Contracts

Question 1

What is a contract?

Answer 1

A contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law, in some way, recognizes a duty

Question 2

What is a “good” in defining a contract?

Answer 2

“Goods” are all things movable at the time they are identified as the goods to be sold under the contract. Article 2 applies – does NOT include real estate and intangibles

Question 3

What does it take to create a contract?

Answer 3

Mutual assent, consideration or an appropriate substitute, lack of defenses to creation

Question 4

What is an offer?

Answer 4

A promise, undertaking, or commitment with definite and certain terms communicated to offeree (creating power of acceptance in the offeree)

Was there: expression of a promise, undertaking, or commitment to enter in a K?
Certainty and definiteness in terms?
Communication to offeree?

Question 5

What is mutual assent?

Answer 5

Together with an offer, an acceptance before termination by revocation, rejection, or operation of law

Question 6

What is consideration?

Answer 6

Bargained-for exchange of legal detriment (something of legal value – i.e benefit to promisor or detriment to promisee)

Promise must induce detriment and vice versa

Question 7

When is an advertisement construed as an offer?

Answer 7

If it specifies quantity and expressly indicates who can accept

Question 8

What are four types of irrevocable offers?

Answer 8

1) Option = offer + promise not to revoke + consideration
2) UCC Firm Offer Rule = Purchase/sale of goods + signed, written promise to keep open + merchant
3) Reliance = reliance + reasonable foreseeable + detrimental
4) Unilateral contract = offeree starts performance (remains irrevocable for a reasonable time)

Question 9

What does “definite and certain terms” in an offer require?

Answer 9

Enough of the essential terms have been provided so that a contract including them would be capable of being enforced. ID an offeree. Definiteness of subject matter.

For real estate K, need to identify the land and specify price terms

For sale of goods, need a quantity term (watch out for requirements and output contracts)

Question 10

Missing terms

Answer 10

The fact that one or more terms are left open does NOT prevent the formation of a contract if it appears that the parties intended to make a contract and there is a reasonably certain basis for giving a remedy.

Question 11

Termination of offer – revocation

Answer 11

A revocation is the retraction of an offer by the offeror. An offeror may revoke by directly communicating the revocation to the offeree. An offer made by publication can be directly revoked only by publication through comparable means

Question 12

Indirect revocation

Answer 12

If offeree receives (i) correct information, (ii) from a reliable source, (iii) of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.

Question 13

Part performance in true unilateral contract offers

Answer 13

An offer for a true unilateral contract becomes irrevocable once performance has begun. The offeror must give the offeree a reasonable time to complete performance. BUT REMEMBER, there is no acceptance until performance is complete.

ALSO – distinguish preparations to perform

Question 14

Termination by offeree

Answer 14

Express rejection: a statement by offeree that she does not intend to accept the offer. Terminates offer.

Counteroffer as rejection: an offer made by the offeree to offeror that contains the same subject matter as the original offer, but differs in its terms. (DISTINGUISH MERE INQUIRY – would a reasonable person believe that the original offer had been rejected)

Lapse of time: reasonable amount of time (look for dates on the exam)

Question 15

What is a rejection effective?

Answer 15

When it is received by the offeror

Question 16

Termination by operation of law

Answer 16

Death or insanity of either party (need not be communicated to other party)

Destruction of the proposed contract’s subject matter

Supervening illegality

Question 17

What is acceptance?

Answer 17

A manifestation of assent to the terms of an offer

Question 18

Who may accept an offer to contract?

Answer 18

Generally, only the person to whom an offer is addressed has the power of acceptance. On may also have the power of acceptance if she is a member of a class to which an offer has been directed. Generally, an offeree’s power of acceptance cannot be assigned. However, if the offeree has paid consideration to keep the offer open, the right to accept is transferable.

Question 19

Offeree must know of offer to accept it

Answer 19

Applies to both bilateral and unilateral offers. Watch out for crossing offer situations, where no contract is formed, even if the offers contain the same terms.

Question 20

Acceptance of offer for unilateral contract

Answer 20

Offer to form a unilateral K is not accepted until performance is COMPLETED.

