Contracts Flashcards
Common Law vs. UCC (40%)
a) The gateway issue in all contracts and sales essay questions will be to determine whether the common law or Article 2 of the UCC governs:
(1) The common law governs if a contract deals with services or real estate (e.g., hiring someone to mow your lawn).
(2) The UCC governs if a contract deals with goods (e.g., agreement to buy 100 reams of paper from a paper supply company).
b) For mixed contracts (contracts that have elements of both services and goods), two rules operate to determine whether the common law or UCC applies:
(1) The common law and UCC CANNOT both govern one indivisible contract at the same time. Thus, mixed contracts must fall into one class or the other. However, there is a limited exception for divisible contracts (contracts that can divide the goods and services portions into separate mini-contracts).
(2) The predominant purpose of the contract determines whether the common law or UCC governs (i.e., whether a good or service plays a bigger role in the contract). If the predominant purpose of the contract involves the purchase or sale of goods, the UCC applies. If the predominant purpose of the contract involves services or real estate, the common law applies.
Requirements to Form a Valid Contract (28%)
a) A traditional, enforceable contract is formed when there is:
(1) Mutual assent (a valid offer + valid acceptance of that offer);
(2) Consideration; AND
(3) No defenses to formation that would invalidate the otherwise valid contract.
Formation (Mutual Assent (Offer + Acceptance))
Offer (12%)
a) To form a valid offer, the offeror must:
(1) Manifest an OBJECTIVE willingness to enter into an agreement; AND
(a) Objective Test. The offer is governed by an objective test, which means that outward appearances of words and actions are determinative – not subjective hidden intentions (e.g., If a person makes an offer as a practical joke with his fingers crossed behind his back but his outward words and actions demonstrate willingness to enter the agreement, it is a valid offer. The offeror’s subjective intent is irrelevant).
(2) Create a power of acceptance in the offeree (i.e., the offeree can simply say, “I accept” and know that he has concluded the deal).
(a) Specific Offeree. Generally, an offer must be directed to a specific offeree. However, there is a limited exception for contest offers and reward offers that promise something to anyone who accomplishes a certain task (e.g., a posted sign that offers a cash reward for finding lost puppy is a valid offer).
(b) Advertisements. An advertisement is usually considered to be an invitation to deal rather than an offer, because advertisements usually fail to confer a power of acceptance to the other side. However, advertisements that are very specific and leave nothing open to negotiation may constitute offers.
Formation (Mutual Assent (Offer + Acceptance))
Terms Required in the Offer (12%)
a) Certain terms MUST be specified in the offer in order for the offer to be valid.
b) Under the common law, all essential terms must be specified in the offer. Generally,
this includes the following four terms:
(1) Parties;
(2) Subject;
(3) Quantity; AND
(4) Price
c) Under the UCC, the law is more willing to plug the gaps. Unlike the common law, PRICE
IS NOT REQUIRED in the offer. Generally, only three terms are required under the UCC:
(1) Parties;
(2) Subject; AND
(3) Quantity
(a) Requirements and output contracts are valid under the UCC even though they do not specify an exact quantity. In a requirement contract, the seller agrees to sell as much as the buyer would require. In an output contract, the seller agrees to sell his entire production to the buyer.
Formation (Mutual Assent (Offer + Acceptance))
Terminating the Offer (16%)
a) If a valid offer is terminated at any time before acceptance, the offer is invalidated. It CANNOT be accepted or revived unless a new offer is made. An offer is terminated if any of the following occur at any time BEFORE acceptance:
(1) The offeror revokes the offer by express communication to the offeree (unless the offer is irrevocable – see below).
(2) The offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract (“constructive revocation”);
(3) The offeree rejects the offer by express communication to the offeror;
(4) The offeree expressly communicates a counteroffer to the offeror;
(5) The offeror dies or otherwise becomes incapacitated (only terminates the offer, not a previous valid contract);
(6) A reasonable amount of time passes (usually requires weeks, not days); OR
(7) The subject matter of the offer becomes illegal or is destroyed.
Formation (Mutual Assent (Offer + Acceptance))
Acceptance (12%)
a) An acceptance is a manifestation of a willingness to enter into the agreement by the offeree (usually must be communicated to the other party – silence generally does not manifest willingness unless there is a past history of silence serving as acceptance).
b) The offeror is the master of the offer, which means that the offeree MUST accept the offer according to the rules of the offer (e.g., whether the offer is bilateral or unilateral).
(1) For bilateral contracts, the start of performance manifests acceptance.
(2) For unilateral contracts, the start of performance only makes the offer
irrevocable – the offer is only accepted once performance is complete.
c) Acceptance is governed by an objective test, which means that outward appearances of words and actions are determinative – not hidden intentions (e.g., a person accepts an offer with his fingers crossed behind his back).
d) The offer must be specifically directed to the person trying to accept it – cannot accept an offer directed elsewhere (for open-to-all contests and reward offers, the person must know about the contest or reward offer in order to accept it.).
