Contracts and Sales

Question 1

Contract - General Approach

Answer 1

1. Which law applies? If the UCC applies, discuss whether the parties are merchants
2. Formation
3. Defenses to Formation
4. Defense to Enforcement
5. Third-Party Beneficiaries and Assignees
6. Construction/Parol Evidence Rule
7. Conditions
8. Breach and Remedies

Question 2

Offer - Rule

Answer 2

An offer consists of:

1. a promise, undertaking, or commitment to enter into a contract;
2. with the essential terms certain and definite; and
3. communication of the promise and the terms to the offeree.

Question 3

Offer - Advertisements vs. Purchase Orders

Answer 3

Ads are usually only invitations to offers, but remember that an ad is a very widespread communication.

Sending purchase order forms to limited merchants in the industry is not making an invitation to an offer—it is a promise, commitment or undertaking.

Question 4

Merchant - Defined

Answer 4

Buyer or seller who regularly deals in goods of the kind sold.

Question 5

Choice of Law - Common Law vs. UCC

Answer 5

Generally, the common law governs contracts. However, the Uniform Commercial Code (UCC) governs all contracts for the sale of goods.

Article 2 of the UCC defines goods as all things movable at the time they are identified as the goods to be sold under the contract.

When a contract includes both services and goods, the contract will be governed by whichever predominates the contract.

Question 6

Formation - Generally

Answer 6

In order to determine the rights of the parties, it is first necessary to ascertain whether or not a valid contract was formed. A valid contract requires:

1. Mutual assent (offer and acceptance)
2. Consideration (or a valid substitute)
3. No defenses to formation or enforcement

Question 7

Offer - Revocation

Answer 7

A revocation terminates the power to accept if it is communicated to the offeree before he accepts.

A revocation can be:

1. communicated directly or,
2. if the offeree indirectly receives correct information from a reliable source of acts that would indicate to a reasonable person that the offer is terminated.

Under the mailbox rule, a revocation is only effective when it is received.

Question 8

Offer - Barriers to Revocation

Answer 8

Revocation of the offer is not permitted where:

1. Consideration given by offeree
2. Merchant’s firm offer—limited to three months
3. Detrimental reliance

Question 9

Acceptance - Generally

Answer 9

An acceptance is an unqualified assent to the terms of an offer.

The acceptance must be communicated to the offeror by any means reasonable under the circumstances. However, if an offer limits the form of acceptance, the acceptance must comply with the offer’s limitation.

Acceptance by mail creates a contract at the moment of dispatch, unless:

1. the offer stipulates that acceptance is not effective until received or otherwise controls the form of acceptance, or
2. an option contract is involved, where acceptance is effective only on receipt.

Question 10

Acceptance - UCC 2-207 (“Battle of the Forms”)

Answer 10

Are there Additional or Different Terms?

Different: The majority rule is the “Knock-Out” Rule, where the conflicting terms are both knocked out of the contract. The terms are then replaced by UCC gap fillers or, if there aren’t any, by course of performance between the parties.

Additional: If the parties are merchants, additional terms become a part of the contract unless:

1. Offer expressly limits acceptance to the terms of the offer, or
2. They materially alter the offer; or
3. Notification of objection to the additional or different terms is given within a reasonable time after notice is received.

If the parties are not both merchants, then the buyer’s proposed change is only a proposal and would not be effective unless seller did something to accept the proposal.

Question 11

Consideration - Generally

Answer 11

Consideration requires a bargained-for exchange—a detriment to the promisor and a benefit to the promisee.

If there is a lack of consideration, consider whether the elements of promissory estoppel are met:

1. the promisor should reasonably expect to induce definite or substantial action or forbearance; and
2. such action or forbearance is in fact induced.

Under the UCC, consideration is not required for a good faith written modification of a contract, and for firm offers in writing by merchants. Additional consideration is required for modifications in common law contracts.

Question 12

Defenses to Formation

Answer 12

Defenses to contract formation include: 1) Mistake; 2) Fraud; 3) Illegality; and 4) Capacity

These conditions must exist at time of contract formation.

