Contracts

Question 1

What are the elements of a valid contract?

Answer 1

1) Mutual Assent (offer and acceptance);
2) Consideration or a substitute; AND
3) No defenses to formation.

Question 2

What law governs contracts for the Sale of Goods?

Answer 2

Article 2 of the Uniform Commercial Code.

*For mixed contracts the predominant purpose of the contract determines what law governs.

Question 3

What are the elements of Mutual Assent?

Answer 3

1) Offer: A manifestation of intent to contract, with definite and reasonably certain terms, that is communicated to the offeree.
2) Acceptance: A manifestation of assent to the terms of the offer, which indicates a commitment to be bound.

Bilateral contracts: performance manifests acceptance,

Unilateral contracts: offer is accepted only when performance is complete.

Question 4

Are advertisements considered offers?

Answer 4

No, BUT instead are deemed invitations for offers.

It may be considered an offer if it includes sufficiently clear and definite terms so a reasonable person would understand how performance and acceptance may be completed.

Question 5

What is the Mailbox Rule?

Answer 5

If the offeror mails a letter revoking, but the offeree sends a letter accepting BEFORE he receives the revocation, then a valid contract is created. This is because the acceptance was effective before the revocation.

Acceptance = once sent or communicated

Revocation = when received

Question 6

When will conduct by the parties create a contract?

Answer 6

If:

1) The conduct is intentional; AND
2) Each party knows (or has reason to) that the other party will interpret the conduct as an agreement to enter into a contract.

Question 7

Output Contract

vs.

Requirement Contract

Answer 7

Output: Requires a seller to sell all of the output of the particular goods to the buyer.

Requirement: Requires the buyer to purchase all of the particular good that the buyer requires from the seller.

Question 8

When is an offer Terminated?

Answer 8

Offers may be terminated before acceptance by:

a) RejectionorCounter-offerbyofferee;
b) Lapse of time;
c) Revocation by offeror; OR
d) Death / Incapacity of either party.

Question 9

When may an offer be revoked, and which types of offers are not revocable?

Answer 9

Offers may be revoked at any time before acceptance through unambiguous words/conduct indicating an unwillingness/inability to contract (effective when received).

Irrevocable offers include: option contracts, amerchant’s firm offer, and offers that were relied on to the offeree’s detriment.

Question 10

What is a Merchant’s Firm Offer?

Answer 10

1) An offer to buy or sell goods;
2) By a merchant;
3) In a signed writing;
4) Which states that the offer will be held open and is not revocable; AND
5) The assurance to keep the offer open must be signed separately by the offeror.

*Enforceable WITHOUT consideration.

Question 11

Rejection vs. Counteroffer

Answer 11

Rejection: Manifestation of intent to not accept an offer (words/conduct) which terminates the offer. Offers CANNOT be accepted after they have been rejected.

Counteroffer: Both a rejection that terminates the original offer and a NEW offer.

Question 12

What is the Mirror Image Rule and UCC exception?

Answer 12

The common law Mirror Image Rule holds that an acceptance MUST exactly mirror the offer.

UCC Art. 2 Exception: The acceptance DOES NOT need to mirror the offer, and additional terms may be added. Additional terms are included if:

1) Both parties are merchants;
2) The term is not a material change;
3) The offer doesn’t limit acceptance to the exact terms; AND
4) No objection was made within a reasonable time.

Question 13

When is an agreement deemed Indefinite?

Answer 13

When the terms of the agreement are NOT certain (they cannot be ascertained to a reasonable degree of certainty), the contract is deemed indefinite and is UNENFORCEABLE.

*A contract that is indefinite as to duration is generally invalid.

Question 14

What is Consideration?

Answer 14

A bargained for exchange of a promise for a return promise or performance (that benefits the promisor or causes detriment to the promisee).

*Past or moral consideration is NOT sufficient to support a contract.

Question 15

When does Promissory Estoppel apply?

Answer 15

Applies when:

1) A party reasonably and foreseeably relied to his detriment on the promise of the other party;
2) The promisor should have reasonably expected a change in position in reliance of the promise; AND
3) Enforcement of the promise is necessary to avoid injustice.

Question 16

Settlement of Legal Claims

Answer 16

The voluntary relinquishment of some known right or privilege.

*Constitutes valid consideration.

Question 17

What is the Common Law Pre-Existing Duty Rule?

What are the exceptions?

Answer 17

Past performance or performance of a pre-existing duty is NOT adequate consideration.

Exceptions:

a) If there is an addition or change in performance or promise;

OR

b) A fair and equitable modification is made due to unanticipated changed circumstance AND the contract is not yet fully performed by either party.

