Contracts II

Question 1

Changed circumstances

Answer 1

Three theories:
Impossibility
Impracticability
Frustration of purpose

Question 2

Impossibility

Answer 2

Performance must literally be impossible. Judged objectively

If, after a contract is made, a party’s performance is made without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language of the agreement or the circumstances indicate the contrary

Question 3

Impracticability

Answer 3

Restatement (second) 261- performance must result in an extreme and unreasonable difficulty, expense, injury, or loss in order to excuse performance

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Question 4

UCC 2-615- approach to impracticability (Excuse by failure of presupposed conditions)

Answer 4

the provision excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstance not within the contemplation of the parties at the time of contracting

Question 5

Frustration of purpose

Answer 5

Restatement 265; occurs when performance becomes meaningless; where after a contract is made a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Question 6

basic assumption

Answer 6

basic assumption about the non-occurrence of the event must have been a basis on which the parties made the contract; not necessary that the event be unforeseeable, rather the standard is that the parties assumed that such event in all probability would not occur

Question 7

Allocation of risk

Answer 7

Party seeking relief must not bear any risk; similar to the mistake doctrine; how to allocate risk:
1. by agreement
2. because one of the parties knew or should have known of the risk
3. by the court based on principles of equity and fairness

One way parties allocate risk by agreement is through a drafting devise called force majeure clause (superior force)

Question 8

Force majeure clause

Answer 8

is a standard clause in many contracts that excuses a party from performing under certain conditions that are beyond the control of the parties.

in order to be enforceable, a force majeure clause must describe conditions 1. that are external forces outside of the control of the parties, 2. that are reasonably foreseeable, and 3. that materially affect the performance of a party’s duties

although the this clause is typically considered boilerplate, a good attorney will consider whether the events the events listed will adversely affect a client’s interests. For example, attorney’s should consider whether the events listed include only natural causes or also include political/social events

Question 9

Parol Evidence Rule

Answer 9

When the parties to a written contract have agreed that the writing is a final and complete expression of the agreement, then a court shall not admi extrinsic evidence of prior or contemporaneous agreements that supplement or contradict the writing.

If the writing is only a partial expression of the contractual terms, then the writing cannot be contradicted but can be supplemented by evidence of consistent additional terms.

Question 10

Extrinsic Evidence

Answer 10

refers to any evidence of the agreement outside of the writing that is purported by one party to be the final and complete expression of their agreement

Question 11

Final

Answer 11

the writing must be final in order to exclude preliminary drafts of an agreement that were used in the negotiation process. As parties negotiate, terms may change, so it makes sense that the courts would not consider these preliminary drafts

Question 12

complete

Answer 12

means that no other terms were agreed upon other than those in the writing

Question 13

partial integration

Answer 13

the parties intended that document to reflect only part of there agreement. some of the terms are missing from the document but can be explained through parol evidence

Question 14

Two types of evidence

Answer 14

Contradictory- parol evidence must conflict with a term in the writing
Consistent- must not conflict with existing terms; supplement the written agreement

Question 15

Determining the admissibility of parol evidence

Answer 15

1. Determining integration: is the contract totally integrated; partially integrated, or not integrated
2. Admissibility of evidence: total integrated- no parol evidence; partially integrated- consistent additional terms; not integrated- both consistent and contradictory terms are allowed
3. Exceptions

Question 16

Merger/integration clause

Answer 16

a statement in the written contract that explicitly states that the writing represents the entire agreement between the parties. Attorneys include a merger clause in most contracts in an attempt to show that the parties intended to create a totally integrated agreement.

in a classic jurisdiction courts must consider an agreement totally integrated if the agreement has a merger clause. However, since the inclusion of a merger clause has become routine, courts in a modern jurisdiction consider the merger clause a factor to consider, but it is not dispositive.