Question 13

Defenses to Enforcement

Answer 13

Defenses to enforcement include:

• Statute of Frauds
• Unconscionability

Question 14

Statute of Frauds - Generally

Answer 14

The Statute of Frauds states that a contract must be in writing if it involves:

1. A promise to pay the debt of another
2. Any interest in Land – leases, easements, deeds of trust
3. Contract cannot be performed within 1 year
4. Sale of goods of $500 or more ($5,000 under UCC)

Question 15

Statute of Frauds - Exceptions

Answer 15

Exceptions to the Statute of Frauds include:

1. Admission
2. Full performance, if the contract is for the sale of goods/services
3. If the contract is for real property, any two of the following:
   - performance by payment (whole or part),
   - possession,
   - making of valuable improvements

Question 16

Unconscionable Contracts - Generally

Answer 16

One-sided contract at time it was formed (especially pre-printed)

Unequal bargaining power of the parties

Question 17

Third Party Beneficiaries - Generally

Answer 17

The issue is whether someone other than the parties to the contract can enforce its terms.

Question 18

Third Party Beneficiaries - Intended vs. Incidental

Answer 18

If a third party is the intended beneficiary, it is because:

1. They are expressly designated or identifiable at the time of performance;
2. Performance is to be made directly to them;
3. They have rights under the contract; or
4. The relationship between the third party and the promisee suggests the promisee wishes the beneficiary to be benefited.

Incidental beneficiaries cannot enforce the contract.

Question 19

Third Party Beneficiaries - Creditor vs. Donee Beneficiary

Answer 19

If the promisee’s intent was to discharge an obligation, then the third party beneficiary is a creditor beneficiary.

If the promisee’s intent was to bestow a gift, then the third party beneficiary is a donee beneficiary.

If the promisor fails to perform, a donee third-party beneficiary cannot sue the promisee unless the third-party beneficiary can claim detrimental reliance on the promise.

A creditor beneficiary can always sue the promisee on the underlying obligation that the promisor’s performance was supposed to discharge.

Question 20

Third Party Beneficiary - Vesting of Rights

Answer 20

A third party beneficiary can only enforce a promise if their rights have vested. Rights vest when the beneficiary:

1. Manifests assent in a manner requested by the parties;
2. Brings suit to enforce the promise; or
3. Materially changes position in justifiable reliance on the promise.

If the promisor fails to perform, the third-party beneficiary may always sue the promisor on the contract.

Question 21

Assignment of Rights - What Rights May be Assigned?

Answer 21

All contractual rights may be assigned, except those that would substantially change an obligor’s duty. The obligor is the party to the contract who DID NOT assign it to another.

The major contracts that fall in this exception are personal services contracts, requirements and output contracts (although assignment may be ok under UCC), and assignments that substantially alter obligor’s risk.

Question 22

Assignment of Rights - Requirements

Answer 22

An assignment does not require a writing except wage assignments, interests in land, choses in action > $5000, and security interests.

The right being assigned must be adequately described in the manifestation of assignment, and the assignor must indicate an intent to completely and immediately assign the interest to the assignee.

Consideration is not required.

Question 23

Assignment of Rights - Revocation

Answer 23

An assignment is revocable, except:

a. If it is given for consideration;
b. If the obligor has already performed;
c. On delivery of a tangible claim (such as stock certificates);
d. If it is an assignment of a chose in action in reliance;
e. Estoppel—foreseeable detrimental reliance.

An obligor can assert any defenses against the assignee it had against the assignor, except personal defenses that arose after the obligor had notice of the assignment.

Question 24

Delegation - Generally

Answer 24

A transfer of duties, as opposed to the entire contract, is a delegation.

All duties may be delegated, EXCEPT:

1. Duties involving personal judgment and skill;
2. Where there is special trust in the delegator (like an attorney or physician);
3. Delegation would create a change in the obligee’s expectancy; or
4. There is a contractual restriction

The delegator remains liable even if the delegate expressly assumes the duties. The non-delegating party cannot compel the delegate to perform unless the delegate promises to perform the duty, and their promise is supported by consideration. In that case, or if delegate in fact performs, delegate is liable to non-delegating party.

Question 25

Parol Evidence Rule - Generally

Answer 25

Where the parties express their agreement in writing, with the intent that it embody the full and final expression of their bargain, any other expressions, written or oral, made prior to the writing, and any oral expressions made contemporaneous with the writing, are inadmissible to vary the terms of the writing.

Question 26

Parol Evidence Rule - Final Expression of the Bargain

Answer 26

For the writing to be a full and final expression of the bargain, it must be signed by both parties.