Question 18

Is consideration required for a modification to a UCC Art. 2 sale of goods contract?

Answer 18

NO, consideration is not required for contract modifications made in good faith,

BUT, the modification must be in writing if:

a) ItfallswithintheStatuteofFrauds; OR
b) The original contract states that modifications must be in writing.

Question 19

Are contracts enforceable when entered into by those who lack capacity?

Answer 19

A party MUST have capacity to enter into a contract, otherwise they are VOIDABLE.

Minors (under 18) and those who lack mental capacity lack the capacity to enter into a contract.

Question 20

Duress
Physical Compulsion vs. Economic Duress

Answer 20

Physical Compulsion: If a person physically compels a person to agree to contract, then the contract is void.

Economic Duress: If a person makes an improper threat that induces a party (who has no reasonable alternative but to enter into the contract), then the contract is void.

*A mere threat to breach is generally insufficient.

Question 21

Undue Influence occurs when?

Answer 21

There is:

1) Unfair persuasion of a person,
2) Who is either:

• Under the domination of the person exercising the influence; OR
• Justified in assuming that the person will not act in a manner inconsistent with his welfare because of his relationship between them (i.e. parent/child).

Question 22

Mutual Mistake vs. Unilateral Mistake

Answer 22

Mutual Mistake: When (1) both parties are mistaken as to the basic assumption on which the contract is made, (2) the mistake is material to the contract, AND (3) the person asserting the mistake did not bear the risk of the mistake.

Unilateral Mistake: A mistake by one party, that is unknown to the other party, concerning a basic assumption that has a material effect on the contract. (not a valid defense to formation)

Question 23

Fraudulent Misrepresentation

vs.

Non-Fraudulent Misrepresentation

Answer 23

Fraudulent: When one party knowingly makes a false representation of a fact AND the other party reasonably relies on the misrepresentation to their detriment.

Non-Fraudulent: When there is a statement of material fact by a party or agent that is false, inducing the contract, AND the other party reasonably relies on the misrepresentation to his detriment.

Question 24

Procedural Unconscionability

vs.

Substantive Unconscionability

Answer 24

Unconscionability usually occurs if the contract/term is BOTH substantively and procedurally unconscionable.

Procedural: When one party to the contract has a superior bargaining position over the other and uses that power to their advantage.

Substantive: When the contract contains terms that are obviously unfair and one-sided in favor of the person with the superior bargaining power.

Question 25

Under the Statute of Frauds, which types of contracts require a signed writing to be valid?

Answer 25

1) Marriage contracts.
2) Suretyships (unless the main purpose exception applies).
3) Contracts that cannot be fully preformed in 1 year.
4) Contracts for the sale of real property.
5) Promises to pay an estate’s debt from the personal funds of the Executor/Administrator.
6) Contracts for the sale of goods for $500 or more.

Question 26

In what situations will a contract that violates the Statute of Frauds still be enforceable?

Answer 26

1) Full performance;
2) Judicial acknowledgment: the party admits to the agreements in pleadings/testimony; OR
3) Estoppel: reasonable and foreseeable detrimental reliance on a promise (only some jurisdictions).

Question 27

Contracts for the sale of goods for $500 or more MUST be in writing.

What are the four exceptions to this rule?

Answer 27

1) Merchant’s Confirmatory Memorandum.
2) Goods accepted or Paid for.
3) Custom Made Goods.
4) Admission during judicial proceeding.

Question 28

What satisfies the writing requirement under the Statute of Frauds?

Answer 28

The writing MUST:

1) Be signed by the party to be charged;
2) Identify the subject matter of the contract;
3) Indicatethatacontracthasbeenmadebytheparties; AND
4) State the essential terms with reasonable certainty.

*An agreement DOES NOT need to be in one writing, it may consist of several writings.

Question 29

What are the exceptions to the Parol Evidence Rule?

Answer 29

1) To correct a clerical error or typo.
2) To establish a defense against formation.
3) To interpret vague or ambiguous terms.
4) To supplement a partially integrated writing.

*The parol evidence rule DOES NOT apply to subsequent agreements.

*Merger clause is evidence that the writing is complete on its face.

Question 30

What are the two instances where a Condition Precedent may be excused?

Answer 30

1) A protected party’s failure to cooperate or make agood faith effort.
2) Waiver – a protected party voluntarily gives up the protection of the condition.

Question 31

What is a waiver, and when are conditions waived?

Answer 31

A voluntary and intentional relinquishment of a contract right by words or conduct (performance is excused when waived).

Condition is waived when:

1) A party indicated through words/conduct that a condition DOES NOT need to be satisfied; AND
2) The other party detrimentally relies on that waiver.

