to a contract to lend money, because it is assumed that a borrower will be able to obtain a substitute bank loan, the borrower’s lost profit due to the failure of the lender to make the loan is considered unforeseeable. c. Causation Although consequential damages do not arise directly from the breach itself, there must be a causal link between the breach and the damages for the damages to be recoverable. A defendant can defend on the ground that the losses that the plaintiff seeks to recover would have occurred even if the defendant had not breached the contract. d. Reasonable certainty To recover consequential damages, the damages cannot be speculative. Instead, a plaintiff must prove the dollar amount of the damages with reasonable certainty. Courts are hesitant to award damages for lost profits, as they are difficult to prove. When lost profits are considered too speculative, such as with a new venture, courts often limit a party’s recovery to reliance damages (i.e., reasonable expenditures made in connection with the contract).

Answer 96

Incidental damages may be awarded to the nonbreaching party as compensation for commercially reasonable expenses incurred as a result of the other party’s breach. In the sale of goods, incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation, care, and custody of goods rightfully rejected, any commercially reasonable charges, expenses, or commissions in connection with effecting cover, and any other reasonable expense incident to the delay or other breach. UCC § 2-715(1). Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyer’s breach, in connection with return or resale of the goods, or otherwise resulting from the breach.

Answer 97

Liquidated damages are damages to be recovered by one party without proof of actual loss in the event the other party breaches the contract. a. Enforceability For a liquidated damages clause to be enforceable, the following two-prong test must be met at the time of contracting: i) Theamount of liquidated damages was reasonable, bearing some relation to the damages that might be sustained; and ii) Actual damages were uncertain in amount and would be difficult to prove. Some jurisdictions, as well as the UCC and the Second Restatement, add a third prong to this test, and refuse to enforce a clause under which the liquidated damages are disproportionate to the actual damages incurred by a party. A few jurisdictions, as well as the Second Restatement, refuse to enforce a liquidated damages clause if the party does not suffer any damages as a consequence of the breach. If the liquidated damages clause is unenforceable, recovery is limited to any actual damages that a party can prove. REASONABLENESS: A liquidated damages clause may not merely serve as a threat to secure performance or as a means to punish nonperformance; otherwise it is unenforceable as a penalty. A liquidated damages clause that fails to take into consideration the gravity of the breach or its relationship to the performance rendered by the breaching party may be found to be unreasonable as may a clause that measures damages in a way that is not linked to the loss suffered by a party (e.g., gross revenue rather than net profits). The parties’ characterization of a provision as a liquidated damages clause rather than a penalty, while entitled to consideration, is not determinative.

Answer 98

- Generally, NO - some states, to punish fraud, for violation of fiduciary duty, for acts of bad faith, for deterrence. - Some follow Rest 2d: unless also a tort.

Answer 99

Damages do not need to be alleged in a cause of action for breach. If no damages are alleged or no damages are proved, the plaintiff is still entitled to a judgment for “nominal” damages (e.g., one dollar).

Answer 100

A party to a contract must avoid or mitigate damages to the extent possible by taking steps that do not involve undue risk, expense, or inconvenience. The nonbreaching party is held to a standard of reasonable conduct in preventing loss. A party under a contract to provide services is generally not required to accept any type of employment, but instead only employment of the same type as the party was contracted to perform. Although the standard is often phrased as a “duty to mitigate damages,” a nonbreaching party’s failure to mitigate does not give the breaching party a right to sue the nonbreaching party for such failure; it only reduces the damages that may be recovered by the nonbreaching party. For example, with regard to a sale of goods, a nonbreaching buyer’s failure to take reasonable steps to mitigate damages by buying substitute goods (i.e., cover) will prevent a claim for consequential damages but will not deprive the buyer of damages measured by the difference between the contract and market prices. Note that reasonable expenses incurred as a result of efforts to mitigate damages can be recovered, even if the mitigation attempt was unsuccessful.