Notice – the offeree is NOT required to give the offeror notice that he has begun the requested performance, but is required to notify the offeror within a reasonable time after performance has been completed. No notice req’d if (i) offeror waives notice, or (ii) offeree’s performance would normally come to offeror’s attention w/in reasonable time

Question 21

Acceptance of bilateral contract

Answer 21

Unless offer specifically provides that it may be accepted only through performance, it will be construed as bilateral K and may be accepted by promise to perform or by beginning of performance

Generally must be communicated (unless offer provides that acceptance need not be communicated)

Question 22

Methods for accepting an offer

Answer 22

Unless otherwise provided, offer is construed as inviting acceptance in any reasonable manner and by any medium reasonable under circumstances

Question 23

Shipment of nonconforming goods

Answer 23

The shipment of nonconforming goods is an acceptance creating a bilateral contract AS WELL AS A BREACH of the contract UNLESS seller seasonably notifies buyer that a shipment of nonconforming goods is offered only as an accommodation. Buyer is not required to accept accommodation goods and may reject them. If he does, shipper not in breach and my reclaim accommodation goods, because tender does not constitute an acceptance of the buyer’s original offer.

Question 24

Article 2 Rule – Battle of the Forms Provision

Answer 24

Proposal of additional or different terms by offeree in a definite and timely acceptance does not constitute a rejection and counteroffer (like under C/L), but rather is EFFECTIVE AS AN ACCEPTANCE, unless the acceptance is expressly made conditional on the assent to the additional or different terms.

Question 25

Conditional Acceptance

Answer 25

When acceptance is made expressly conditional on acceptance of new terms, it is a rejection.

Watch out for counteroffer/acceptance/contract formation

NOT a counteroffer that can be accepted by performance

If the parties ship or accept goods after conditional acceptance, K formed by conduct, new terms not included

Question 26

When does acceptance by mail NOT create a contract upon dispatch?

Answer 26

1) If offer stipulates that acceptance is not effective until received
2) An option K is invovled
3) If the offeree sends a rejection and THEN sends an acceptance, whichever arrives first is effective
4) If the offeree sends acceptance and then a rejection, the acceptance is effective UNLESS the rejection arrives first and the offeror detrimentally relies on it

Question 27

When is an act or forbearance by promisee sufficient consideration?

Answer 27

When it benefits the promisor. The benefit need not be economic.

Question 28

What does the modern trend say about past acts and consideration?

Answer 28

If a past act benefited the promisor and was performed by the promisee at the promisor’s request or in response to an emergency, a subsequent promise to pay for that act will be enforceable.

Question 29

Exceptions to the Preexisting Duty Rule

Answer 29

There is consideration if:

1) New or different consideration is promised (a hawk)
2) The promise is to ratify a voidable obligation;
3) The preexisting duty is owed to a third person rather than to the promisor;
4) There is an honest dispute as to the duty; or
5) There are unforeseen circumstances sufficient to discharge a party

ALSO – good faith agreement modifying a K subject to UCC needs no consideration to be binding

Question 30

Forbearance to sue

Answer 30

Refraining from suing is consideration if claim is valid or claimant in good faith believes the claim is valid

Question 31

When does a right to choose alternatives render a K illusory?

Answer 31

A promise to choose one of several alternative means of performance is illusory UNLESS every alternative involves legal detriment to promisor

Not illusory if (i) at least one alternative involves legal detriment and the power to choose rents with the promisee or third party, or (ii) a valuable alternative is actually selected

Question 32

Three elements of Promissory Estoppel

Answer 32

A promise is enforceable if necessary to prevent injustice if:

1) The promisor should reasonably expect to induce action or forbearance;
2) Of a definite and substantial character;
3) Such action or forbearance is in fact induced

ALWAYS BETTER TO PREVAIL ON THE K

Question 33

Mutual Mistake

Answer 33

BOTH parties mistaken about existing facts relating to agreement, voidable by adversely affected party if:

1) Mistake concerns basic assumption on which K is made
2) Mistake has material effect on agreed-upon exchange; and
3) Party seeking avoidance did not assume the risk of mistake

Question 34

Unilateral mistake

Answer 34

If only one party is mistaken about facts relating to agreement, mistake will NOT prevent formation of K