Question 32

How is good faith defined under the UCC?

Answer 32

Good faith is defined as:

1) Honesty in fact; AND
2) The observance of reasonable commercial standards of fair dealing.

*Every contract contains an implied obligation of good faith and fair dealing.

Question 33

Impossibility vs. Impracticability

Answer 33

Impossibility: Performance is discharged because of (a) the death/physical incapacity of a necessary person; (b) an unanticipated destruction of the necessary subject matter; OR (c) when a new law/regulation makes performance extremely and unreasonably difficult/expensive.

Impracticability: When an event occurs after contract formation, making performance extremely and unreasonably difficult/expensive.

Question 34

When is performance excused under the Frustration of Purpose Doctrine?

Answer 34

When the purpose of the contract no longer exists IF:

1) A party’s principal purpose is substantially frustrated without his fault;
2) By an unforeseeable supervening event out of their control;

AND

3) Both parties knew the purpose at the time of formation.

Question 35

Performance

Material Breach

vs.

Minor Breach

Answer 35

Material: WILL excuse the non-breaching party’sperformance. It occurs when a party does not render substantial performance.

Minor: WILL NOT excuse performance (the non- breaching party must perform, though they may bring a separate action for damages resulting from the breach).

Question 36

How do courts determine whether a breach is material?

Answer 36

They will consider:

1) The extent of the benefit deprived to the injured party;
2) The adequacy of compensation for loss to the non- breaching party;
3) The extent the breaching party will suffer forfeiture;
4) The likelihood that the breaching party will cure; AND
5) Absence of good faith and fair dealing by the breaching. party.

Question 37

What is a time is of the essence clause?

Answer 37

It requires performance by a specific date, where failure to perform by said date is deemed a material breach.

Without this clause, failure to perform by a specified date is usually NOT deemed a material breach.

Question 38

When is a contract divisible?

Answer 38

When:

1) The performances to be exchanged can be divided into corresponding pairs of part performances,
2) In a way that the elements of each pair will be treated as if the parties had agreed they were equivalents.

*Both elements MUST be satisfied.

Question 39

Under the UCC Perfect Tender Rule, the seller must deliver conforming goods and the smallest non-conformity is a breach.

What are two exceptions to this rule?

Answer 39

Exceptions:

1) The seller has the right to cure in 2 situations: (1) If the time for performance has not yet expired, the seller can cure within the remaining time; (2) The seller had reasonable grounds that the non-conforming goods would be accepted.
2) Installment contracts: These contracts may only be cancelled if the installment is so defective that it substantially impairs the value of the entire contract.

Question 40

After the acceptance of goods, when may a buyer later revoke that acceptance?

Answer 40

If:

1) The non-conformity substantially impairs the value of the goods; AND
2) Either the defect was difficult to discover (latent) OR the buyer accepted the goods on the reasonable assumption that the defect would be cured.

*If a buyer successfully revokes acceptance, he is entitled to return of the purchase price.

Question 41

When does an Anticipatory Repudiation occur?

Answer 41

When a party unequivocally communicates that he is unable or unwilling to perform.

*A party that breaches may retract its repudiation and restore the contract UNLESS the aggrieved party has: cancelled, materially changed his position, or indicated that he considers the repudiation final.

Question 42

When an Anticipatory Repudiation occurs, what may a non-breaching party do?

Answer 42

a) Treat the contract as repudiated and sue for damages;
b) Treat the contract as discharged;
c) Wait until performance is due and sue when performance doesn’t occur; OR
d) Urge the party to perform.

Question 43

What is an Accord and Satisfaction?

Answer 43

An accord is an executory contract between the parties promising to relieve a party of his contractual obligations in return for a specific act.

Upon Satisfaction of that act, a person is excused from further performance under the contract.

Question 44

When is an Express Warranty created?

Answer 44

When:

1) A seller makes an affirmation of fact, promise, or description or provides a sample;
2) Which relates to the goods; AND
3) Becomes part of the basis of the bargain.

*Intent or direct words of “warranty” or “guarantee” are not required.

Question 45

What is the Implied Warranty of Merchantability?

Answer 45

Requires that all goods sold by a merchant MUST be fit for their ordinary purpose. To disclaim the implied warranty, a merchant must do so expressly in a conspicuous writing.

*Merchant = person dealing in goods of the kind.

Question 46

The Warranty of Title includes what warranties?

Answer 46

1) The title conveyed shall be good and its transfer rightful;

AND

2) The goods shall be delivered free from any security interest or other lien or encumbrance.