If there is a merger clause, reciting that the agreement is complete, it is certainly fully integrated. A partially integrated writing cannot be contradicted, but it can be supplemented.

Question 27

Parol Evidence Rule - Exceptions

Answer 27

Exceptions to the parol evidence rule include formation defects (fraud, duress, mistake and illegality), a condition precedent, interpretation of an ambiguity, and a showing of true consideration.

To allow in evidence of an ambiguity, there must first in fact be an ambiguity in the language. The oral conversation itself cannot create the ambiguity—it must appear on the face of the writing.

Question 28

Parol Evidence Rule - UCC

Answer 28

Consistent additional terms are admissible unless there is a merger clause or the Court finds the parties intended the writing as a complete and exclusive statement of the terms of the agreement.

Question 29

Contract Modifications - Generally

Answer 29

Subsequent expressions are not barred by the Parol Evidence Rule, but they may be modifications. If so, a modification requires consideration, unless the UCC applies.

In the case of the UCC, a good faith modification does not require consideration. However, if the modification brings the contract within the Statute of Frauds, it must be in writing.

Question 30

Condition vs. Promise

Answer 30

A promise is a commitment to do or refrain from doing something.

A condition is an event, other than the passage of time, which will extinguish, modify, limit or create a duty to perform. A condition modifies a promise. Express conditions are expressed in the contract. Implied conditions are fairly inferred from the parties’ conduct. Constructive conditions are read into the contract by the court, irrespective of the parties’ conditions (for ex., A can’t demand payment for a book without delivering the book).

A provision can be a promise for one party and a condition for the other (for example: A agrees to sell a book to B if B pays A $25).

The failure of a condition precedent, or occurrence of a condition subsequent, constitutes an excuse from performance that avoids a breach.

Question 31

Breach

Answer 31

A breach occurs when a promisor has a duty and fails to perform it.

A minor breach is one where the obligee gains the substantial benefit of the promise, and their duty to perform is not discharged. A material breach is one where the nonbreaching party does not gain the substantial benefit of the promise, and has the right to all remedies.

When a party to a contract informs the other party before the due date of performance that they do not intend to perform, that party has committed an anticipatory repudiation of the contract. When a party commits an anticipatory repudiation of the contract, the other party is entitled to treat the anticipatory repudiation as a breach of the contract, and the non-breaching party may immediately sue for breach of contract.

Question 32

Implied Covenant of Good Faith and Fair Dealing

Answer 32

The implied covenant of good faith and fair dealing exists in every contract, and requires that both parties do nothing to prevent performance by the other party.

It is also breached in employment contracts by terminating an employee for refusing to do an illegal act, and in insurance contracts by bad faith denial of coverage.

Question 33

Discharge by Impossibility or Impracticability

Answer 33

An impossibility must be objective (the duties could not be performed by anyone), and must arise after the contract has been entered into.

Impracticability requires that the party to perform has encountered extreme and unreasonable difficulty and/or expense, and the difficulty was not anticipated.

In both cases, they are not situations created by the parties. Economic disruptions can be anticipated and handled with appropriate contract language, so they are not commercially impracticable.

Question 34

Discharge by Frustration of Purpose

Answer 34

Frustration will exist if the purpose of the contract becomes valueless by virtue of a supervening act not the fault of the party seeking discharge. This requires:

1. A supervening act;
2. At the time of the contract, the parties did not reasonably foresee the supervening act;
3. The purpose of the contract has been completely or almost completely destroyed by the act; and
4. Both parties realized the purpose when making the contract.

Question 35

Discharge by Accord and Satisfaction

Answer 35

An accord is an agreement where one party to an existing agreement agrees to accept, in lieu of the agreed-upon performance, some other, different performance. An accord must be supported by consideration, which can be partial payment of the original agreed upon price and forbearance to sue.

Satisfaction is the performance of the accord agreement, and discharges the original contract and the terms of the accord.

Question 36

Discharge by Waiver

Answer 36

A condition of a contract may be waived by words or conduct indicating that the party will not insist on the condition being met. The issue is often whether a one-time waiver will waive the condition on future occurrences.

Question 37

Damages - Generally

Answer 37

The major types of damages to consider are:

1. Compensatory damages (benefit of the bargain or out of pocket damages),
2. Consequential damages (additional expenses or costs that are foreseeable at the time of the contract),
3. Reliance damages, and
4. Nominal damages (no real harm).