BUT, if nonmistaken party knew or had reason to know of the mistake made by the other party, K is voidable by mistaken party

Question 35

Ambiguous language

Answer 35

(i) Neither party aware? No K unless both intended same meaning
(ii) Both parties aware? No K unless both parties intended same meaning
(iii) One party aware? Biding K based on what ignorant party reasonably believed to be the meaning of ambiguous words

SUBJECTIVE INTENT MATTERS

Question 36

Misrepresentation elements

Answer 36

1) Statement of “fact” before the contract;
2) By one of the contracting parties or her agent;
3) That is false; and
4) Induces the contract (justifiable reliance)

Question 37

When is nondisclosure of a fact misrepresentation?

Answer 37

When it is material and fraudulent (e.g. false denial of knowledge of a material fact)

Question 38

Nonfraudulent Misrepresentation

Answer 38

K is voidable by innocent party if innocent party justifiably relied on misrepresentation and it was material.

Material if either (i) info asserted would induce a reasonable person to agree; or (ii) the maker of the misrep knew the info asserted would cause a particular person to agree

Question 39

When will withholding something someone needs constitute economic duress?

Answer 39

If (i) party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; and (ii) there are no adequate means available to prevent the threatened loss.

Question 40

Undue influence – elements

Answer 40

1) Undue susceptibility to pressure by one party, and
2) Excessive pressure by the other party

LOOK OUT FOR CAREGIVER RELATIONSHIPS

Question 41

Statute of Frauds

Answer 41

Certain Ks must be evidences by a writing signed by the parties SOUGHT TO BE BOUND.
Agreements covered:
1) Executor or administrator promises personally to pay estate debts
2) Promises to pay debt of another (suretyship)
3) Promises in consideration of marriage
4) INTEREST in land (leases more than 1 year included)
5) Service contract not capable of being performed within a year from the time of the contract
6) Goods priced at $500 or more

Question 42

Statute of Frauds Writing Requirement

Answer 42

SOF doesn’t require the contract to be in writing – merely requires that there be one or more writings signed by the person sought to be held liable on the K that reflect the MATERIAL terms of the K.

E.g. a letter, receipt, or check indicating the quantity of goods on the memo line

Signature requirement construed liberally

Question 43

Three exceptions for land interest SOF requirements (need at least two)

Answer 43

1) Substantial improvements to the land
2) Payment (in whole or part)
3) Possession

Question 44

When writing not required for sale of goods (SWAP)

Answer 44

1) Specially manufactured goods (not suitable for sale to others by seller in ordinary course), and seller has made substantial beginning
2) Written confirmation by merchant, not objected to w/in ten days
2) Admissions in pleadings or court (not enforced above quantity admitted)
3) Payment or delivery of goods (not beyond quantity of goods accepted or paid for)

Question 45

Exculpatory Clauses

Answer 45

E/C releasing K party from liability for his own INTENTIONAL wrongful acts is usually found to be unconscionable

E/C for negligent acts may be found to be unconscionable if inconspicuous, but are commonly upheld if they are in contracts for activities that are known to be hazardous

Question 46

Parol Evidence Rule

Answer 46

When the parties to a K express their agreement in a writing with the intent that it embody the final expression of their bargain (integration), any other expressions – written or oral – made prior to the writing, as wellas any oral expressions contemporaneous with the writing, are inadmissible to vary the terms of the writing under the parol evidence rule

Question 47

Is the writing an integration?

Answer 47

(I) Is the writing intended as a FINAL expression?
(ii) Is the writing a complete or partial integration? If merger clause exists reciting that agreement is complete on its face, this clause strengthens the PRESUMPTION that all negotiations were merged into the written document

Question 48

Who decides status of integration?

Answer 48

Majority view: the judge

Question 49

How to determine if parties intended writing to be a complete and final integration

Answer 49

Corbin Test: Look at specific circumstances of transaction involved (parties relations, transaction size) and ask whether parties like these, situated as they are, would naturally and normally include in their writing the extrinsic matter that is sought to be introduced. If so, exclude under PER. Otherwise, it is admissible.