Answer 101

When a defendant is unjustly enriched by the plaintiff, restitution generally allows the plaintiff to recover on the benefit conferred by the plaintiff upon the defendant (rather than on the harm suffered by the plaintiff). Generally, this benefit may be measured by either the reasonable value of the defendant obtaining that benefit from another source or the increase in the defendant’s wealth from having received that benefit (e.g., the increase in value of property owned by the defendant). Instead of seeking to enforce a contract, a nonbreaching party may seek restitution for any benefit conferred on the breaching party by way of part performance or reliance. Restitution is available whether the breach is by nonperformance or by repudiation, but in the case of nonperformance, restitution is available only if the breach gives rise to a claim for damages for total, not partial, breach. 2) Recovery by breaching party If a plaintiff has not substantially performed and is in breach of the contract, the plaintiff is not permitted to recover under the contract. However, if the defendant has benefited from the plaintiff’s performance, the plaintiff can generally recover in restitution for the benefit conferred on the defendant less the defendant’s damages for the breach. In general, the breaching party’s recovery is limited to a ratable portion of the contract price. a) Exceptions i) Willful breach Most courts hold that a plaintiff in breach is permitted to recover in restitution only if her breach is not willful. If a party intentionally furnishes services that are materially different from what she promised, then she cannot recover anything in restitution unless the nonbreaching party has accepted or agreed to accept the substitute performance. Restatement (Second) of Contracts §374 cmt. b. ii) Liquidated-damages clause An exception exists if the contract provides for the nonbreaching party to retain the breaching party’s performance (e.g., a down payment on the purchase price) as liquidated damages; restitution is not allowed if the liquidated damages are reasonable. Restatement (Second) of Contracts § 374(2). iii) Sale of goods—payment by the defaulting buyer For contracts for the sale of goods, a defaulting buyer is entitled to a refund of any payments made on the contract, less either (i) the amount to which the seller is entitled by virtue of an enforceable liquidated-damages provision, or (ii) a penalty of “20 percent of the value of the total performance for which the buyer is obligated under the contract, or $500, whichever is smaller.” This amount is subject to an offset for any contract damages that the seller can establish other than those arising under a liquidated damages provision. UCC § 2-718(2),(3).

Answer 102

If a contract is unenforceable due to the Statute of Frauds or is voidable due to lack of capacity, mistake, misrepresentation, duress, or undue influence, then a party is entitled to restitution of any benefit conferred on the other party by way of part performance or reliance. Similarly, a party whose duty is discharged or does not arise as a result of impracticability of performance, frustration of purpose, or the nonoccurrence of a condition is entitled to restitution of any benefit conferred on the other party by way of part performance or reliance.

Answer 103

Reliance damages may be recovered if a nonbreaching party incurs expenses in reasonable reliance upon the promise that the other party would perform. Unlike with a restitutionary recovery, with reliance damages, there is no requirement that the defendant benefit from the plaintiff’s expenditures. The injured party can choose to pursue reliance damages instead of expectation damages, but a party cannot recover both reliance and expectation damages. Reliance damages are mitigated by any losses that the plaintiff would have sustained if the contract had been performed. In addition, reliance damages generally may not exceed the full contract price. Restatement (Second) of Contracts § 349.

Answer 104

When damages are an inadequate remedy, the nonbreaching party may pursue the equitable remedy of specific performance. 1. Factors Considered In determining whether the legal remedy is adequate, the court will consider a variety of factors, including the difficulty of proving damages with reasonable certainty, hardship to the defendant, balance of the equities, the wishes and understandings of the parties, practicality of enforcement, and mutuality of the agreement.

Answer 105

2. Real Property Contracts involving the transfer of an interest in real property may be enforced by an order of specific performance because every parcel of real property is considered unique. 3. UCC Specific performance may be granted to the buyer when the goods are rare or unique, or in other circumstances, such as for breach of a requirements contract when there is not another convenient supplier. UCC § 2-716. 4. Limitations Even if the remedy of damages is inadequate, specific performance will not be granted when the court cannot supervise enforcement. Thus, courts rarely grant specific enforcement of contracts for personal services, although they may restrain the breaching party from working for another when the contract contains a noncompete clause (known as the Lumley doctrine). 5. Defenses Equitable defenses, such as laches (prejudicial delay in bringing the action) or unclean hands (when the nonbreaching party is guilty of some wrongdoing in the transaction at issue) may be raised by the breaching party. A party may also seek an injunction against the breaching party to enforce the contract.