Question 47

Intended Third-Party Beneficiary

vs.

Incidental Beneficiary

Answer 47

Intended: Not a party to the contract, but has rights because the contracting parties agreed that their respective performances were intended to benefit an identified third-party.

Incidental: A person that just happens to benefit, but has NO legal rights because the purpose of the contract was not to benefit them.

Question 48

When does an Intended Third-Party Beneficiary’s rights vest?

Answer 48

When the beneficiary:

a) Manifests assent to the promise under the contact;
b) Detrimentally relied on the contract; OR
c) Brings suit to enforce the contract.

*Once rights vest, a contract CANNOT be modified without the third-party’s consent.

Question 49

When may rights and benefits under a contract be transferred (assigned) to a third-party?

Answer 49

If:

1) The assignor manifests his intent to transfer the rights; AND
2) The assignee assents to the assignment.

Consideration is NOT required but if provided makes the assignment irrevocable.

Question 50

When is an Assignment NOT valid?

Answer 50

IF:

a) Itmateriallyalterswhatisexpectedunderthecontract;
b) It is prohibited by law or public policy; OR
c) It is precluded by contract.

Question 51

Assignments

Prohibitions vs. Invalidations

Answer 51

Prohibitions: Terms in a contract that prohibit the transfer of rights. If the rights are assigned, the assignor is liable for damages, but the assignment is still valid and enforceable by the assignee.

Invalidations: Terms in a contract that void all assignments. If the rights are assigned anyway, the assignment is void.

Question 52

Which prevails in:

Multiple Gratuitous Assignments

Multiple Assignments for Consideration

Answer 52

Gratuitous: The last ASSIGNEE prevails

Consideration: The first assignment prevails, unless the later assignment:

1) Has no notice of the earlier assignment; AND
2) Is the first to obtain payment or indicia of ownership.

Question 53

When are contract duties not delegable?

Answer 53

a) The contract prohibits delegations/assignments;
b) The delegation is against public policy;
c) The contract is for personal services that call for the exercise of personal skill or discretion; OR
d) The delegation materially alters the expectancy of the oblige.

*An assignment generally includes a delegation of the unperformed duties under a contract.

Question 54

What are Expectation Damages?

When are they recoverable?

Answer 54

They arise directly from the breach, and are an attempt to put the non-breaching party in the same position it would have been in but for the breach.

To recover, the damages must be:

1) Caused by the defendant;
2) Foreseeable;
3) Certain; AND
4) Unavoidable.

Question 55

What are Consequential Damages?

When are they recoverable?

Answer 55

They arise indirectly from the breach, and are awarded becauseof the injured party’s special circumstances.

To recover, the damages must be:

1) Reasonably foreseeable at the time of contract formation;
2) Arise from the plaintiff’s special circumstances that the. defendant knew of (or should have known); AND
3) Certain (not speculative).

Question 56

Under the UCC, what remedies does a seller have if a buyer breaches a contract for the sale of goods?

Answer 56

a) Withhold delivery of the goods;
b) Cancel;
c) Recovercoverdamages;
d) Recover market damages;
e) Recover lost profits if the seller is a lost volume seller;
f) Stop delivery of the goods when he discovers buyer is insolvent;
g) Stop delivery of a truckload when buyer breaches; OR
h) Replevy identified goods.

Question 57

Cover Damages

vs.

Market Damages

vs.

Loss-in-Value Damages

Answer 57

Cover: Difference in price between the contact price and price of substitute goods.

Market: Difference between the market price and contract price (used if buyer did not cover in good faith or at all).

Loss-in-Value: Difference between the value as promised and the value of the non-conforming goods (used if buyer keeps the non-conforming goods).

Question 58

When will the Waste Doctrine apply?

Answer 58

If:

1) The contractor performs in good faith, but defects nevertheless exist; AND
2) Remedying the defects would entail economic waste.

*In this instance, the decrease in value becomes the proper measure of damages.

Question 59

When is Restitution awarded?

Answer 59

It is awarded to prevent unjust enrichment, and is available when one party confers a benefit to another party.

Damages will be awarded based on the value of the benefit conferred.

Question 60

When does a novation occur?

Answer 60

When:

1) All parties to a contract,
2) Agree to discharge an original party to the contract, AND
3) Substitute a third party in the original party’s place.

Question 61

What is Rescission?

Answer 61

Recession treats the contract as canceled.

*It is available if there was a problem with contract formation (defense to formation, fraud, misrepresentation).

Question 62

When will a contract NOT be rescinded?

Answer 62

If:

a) A valid equitable defense applies; OR
b) The plaintiff sued for damages under the contract in a prior action.