Question 50

Determining contract terms by parties’ conduct

Answer 50

Course of performance – same people, same contract

Course of dealing – same people, different but similar contract

Custom and usage – different but similar people, different but similar contract

Question 51

Battle of Forms - which terms included in K

Answer 51

Ks involving a nonmerchant – terms of offer govern – additional or different terms are mere proposals to modify K that do not become part of K unless offeror expressly agrees

Ks b/w merchants – additional terms in acceptance usually included UNLESS: (i) they materially alter the original terms of the offer (ii) the offer expressly limits acceptance to terms of offer; or (iii) offeror has already objected to the particular terms, or objects w/in a reasonable time after notice of them is received

Question 52

What three things must a seller have to do to complete its delivery obligation under a shipment contract (under UCC)?

Answer 52

For shipment contracts:

(1) Get goods to common carrier
(2) Make reasonable arrangements for delivery; and
(3) Notify the buyer

In a destination contract:
Seller does not complete its delivery obligation until the goods arrive at the destination.

Question 53

What does FOB signify in a shipment or destination contract context?

Answer 53

FOB (free on board) followed by city where seller IS or where goods ARE means shipment contract. FOB followed by anything else means destination contract.

Question 54

What are the risk of loss rules?

Answer 54

Agreement – agreement of parties controls

Breach – breaching party is liable for any uninsured loss even through breach unrelated to problem

Common carrier delivery – risk of loss shifts from seller to buyer at the time the seller completes its delivery obligations

Catch-all – the determining factor is whether the SELLER is a merchant. Risk of loss shifts from merchant seller to the buyer on the buyer’s receipt of the goods; risk of loss shifts from a nonmerchant seller when he tenders the goods

Question 55

What is the implied warranty of merchantability?

Answer 55

Implied in every K for sale by a merchant who deals IN GOODS OF THE KIND sold, there is a warranty that the goods are merchantable. Includes sale of food and drink.

Goods must be fit for the ordinary purposes for which such goods are used.

Doesn’t matter that seller did not know of defect. Based on absolute liability, not negligence.

Question 56

What is the implied warranty of fitness for a particular purpose?

Answer 56

A warranty will be implied in contract for sale of goods whenever ANY seller (merchant of not) has reason to know the particular purpose for which the goods are to be used and that the buyer is relying on the seller’s skill and judgment to select suitable goods; and the buyer in fact relies on seller’s skill or judgment.

Question 57

What are the limitations on warranty liability?

Answer 57

1) SOL – 4 years, begins running when tender of delivery is made (not when buyer learns of defect)
2) Privity – plaintiff must have contracted with defendant
3) Buyer’s exam of goods – examination eliminates implied warranties
4) Disclaimer – express warranties generally can’t be disclaimed, but implied can be by CONSPICUOUS language of disclaimer mentioning merchantability, or “as is” or “with all faults” language

Question 58

Damages for breach of warranty

Answer 58

Generally, the measure of damages for breach of warranty is the difference between the value of the goods accepted and the value of the goods as warranted, measured at the time and place of acceptance.

Question 59

What does performance of a contract require under Article 2?

Answer 59

Article 2 requires perfect tender for performance. The delivery and condition of the goods must be exactly as promised in the contract:

A less than perfect tender by seller generally gives the buyer the option of rejection of the delivered goods, so long as the buyer acts in good faith (honesty in fact and the observance of reasonable commercial standards of fair dealing)

Question 60

When does a breach occur?

Answer 60

If it is found that (i) the promisor is under an absolute duty to perform, and (ii) this absolute duty of performance has not been discharged, then this failure to perform in accordance with contractual terms will amount to a breach of the contract. The nonbreaching party who sues for breach of contract must show that she is willing and able toperform but for the breaching party’s failure to perform.

Question 61

What is a minor breach?

Answer 61

A breach of contract is minor if the obligee gains substantial benefit of her bargain despite the obligor’s defective performance. This doesn’t relieve the aggrieved party of duty of performance under the contract; merely gives right to damages for the minor breach (SETOFF).

Question 62

What is a material breach?

Answer 62

If the obligee does not receive the substantial benefit of her bargain, the breach is material. If the breach is material, the nonbreaching party (i) may treat the contract as at an end, (ii) and will have an immediate right to all remedies for breach of the entire contract, including total damages.

Question 63

What happens if a minor breach is coupled with anticipatory repudiation?