Answer 106

a. Failure to tender Under the UCC, the buyer has several alternative remedies if the seller fails to tender the goods. UCC § 2-711. 1) Cancel the contract When the contract is an installment contract and the breach goes to the entire contract, the buyer may cancel the contract. UCC § 2-711(1). 2) Recovery of payments Whether the buyer cancels the contract, the buyer is entitled to recover any payments made to seller for the goods. UCC § 2-711(1). a) Security interest On rightful rejection or justifiable revocation of acceptance, a buyer also has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them the same manner as an aggrieved seller would be able to do. UCC § 2-711(3). 3) Damages The buyer may recover the market price minus the contract price. The market price is the price that existed at the time of the breach at the place where tender was to occur under the contract. When the seller has anticipatorily breached the contract, the market price is measured as of the time that the buyer learned of the breach. Most courts treated this time as the time that the buyer learned of the repudiation. UCC § 2-713. a) Incidental and consequential damages A buyer may recover incidental and consequential damages resulting from the seller’s breach. Incidental damages are damages that are incidental to the seller’s failure to perform, such as the costs of warehousing, transportation, inspection, etc. Consequential damages are any losses resulting from general or particular requirements and needs of which the seller, at the time of contracting, had reason to know and which could not be reasonably prevented by purchasing substitute goods or otherwise. Consequential damages may be limited or excluded unless such limitation or exclusion would be unconscionable. UCC § 2-719(3). b) Liquidated damages The buyer can receive damages in the amount provided in a liquidated damages clause, provided the amount is reasonable. UCC § 2-718(1). 4) Cover Alternatively, the buyer may purchase similar goods elsewhere and recover the replacement price minus the contract price. UCC § 2-712. 5) Specific performance The buyer may demand specific performance for unique goods. In addition, specific performance may be had in other proper circumstances. An inability to cover is strong evidence of such circumstances. The court may grant specific performance on terms and conditions that the court deems just. UCC §2-716(1). 6) Replevin a) Payment by the buyer When the buyer has made at least partial payment for identified goods, the buyer can obtain the undelivered goods from the seller if: i) The seller becomes insolvent within 10 days of receiving the first payment from the buyer; or ii) The goods were for family, personal, or household purposes, and the seller has repudiated or failed to deliver the goods as required by the contract. To obtain the goods, the buyer must tender any unpaid portion of the price to the seller. UCC § 2-502. b) Buyer’s inability to cover The buyer can also obtain identified, undelivered goods from the seller if: i) The buyer is unable to effect cover; ii) The circumstances reasonably indicate that reasonable effort to obtain cover will be unavailing; or iii) The goods have been shipped under reservation, and satisfaction of the security interest in the goods has been made or tendered. UCC § 2-716(3). b. Nonconforming tender Under the UCC, if either the tender or the goods is nonconforming, then the buyer has the right to accept or reject all of the goods. When the goods are sold in commercial units, the buyer can accept one or more commercial unit(s) and reject the rest. UCC § 2-601. The buyer has the right to inspect the goods before deciding whether to accept or reject. Payment does not constitute acceptance if there is no right of inspection before payment (e.g., C.O.D., C.I.F., or C & F contracts). UCC§2-513. 1) Rejection a) Requirements A valid rejection requires that the buyer: i) Give notice to the seller; ii) Within a reasonable time; and iii) Before acceptance. UCC §§ 2-602(1), § 2-607(2). Upon a rightful rejection, the buyer is entitled to a return of any payments made on the goods. UCC § 2-711(3). b) Retain possession The buyer must retain possession of rejected goods for a reasonable time to allow for the seller to reclaim them. UCC § 2-602(2). c) Perishable and nonperishable goods In the absence of other instructions from the seller, a merchant buyer may store nonperishable goods at the seller’s expense, reship them to the seller, or sell them for the seller’s account. If the goods are perishable and the seller has no local agent to whom they can be returned, in the absence of other instructions from the seller, a merchant buyer is required to sell the goods on the seller’s behalf. UCC § 2-603. d) Remedies The same remedies are available to the buyer after a rightful rejection as if no tender was made by the seller, such as a return of any payments made by the buyer on the goods (see F.1.a. Failure to tender, above). UCC 2-711. Need for notice: A failure to give notice of the breach to the seller within a reasonable time after the buyer discovers or should have discovered the breach will preclude the buyer from any remedies.