Reliance damages apply where compensatory damages, such as benefit of the bargain, are difficult to calculate. These are damages, such as out of pocket damages, that can be recovered even if no contract was completed.

Question 38

Damages - Requirements

Answer 38

Contract damages must be:

1. Causal (“but for”),
2. Foreseeable (as of the time of formation),
3. Certain, and
4. Unavoidable.

Certainty with regard to established businesses can be determined using a profit history. Certainty is an issue with new businesses, since future profits are often speculative. Relevant factors in determining certainty are availability of the evidence, certainty of actual loss, and culpability of the defendant.

Unavoidability refers to mitigation. A plaintiff must take reasonable steps to mitigate his or her loss.

Question 39

Damages - Perfect Tender Rule

Answer 39

Under the UCC, if the goods or tender fail in any respect to conform to the contract, the buyer may accept all the goods, reject all the goods, or accept some and reject the rest.

Rejection must be within a reasonable time after delivery or tender, and requires that the buyer seasonably notify the seller.

The buyer’s basic remedy is the difference between the contract price and either the market price (benefit of the bargain) or the cost of replacement (cover), measured at the time buyer learns of the breach.

If the buyer accepts goods which breach a warranty, the damages are the difference between the value as delivered and the value had they been according to the contract, plus incidental and consequential damages.

Question 40

Damages - Replevin

Answer 40

Under the UCC, the buyer may also have a right to the remedy of replevin if:

1. Buyer has paid for some or all of the goods;
2. Seller refuses to deliver; AND EITHER
3. Seller becomes insolvent within 10 days of receiving buyer’s first payment; OR
4. The goods were purchased for personal, family, or household purposes; OR
5. Buyer is unable to cover (obtain adequate substitute goods).

UCC replevin does not require that title has passed to the buyer.

Question 41

Damages - Liquidated Damages

Answer 41

Liquidated damages are upheld if damages will be extremely difficult to ascertain and the stipulated amount is a reasonable forecast of the damages (look at proportionality between the stipulated amount and the reasonable forecast of damages). Otherwise, liquidated damages are void as a penalty.

Question 42

Damages - Specific Performance

Answer 42

A party is entitled to specific performance when:

1. There is a valid and enforceable contract, definite and certain;
2. The party has met all the conditions required;
3. The legal remedy is inadequate (for contracts, the goods or objects of the contract are unique); and
4. The remedy is feasible. It is generally not feasible for a court to specifically enforce a personal services contract.

Question 43

Rescission - Generally

Answer 43

Rescission is the undoing of a contract. The plaintiff effects a cancellation of the contract by prompt notice of the rescission and tender back of the consideration, or by a lawsuit in which the plaintiff seeks rescission and offers to tender back the consideration.

The grounds for rescission must have existed at the time of the making of the contract, making it voidable.

Question 44

Rescission - Mutual Mistake

Answer 44

A mutual mistake must be as to a material fact—one that goes to the basis of the bargain. Thus, the mistake must be as to the nature or identity of the subject matter of the contract—not its quality.

Question 45

Rescission - Unilateral Mistake

Answer 45

A unilateral mistake must be as to a material fact. A unilateral mistake will only be grounds for rescission is the non-mistaken party knows of or should know of the mistake.

The modern trend grants rescission if the mistake is basic and the mistaken party’s hardship outweighs the detriment to the non-mistaken party’s expectations under the contract.

Question 46

Rescission - Misrepresentation

Answer 46

Misrepresentation means a:

1. False representation;
2. Intentionally, negligently, or innocently made;
3. With the intent to induce defendant into relying on the representation;
4. Which defendant in fact relies upon to their detriment.

While only fraudulent and negligent misrepresentation allow for damages as a remedy, any form of misrepresentation—innocent, negligent, or fraudulent—will be grounds for rescission.

Question 47

Reformation - Generally

Answer 47

Reformation is the remedy by which the court alters or modifies a written instrument, to make it conform to the parties’ previous understanding. It requires a valid prior agreement in the first place.

The grounds include a mutual mistake of fact regarding whether the instrument conformed to the parties’ intentions, including scrivener’s errors, unilateral mistake where one party knows the instrument contains an error but the other party does not, mistake of law as to the legal meaning of terms, and fraud.