Formation (Mutual Assent (Offer + Acceptance))
Counteroffer vs. Acceptance (12%)
a) A counteroffer operates as both a rejection that terminates the original offer AND as a formation of a new offer.
b) Mirror Image Rule. Under the common law, the terms in the acceptance MUST match the terms of the offer exactly – otherwise it is not an acceptance, it is a counteroffer (i.e., the terms of the offer and acceptance must mirror each other exactly).
c) UCC § 2-207 (“Battle of the Forms”). Under the UCC, the acceptance does NOT have to mirror the offer (i.e., the acceptance can include different or additional terms from those in the offer). UCC § 2-207(1) determines whether the purported acceptance (containing new terms) will operate as an acceptance or as a counteroffer. It states:
(1) A definite and seasonable expression of acceptance or written confirmation;
(2) Which is sent within a reasonable amount of time;
(3) Operates as an ACCEPTANCE even though it states terms additional to or different from those offered or agreed upon;
(4) UNLESS acceptance is expressly made conditional upon assent to the additional or different terms.
UCC § 2-207(2). If the purported acceptance is a valid acceptance under UCC § 2-207(1),
the next issue is whether the additional or different terms in the acceptance will govern
the contract or whether UCC gap fillers will be implemented. Under UCC § 2-207(2), the
ADDITIONAL terms (see distinction between “additional” and “different” terms
below) will govern the contract if BOTH parties are merchants UNLESS:
(1) The initial offer expressly limited acceptance to its terms;
(2) The additional terms materially alter the deal; OR
(3) The offeror objects to the additional terms within a reasonable amount of time.
The Knockout Rule. Most courts apply the knockout rule with UCC § 2-207(2) to determine whether the new terms control or whether UCC gap fillers must be implemented. Under the knockout rule, a distinction is made between “different” and “additional” terms.
(1) A different term is a term that was not included in the original offer that conflicts with the terms of the original offer (e.g., offeree changes the price term from $5,000 to $4,000 and sends it back to the offeror). (2) An additional term is a term that was not included in the original offer that does NOT conflict with the original offer (e.g., offeree adds a choice of law provision that was not included in the original offer and sends it back to the offeror).
Under the knockout rule, different terms in the original offer and acceptance knock each other out creating a gap in the contract. UCC gap fillers are then used to plug this gap (regardless of whether the parties are merchants). The knockout rule does not apply to additional terms added by the offeree. UCC § 2-207(2) will determine whether the additional terms control or whether UCC gap fillers must be implemented.
Contract Modification and the Preexisting Duty Rule (12%)
a) Under the common law, contract modifications MUST be supported by consideration. The common law follows the preexisting duty rule, which means that a promise to do something that a party is already legally obligated to do (by contract or otherwise) is NOT consideration.
(1) Watch out for this Bar Exam trick: Alex rents an apartment from Slumlord for one year at a rent of $1,500 per month. Later that year, Alex (running short on cash) and Slumlord both agree to modify the rent to $1,000 per month. Here, under the common law, Slumlord can sue Alex at the end of the month for the extra $500, because there was no consideration for the modification of the contract (Alex had a preexisting legal duty to pay the full $1,500).
b) Under the UCC, there is no consideration requirement. A contract modification is valid if it is made in good faith (i.e., the UCC does NOT apply the preexisting duty rule).
Anticipatory Repudiation (12%)
a) Under the common law, anticipatory repudiation occurs when a promisor clearly and unequivocally repudiates a promise before the time for performance is due (by words or conduct). Under the common law, repudiation may be retracted until the promisee:
(1) Acts in reliance on the repudiation;
(2) Signifies acceptance of the repudiation; OR
(3) Commences an action for breach of contract.
b) Under the UCC, anticipatory repudiation occurs when:
(1) The buyer or seller makes an unequivocal refusal to perform; OR
(2) Reasonable grounds for insecurity arise regarding either party’s ability or willingness to perform, and the repudiating party fails to provide adequate assurances within a reasonable time (not to exceed 30 days) upon the non- repudiating party’s demand for such assurances.
Under the UCC, anticipatory repudiation may be retracted until the non-repudiating party cancels the contract or materially changes his position.
c) When an anticipatory repudiation occurs, the non-repudiating party may:
(1) Treat the repudiation as a breach and sue immediately for damages; OR
(a) However, if the date of performance has not passed and the only performance left is payment, the non-repudiating party must wait until performance is due and the actual breach occurs before filing suit.
(2) Ignore the repudiation, urge performance, and see what happens.
(a) However, if the repudiation is ignored, then continued performance by the non-repudiating party must be suspended if the performance would increase the damages of the repudiating party.
Remedies: Money Damages: Expectation Damages (20%)
a) The goal of expectation damages is to put the non-breaching party in the same economic position that it would be in if the contract had been performed as promised. Expectation damages are measured by comparing the value of the performance without the breach to the value of the performance with the breach.
b) There are three major limitations on the calculation of expectation damages:
(1) Expectation damages MUST be proven with reasonable certainty.
(a) Common fact patterns include new or unproven business ventures that have trouble proving lost profits from a consistent sales record.
(2) Unforeseeable consequential damages are NOT recoverable UNLESS the breaching party had some reason to know about the possibility of these unforeseeable damages.
(a) General Damages. The type of losses that almost anyone would suffer from a breach (e.g., cost of storing rejected goods, finding a new buyer, finding a replacement vendor, etc.).
(b) Consequential Damages. The type of losses that are unique or special to this plaintiff (i.e., losses that arise indirectly from the breach due to the plaintiff’s special circumstances).
Remedies: Mitigation Damages: Duty to Mitigate (12%)
The plaintiff has a duty to take reasonable steps to mitigate (reduce) his losses. If the plaintiff fails to do so, the court will reduce the total damages by the amount that could have been avoided had the plaintiff taken reasonable steps to mitigate his losses.