Answer 107

Under the UCC, the buyer accepts goods by: i) Expressly stating acceptance; ii) Using the goods; or iii) Failing to reject the goods.

Answer 108

When the buyer accepts goods that are nonconforming, the buyer may recover damages for the resulting loss. When the buyer accepts goods that violate one of the seller’s warranties, the buyer may recover damages measured as the difference (at the time and place of acceptance) between the value of the goods as accepted and the value they would have had if they had been as warranted, plus any appropriate consequential and incidental damages. Typically, the amount of such damages is the cost to repair or replace the goods. UCC § 2-714. b) Notice To recover damages, the buyer must give notice to the seller of the breach within a reasonable time after the buyer discovers or should have discovered the breach. If such notice is not given, the buyer will be barred from any remedy. UCC § 2-607(3)(a). c) When the Buyer Resells Goods and is Sued by a Subsequent Buyer If the buyer resells the goods and is sued for breach of a warranty or other obligation for which the seller would be answerable over the buyer, then the buyer may give the seller written notice of the litigation and that the seller may come in and defend, and that if the seller does not do so, the seller will be bound in any action against him by the buyer with regard to any determination of fact common to the two litigations. If the seller, after seasonable receipt of the notice, does not come in and defend, then the seller will be bound by the litigation. This is referred to as “vouching in.” As a practical matter, this procedure would only be used if the buyer is unable to implead the seller because the seller has insufficient contacts with the forum jurisdiction. UCC § 2-607(5).

Answer 109

A buyer may revoke an acceptance of goods if the nonconformity substantially impairs their value to the buyer and: i) The buyer accepted the goods on the reasonable belief that the seller would cure the nonconformity, but the seller has failed to do so; or ii) The buyer accepted the goods without discovery of the nonconformity, and such acceptance was reasonably induced either by the difficulty of discovering the nonconformity before acceptance or because the seller gave assurances that the goods were conforming. a) Timing of revocation The buyer must inform the seller of its decision to revoke within a reasonable time after the nonconformity is discovered or should have been discovered by the buyer. b) Buyer’s rights and duties after revocation A buyer’s rights and duties with respect to the goods for which acceptance is justifiably revoked are the same as those for goods that the buyer properly rejected. c) Buyer’s remedies A buyer who justifiably revokes acceptance may be entitled not only to a return of purchase price paid but also damages based on the difference between the market price and the contract price or cover. UCC §2-608, cmt. 1. 4) Withdrawal of refusal to accept A buyer’s original refusal to accept may be withdrawn by a later acceptance if the seller indicates that he is holding the tender open. UCC § 2-601. However, if the buyer attempts to accept after his original rejection caused the seller to arrange for other disposition of the goods, then the buyer is liable for any ensuing damage. The buyer is liable even if the seller chooses to treat his action as acceptance rather than conversion. UCC § 2-601 cmt.2. 5) Right to cure The seller has a right to cure a defective tender if: i) The time for performance under the contract has not yet elapsed; or ii) The seller had reasonable grounds to believe that the buyer would accept despite the nonconformity.

Answer 110

The seller has a right to cure a defective tender if: i) The time for performance under the contract has not yet elapsed; or ii) The seller had reasonable grounds to believe that the buyer would accept despite the nonconformity. The seller must give notice of the intent to cure and make a new tender of conforming goods. If the seller had reasonable grounds to believe that the buyer would accept despite the nonconformity, the tender must be made within a reasonable time. Once cured, the tender is considered proper and valid. UCC § 2-508.