Answer 63

If a minor breach is coupled with anticipatory repudiation, the nonbreaching party may treat it as a material breach, i.e. she may sue immediately for total damages and is permanently discharged from any duty of further performance. To continue on by the aggrieved party would be a failure to mitigate damages. If U.C.C., manufacturer may continue to finish making the goods.

Question 64

What factors are used to determine the materiality of a breach?

Answer 64

Amount of benefit received by nonbreaching party

Adequacy of compensation for damages to injured party

Extent of performance

Hardship to breaching party

Negligent or willful behavior of breaching party

Likelihood that breaching party will perform remainder of contract

Question 65

What is a buyer’s responsibility after rejecting goods?

Answer 65

After rejecting goods in her physical possession, the buyer has an obligation to hold them with reasonable care at the seller’s disposition and to obey any reasonably instructions as to the rejected goods. If the seller gives no instructions within a reasonable time, the buyer may reship the goods to the seller, store them for the seller’s account, or resell them for the seller’s account. If the buyer resells, she is entitled to recover her expenses and a reasonable commission.

Question 66

When may a buyer revoke acceptance?

Answer 66

The buyer may revoke her acceptance if the goods have a defect that substantially impairs their value to her and:

(1) She accepted them on the reasonable belief that the defect would be cured and it has not been; or
(2) She accepted them because of the difficulty of discovering defects or because the seller’s assurance that the goods conformed to the contract.

Must occur in reasonable time after buyer discovers or should have discovered defects and before any substantial change in the goods occurs that is not caused by a defect present at time the seller relinquished possession.

Question 67

When can goods be rejected in an installment contract scenario?

Answer 67

An installment can be rejected only if the nonconformity substantially impairs the value of that installment and cannot be cured. The whole contract is breached only if the nonconformity substantially impairs the value of the entire contract.

Question 68

How may a seller cure in a single delivery contract?

Answer 68

By notice and new tender within time for performance. If buyer rejected goods because of defects, seller may within the time originally provided for performance cure by giving reasonable notice of intention to do so and making a new tender of conforming goods that the buyer must then accept.

Question 69

What is specific performance and when is it available?

Answer 69

The nonbreaching party may seek specific performance, which is an order from the court to the breaching party to perform or face contempt of court charges.

It is available when the legal remedy is inadequate. It is always available for land sale contracts. Also available for goods that are rare or unique at time performance is due. It is NOT available for breach of contract to provide services, even if unique or rare.

Question 70

Covenants not to compete

Answer 70

Will be enforced if services to be performed are unique and covenant is reasonable.

To be reasonable: (1) Covenant must be reasonably necessary to protect a legitimate interest of the person benefited by the covenant, (2) Covenant must be reasonable as to its geographic scope and duration, and (3) Covenant must not harm the public.

Question 71

What is the usual goal of damages in breach of contract actions?

Answer 71

To put the nonbbreaching party where she would have been had the promise been performed, so far as money can do this.

Expectation damages – sufficient damages for nonbreaching party a substitute performance.

Question 72

What are reliance damages?

Answer 72

If plaintiff’s expectation damages are too speculative to measure, the plaintiff may elect to recover damages based on a reliance measure, rather than expectation. They award the plaintiff the cost of her performance, i.e. they are designed to put the plaintiff in the position she would have been in had the contract never been formed.

Question 73

What are consequential damages?

Answer 73

Consequential damages consist of losses resulting from the breach that nay reasonable person would have foreseen would occur from a breach at the time of entry into the contract. In a sale of goods contract, ONLY A BUYER MAY RECOVER CONSEQUENTIAL DAMAGES.

Question 74

What are incidental damages?

Answer 74

In contracts for the sale of goods, compensatory damages may also include incidental damages. Incidental damages include expenses reasonably incurred by the buyer in inspection, receipt, transportation, care, and custody of goods rightfully rejected and other expenses reasonably incident to the seller’s breach, and b y the seller in storing, shipping, returning, and reselling the goods as a result of the buyer’s breach.

Question 75

What is the consequence of being an intended third party beneficiary?