Answer 111

a. Right to price In certain circumstances, a seller may seek to recover the full contract price (or if a price has not been agreed upon, a reasonable price) plus any incidental damages. This remedy is analogous to the remedy of specific performance that the buyer has in limited circumstances. 1) Accepted goods When a buyer has accepted the goods and fails to pay the price when it becomes due, the seller may sue for the price. UCC § 2-709(1)(a). 2) Goods lost or damaged after risk of loss has passed to the buyer If the risk of loss has passed to the buyer and the conforming goods then are lost or damaged, the seller may maintain an action for the price of the conforming goods if the buyer fails to pay the price as it becomes due. UCC§2-709(1)(a). 3) Identified goods If goods have been identified and the buyer fails to pay the price as it becomes due, the seller may recover the price only if the seller is unable to sell the goods at a reasonable price after a reasonable effort or circumstances indicate that such an effort will not yield a sale. UCC§2-709(1)(b).

Answer 112

1) Insolvent buyer When an insolvent buyer receives goods on credit, and the seller learns that the buyer is insolvent, the seller may reclaim the goods, provided a demand is made within 10 days after the buyer’s receipt of the goods. This 10-day limitation does not apply if the buyer has misrepresented solvency to the seller in writing within three months before delivery. Otherwise, the seller cannot base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay. In addition, this right is subordinate to the rights of a buyer in the ordinary course or other good-faith purchaser, and, if exercised, precludes all other remedies with respect to the reclaimed goods. UCC § 2-702. Pre-delivery insolvency: As a condition for the seller to reclaim goods from a buyer, the buyer must have received the goods on credit while insolvent. If the buyer becomes insolvent after delivery, then the seller may not reclaim the goods.

Answer 113

If the buyer pays with a check that is subsequently dishonored, then the seller may reclaim the goods following a demand made within a reasonable time. The seller’s right to reclaim is subject to the right of a good-faith purchaser.

Answer 114

c. Stoppage of goods in transit 1) Buyer’s breach A seller can stop the goods in transit because of the buyer’s breach; goods can be stopped in transit only if shipped in large-sized (e.g., carload, truckload) lots. The seller cannot stop goods in transit once the: i) Buyer has received the goods; ii) Carrier or warehouseman has acknowledged the buyer’s rights; iii) Goods have been reshipped by the carrier; or iv) Title has been given to or negotiated with the buyer. UCC § 2-705(1),(2). 2) Buyer’s insolvency If the buyer becomes insolvent before the delivery of the goods, then the seller can stop goods in transit and refuse delivery except for cash. UCC§2-705(1).

Answer 115

1) Collect damages The seller would ordinarily be entitled to the contract price minus the market price at the time and place for tender, together with any incidental damages, less any expenses saved as a result of the buyer’s breach. UCC § 2-708(1). a) Lost profits In some circumstances, a seller cannot be made whole through resale at the contract price. This is true for volume sellers (those sellers who have an unlimited supply of the goods and who make a profit per item). Although they can resell the goods at the same price as the contract price, they have lost the opportunity to sell them in the first instance when the buyer breached or repudiated. They are, therefore, entitled to those lost profits. To qualify as a “lost volume” seller, the seller needs to show only that it could have supplied both the breaching purchaser and the resale purchaser with the goods. In general, the measure of lost profit would be the list price minus the cost to the dealer or manufacturer. UCC § 2-708(2). Example: S, a high-volume maker of personal computers, contracts to sell 100 computers to B for $100,000 (the list price). B subsequently repudiates the contract, and S resells the computers to another customer. S can recover its lost profit (the list price of $100,000 minus its manufacturing cost), as well as any incidental damages from B. b) Liquidated damages The seller can receive damages in the amount provided in a liquidated damages clause provided the amount is reasonable. UCC § 2-718(1). 2) Resell the goods If the seller elects to resell and sue for the contract price minus the resale price, then the resale must be (i) only of goods identified in the contract and (ii) commercially reasonable. UCC § 2-706. However, if the seller wishes to resell the goods in a private sale, the seller must first give the buyer reasonable notice of his intent to resell. UCC § 2-706(3). 3) Recover the price The seller can recover the price after rejection only if the seller is unable to sell the goods at a reasonable price after a reasonable effort or circumstances indicate that such an effort will not yield a sale. UCC § 2-709(1)(b). If not defined in the contract, the price is a reasonable price. UCC § 2-305. 4) Incidental damages Note that in addition to any of the remedies listed above, the seller is entitled to recover incidental damages (including storage and shipping costs). UCC § 2-710.