Answer 75

Only intended third party beneficiaries have contractual rights. Incidental beneficiaries do not. To determine whether intended or not, consider whether the beneficiary is (i) identified in the contract, (ii) receives performance directly from the promisor, or (iii) has some relationship to the promisee to indicate intent to benefit.

Question 76

When do the rights of a third party beneficiary vest?

Answer 76

When the third party:

(1) Learns of it and assents in manner requested by the parties
(2) Learns of the promise and materially changes position in justifiable reliance on the promise; or
(3) Learns of the promise and brings suit to enforce the promise

Question 77

When can a third party beneficiary enforce his rights?

Answer 77

Only once they have vested. Prior to vesting, the promisee and promisor are free to modify or rescind the beneficiary’s rights under the contract.

Question 78

What is an assignment?

Answer 78

In the typical assignment situation, X (the obligor) contracts with Y (the assignor). Y assigns his rights to X’s performance to Z (the assignee).

Question 79

What rights may be assigned under a contract?

Answer 79

Generally, all contractual rights may be assigned. Exceptions: (i) an assignment that would substantially change the obligor’s duty of risk (e.g. personal service contracts where the service is unique, requirements or output contracts where the assignee will substantially vary the quantity); (ii) as assignment of future rights to arise from future contracts (not future rights in already existing contracts); and (iii) an assignment prohibited by law (e.g. wage assignments).

Question 80

What if a contract contains an express contractual provision against assignment?

Answer 80

A clause prohibiting assignment of “the contract” will be construed as barring only delegation of the assignor’s duties. A clause prohibiting assignment of contractual rights generally does not bar assignment, but rather merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign will be void, the parties can bar assignment. Also, if the assignee has notice of the nonassignment clause, an assignment will be ineffective.q

Question 81

What is the effect of an assignment?

Answer 81

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and assignor.

Question 82

What is necessary for an effective assignment?

Answer 82

The assignor must manifest an intent to immediately and completely transfer his rights. A writing is usually not required to have an effective assignment. The rights being assigned must be adequately described. Not necessary to use the word “assign.” Gratuitous assignments are effective.

Question 83

When is an assignment “for value”?

Answer 83

If it is (i) done for consideration, or (ii) taken as security for or payment of a preexisting debt. Assignments for value CANNOT be revoked.

Gratuitous assignments generally are revocable.

Question 84

When is a gratuitous assignment irrevocable?

Answer 84

If (i) the obligor has already performed; (ii) a token chose is delivered; (iii) an assignment of a simple chose is put in writing; or (iv) the assignee can show detrimental reliance on the gratuitous assignment.

Question 85

How can a revocable gratuitous assignment be terminated?

Answer 85

By (i) death or bankruptcy of the assignor; (ii) notice of revocation by the assignor to the assignee or the obligor; (iii) the assignor taking performance directly from the obligor; or (iv) subsequent assignment of the same right by the assignor to another.

Question 86

What does the assignor warrant to the assignee in every assignment for value?

Answer 86

The assignor warrants that (i) he has not made a prior assignment of the same right, (ii) the right exists and is not subject to any undisclosed defenses; and (iii) he will do nothing to interfere with the assigned right.

Assignee may sue assignor for breach of these warranties, BUT assignor will not be liable to assignee if obligor is incapable of performing.

Question 87

What is a delegation?

Answer 87

In the typical delegation, Y (the obligor/delegator) promises to perform for X (the obligee). Y delegates her duty to Z (the delegate).

Question 88

What duties may be delegated?

Answer 88

Generally, all duties may be delegated. Exceptions: (i) the duties involve personal judgment and skill; (ii) delegation would change the obligee’s expectancy; (iii) a special trust was reposed in the delegator by the other party to the contract; and (iv) there is a contractual restriction on delegation.

Question 89

What is necessary to make an effective delegation?

Answer 89

The delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral.

Question 90

When will a court not grant specific performance in the sale of land context?

Answer 90

When the land has been sold to a BFP for value.

Question 91

How is a condition precedent waived?

Answer 91

The party who is entitled to fulfillment of a condition precedent may waive the condition (i.e. knowingly relinquish the right to demand fulfillment of the condition). Such a waiver will be enforceable and cannot be retracted if consideration is given for the waiver or the other party changed his position in reliance on the waiver.