Answer 116

- Entitled to lost profits, not just through resale at K price. - To qualify: To qualify as a “lost volume” seller, the seller needs to show only that it could have supplied both the breaching purchaser and the resale purchaser with the goods. In general, the measure of lost profit would be the list price minus the cost to the dealer or manufacturer.

Answer 117

NOTE: When approaching risk-of-loss problems, first ask whether the contract sets forth the risk of loss. If it does, the agreement controls. If not, ask whether there is a breach or repudiation by either party. If so, the breaching party usually bears the risk. If not, determine whether the contract is a shipment or destination contract and continue the analysis under UCC § 2-509. a. General rules—non-identified goods, no breach Unless the parties otherwise agree, if goods that have not been identified are damaged or destroyed without the fault of either party to the contract, then the risk of loss is generally on the seller until the seller satisfies the contractual delivery obligations. Upon the happening of that event, the risk of loss shifts to the buyer. UCC § 2-509. 1) Goods to be shipped by a third-party carrier If the contract requires or authorizes the seller to ship the goods by carrier, the event necessary to shift the risk of loss is dependent upon whether the contract is a “shipment” or “destination” contract. UCC § 2-509(1). a) Shipment contract If the contract is a shipment contract (often identified by the words “F.O.B. (free on board) seller’s place of business”), then the seller must deliver the goods to the carrier, make a proper contract for their shipment, obtain and deliver any document necessary for the buyer to obtain possession of the goods, and give the buyer notice that the goods have been shipped. b) Destination contract If the contract is a destination contract (often identified by the words “F.O.B. buyer’s place of business”), then the seller must deliver the goods to a particular place (specified in the contract) and tender them there by holding the goods at the buyer’s disposition and giving the buyer notice. Example: B orders a computer from S that is identical to a display model shown on the floor of S’s store. The contract specifies that the computer is to be tendered by S at B’s place of residence. In transit, the computer is destroyed by the shipping company through no fault of S. S bears the risk of loss. 2) Goods held by a bailee When goods that are held by a bailee are to be transferred without being moved, the risk of loss generally passes to the buyer on the buyer’s receipt of a negotiable document of title covering the goods or on acknowledgment by the bailee of the buyer’s right to possession of the goods. UCC§2-509(2). 3) All other cases Unless the parties agree otherwise, in other cases (e.g., the buyer picks up the goods from the seller or the seller delivers the goods to the buyer), risk of loss passes to the buyer upon the taking of physical possession if the seller is a merchant; otherwise, risk passes on tender of delivery.UCC§2-509(3). b. Effect of a breach of contract on risk of loss 1) Seller’s breach If the seller delivers nonconforming goods, the risk of loss remains on the seller until the buyer accepts or there is a cure. If the buyer rightfully revokes acceptance, the risk of loss shifts back to the seller to the extent of any lack of insurance coverage by the buyer. UCC§2-510(1,2). 2) Buyer’s breach If the buyer repudiates or breaches after the goods have been identified but before the risk of loss shifts, then the risk of loss is immediately shifted to the buyer to the extent of any lack of insurance coverage by the seller. UCC§2-510(3). c. Effect of destruction of or damage to identified goods If the contract deals with identified goods (e.g., a specific painting or specifically identified items of inventory), then the seller is excused if the goods are totally destroyed through no fault of the seller prior to the risk of loss being shifted to the buyer. Neither party is required to perform; neither party has breached. If the specifically identified goods are damaged but not totally destroyed, then the contract is avoided unless the buyer chooses to take the goods at a reduced price without any other claim against the seller. UCC§2-613.

Answer 118

The buyer of goods obtains an insurable interest in the goods as soon as the goods are identified in the contract. Identification can be made at any time by the parties’ explicit agreement. In the absence of such an agreement, identification occurs when the contract is made if it is for the sale of goods already existing and identified; for future goods, identification occurs when the goods are shipped, marked, or otherwise designated by the seller as the goods to which the contract refers.

Answer 119

a. Entrusting provisions The UCC provides that entrustment of goods by the owner to one who sells goods of that kind gives the transferee the power to convey good title to a buyer in the ordinary course. A “buyer in the ordinary course” is one who in good faith and without knowledge of a third party’s ownership rights or security interest buys goods from someone selling goods of that kind. UCC § 2-403. “Entrusting” includes any delivery and acquiescence in possession regardless of any condition expressed between the parties and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods has been larcenous. UCC § 2-403(3). b. Voidable title When the true owner of goods sells them to another, but the sale is voidable because of fraud, because of lack of capacity, or because it was a cash sale and the buyer failed to pay or paid with a dishonored check, the buyer may transfer good title to a good-faith purchaser. UCC § 2-403. 6. Statute of Limitations on a Breach of a Sales Contract or Warranty a. Period of limitations Under Article 2, an action for breach of any sales contract or warranty must be commenced within four years after the cause of action accrues. b. When a cause of action accrues In general, a cause of action accrues when the breach occurs, regardless of whether the aggrieved party knows of the breach. A breach of warranty generally accrues when delivery is made. If a warranty expressly extends to the future performance of the goods, the cause of action will accrue when the breach is or should have been discovered by the aggrieved party. c. Modification of limitations period By their original agreement, the parties may reduce the four-year limitations period of Article 2 to not less than one year, but they may not extend it.

Answer 120

1. Reformation Reformation is the modification of a contract by a court upon petition by a party. The modification is typically based on the failure of the contract to reflect the intent of the parties to the contract. 2. Rescission Rescission is the unmaking of a contract, whether the contract is oral or written. Rescission leaves the parties to a contract in the same position they would have been in if the contract had never existed. 3. Cancellation The UCC characterizes the negation of a contract for the sale of goods as a cancellation. In general, the buyer or seller of goods may cancel the contract of sale upon breach by the other party. Such a remedy does not foreclose the buyer or seller from also pursuing monetary damages. UCC §§ 2-703(f) (seller), 2-711 (buyer). 4. Grounds As equitable remedies, reformation, rescission, and cancellation require justification for modifying or negating existing legal rights. Generally, defenses that can be raised to the formation or enforcement of a contract can serve as grounds for these remedies (see I.E. Defenses to Formation, supra). Among the most prominent grounds are mistake, fraud, undue influence, duress, and lack of capacity. These grounds must have occurred prior to or contemporaneously with the execution of the instrument or formation of the contract. 5. Failure of Consideration Rescission of a contract may be allowed when there has been a failure of consideration, but rescission is not allowed when the failure is only partial and there has been part performance by the defendant. However, substantial failure of consideration can constitute evidence of fraud. 6. Limitations Reformation, rescission and cancellation are not available if the contract or other instrument concerns property that has been transferred to a bona fide purchaser who is unaware of the conduct (e.g., fraud) that gives rise to a justification for the reformation, rescission, or cancellation. In addition, a party to a contract is generally required to tender any consideration received in order to pursue an action for rescission.

Answer 121

If the rights and obligations of the parties under a contract are unclear, and an actual dispute exists between the parties concerning those rights and obligations, then either party may bring a declaratory-judgment action to obtain an adjudication of those rights and duties. Declaratory judgment is not available, however, to resolve moot issues or theoretical problems that have not risen to an actual dispute.

Answer 122

When a buyer breaches or repudiates, the seller may resell the goods and sue for the contract price minus the resale price. A seller intending to resell the goods in a private sale must first give the buyer reasonable notice of his intent to resell. If the resale is made in good faith and in a commercially reasonable manner, the seller can recover the difference between the contract price and the resale price plus incidental and consequential damages. In the sale of goods, such damages may include the cost of transporting the goods.