Below is an example of a merger clause. The clause also contains a common provision that any subsequent modifications must be in writing

Question 17

Classic jurisdiction

Answer 17

under restrictive view, if a writing appears to be complete and unambiguous on its face, then the terms can only be determines from the four corners of the writing and not from extrinsic evidence

the presence of a merger clause is dispositive, and an agreement with a merger clause is automatically deemed to be totally integrated in a classic jurisdiction

Question 18

Modern jurisdiction

Answer 18

a judge may consider all of the surrounding facts and circumstances to determine whether a writing is integrated

The presence of a merger clause creates a strong presumption of integration but is not dispositive

Question 19

Exceptions

Answer 19

1. Evidence offered to interpret an ambiguous term
2. subsequent agreement (oral or written)
3. showing of fraud, mistake, duress, undue influence, or other voidability
4. collateral agreement with separate consideration: a contract where the parties to a contract had also agreed to enter into a second related contract for a separate consideration
5. Condition precedent to the formation of a contract: that parties have drafted a written agreement that is totally integrated; however, they have also agreed that there is a condition that must occur before the fully integrated agreement takes effect
6. condition precedents to the formation of a contract

Question 20

UCC Parol Evidence Rule- 2-202

Answer 20

more liberal than the common law in terms of allowing in extrinsic evidence

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemental
a. by course of dealing or usage of trade or by course of performance
b. by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement

Question 21

Interpretation and Implied Terms: steps to analyzing

Answer 21

1. Identify Interpretation Issue: requires dispute over meaning and ambiguity exists
2. Apply Primary Rules: determine intent of the parties by considering-
   a. express language
   b. course of performance
   c. course of dealing
   d. trade usage
3. If needed, apply secondary rules: specialized rules for certain circumstances

Question 22

patent ambiguities

Answer 22

consists of language where the plain meaning of the language is either uncertain or reasonably susceptible to more than one meaning

Question 23

latent ambiguities

Answer 23

requires additional outside evidence other than the plain meaning of the term in order to understand that the term is susceptible to more than one meaning

Question 24

rules of construction vs. rules of interpretation

Answer 24

Some courts discuss the rule of construction rather than the rules of interpretation. historically, interpreting a contract meant determining what the parties meant when using certain language, and construing a contract meant the court’s role in characterizing the legal effect of the language

modernly, many courts no longer make a distinction between riles of interpretation and rules of construction, though some treaties think the distinction is still an important one. this book uses the same practical approach that the U.S. Supreme Court adopted a century ago, which treats construction and interpretation as synonymous

Question 25

Contract Interpretation

Answer 25

The primary function of interpretation is to discern the intent that parties had at contract formation

the language of the express terms controls provided that it is clear and explicit and does not result in an absurdity

language should be interpreted according to the ordinary meaning that would be given by a reasonable person considering all of the circumstance unless the parties use the term in a technical sense or agree on a different meaning

if the language of the contract is ambiguous, then courts may consider course of performance, trade usage, and course of dealing to interpret the provision

Question 26

Language of the express

Answer 26

the single most important factor in determining intent. the language might be written or oral, provided the parol evidence rule doesn’t bar it

Question 27

Secondary rule of interpretation

Answer 27

1. preference to interpret contracts as valid, lawful, and reasonable
2. Conflicts between clauses
3. Ejusdem Generis- of the same kind
4. Interpretation against the drafter: courts may interpret the terms most strongly against the party who caused the uncertainty to exist

Question 28

Supplying an omitted essential term

Answer 28

Restatement 204- When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to term which is essential to a determination of their rights and duties, a term which is reasonable in their circumstances is supplied by the court

Question 29

Gap fillers

Answer 29

default terms that a court may supply if the parties fail to include then in the bargaining process but otherwise intend to enter into a contract

a missing term does not show indefiniteness so long as the parties intended to form a contract

Question 30

UCC 2-305 (1)-(2)

Answer 30

1. The parties if they so intend can conclude a contract for sale even though the price is not settled. in such a case the price is reasonable price at the time for delivery if

a. nothing is said as to price
b. the price is left to be agreed by the parties and they fail to agree
c. the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set recorded

2. a price to be fixed by the seller or by the buyer means a price for him to fix in good faith

Question 31

Absence of specific time provision; notice of termination

Answer 31

1. the time for shipment of delivery or any other other action under a contract if not provided in this article or agreed upon shall be a reasonable time
2. where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party
3. termination of a contract by one party except on the happening of an agreed event requires that reasonable modification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable

Question 32

Implied obligation of good faith and fair dealing- restatement 205

Answer 32

every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement

Question 33

UCC good faith dealings

Answer 33

Good faith generally- means honesty in fact and the observance of reasonable commercial standards of fair dealing

Good faith merchant definition- good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade

Question 34

Satisfaction clauses

Answer 34

if a party has a right to reject performance based on a satisfaction clause, then the decision to accept performance must be made according to a reasonable person standard

Exception:
in matters of aesthetics, where subjective tastes differ, a party can rejection performance for any reason so long as their decision was made in good faith

Question 35

Express warranties by affirmation, promise, description- UCC 2-313

Answer 35

1. express warranties by the seller are created follows:

a. any affirmation of fact or promise made by seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise
b. any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description
c. any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model

2. is not necessary that the seller use formal words such as “warrant” or “guarantee”, but an affirmation merely of the value… or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty

Question 36

Implied warranty: merchantability; usage of trade UCC 2-314

Answer 36

1. unless excluded…, a warranty that the goods shall be merchantable is implied in a contract for the sale if the seller is a merchant with respect to good of that kind…
2. goods to be merchantable must at least such as

a. pass without objection in the trade under the contract description
b. in the case of fungible goods, are of fair average quality
c. are fit for the ordinary purpose for which such goods are used
d. run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved
e.
f. conform to the promises or affirmations of fact made or the container or label if any

3. unless excluded or modified other implied warranties may arise from course of dealing or usage of trade

Question 37

Implied warranty: fitness for particular purpose UCC 2-315

Answer 37

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s still and judgement to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose

Question 38

Exclusion or modification of warranties UCC 2-316

Answer 38

1. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of the article on parol or extrinsic evidence negation or limitation is inoperative to the extent such construction is unreasonable
2. Subject to subsection (3) to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous
3. unless the circumstances indicate otherwise, all implied warranties are excluded by expression like as is, with all faults or other language which in common understanding calls the buyer’s attention to the exclusion of warranties

Question 39

implied warrant of habitability

Question 40

Partial Breach

Question 41

Material breach

Answer 41

If a party has materially breached a contract, then the non-breaching party may terminate the contract unless the circumstances suggest that he breaching party will cure its breach

If the breaching party is given a chance to cure the breach, then the non-breaching party may suspend performance
If the material breach remains uncured, then it becomes a total breach and the non-breaching party may withhold performance and terminate the contract

Question 42

Determining materiality Restatement 241

Answer 42

1. Amount of benefit not received
2. Adequacy of damages
3. Forfeiture suffered by breaching party
4. Likelihood of cure
5. Lack of good faith and fair dealing

Question 43

total breach

Question 44

substantially performed

Question 45

No right to terminate

Question 46

Obligor

Question 47

Obligee

Question 48

Discharge of duties

Answer 48

1. full performance
2. tender of performance that is rejected
3. agreement by the parties
4. valid defense or excuse
5. occurrence of a condition
6. total breach/repudiation by the other party

Question 49

UCC nonperformance rules

Answer 49

1. non-delivery
2. failure to make perfect tender
3. breach of warranty
4. anticipatory repudiation

Question 50

perfect tender rule UCC 2-601 (Buyer’s rights on improper delivery)

Answer 50

Subject to the provisions of the article on breach in installment contracts and unless otherwise agreed under the sections on contractual limitations of remedy, if the goods or the tender of delivery fail in any respect to conform to the contrat, the buyer may:
1. reject the whole
2. accept the whole
3. accept any commercial unit or units and reject the rest

Question 51

Acceptance

Question 52

Rejection

Answer 52

If the buyer rejects the goods, then he must seasonably notify the seller of his rejection

Question 53

Reasonable time

Question 54

Buyer’s nonperformance

Answer 54

1. wrongful rejection of goods
2. failure to make payment
3. anticipatory repuiation

Question 55

Expectation Damages

Answer 55

The injured party is normally entitled to: general damages; consequential damages; and incidental damages

Damages are limited by the principles of certainty, causation, foreseeability, and mitigation

to avoid overcompensation, damages may also offset:
-prepayments made to the injured party
-any savings the injured party had by mitigating the lose
-any gain that the injured party experienced as a direct result of the breach

Question 56

Consequential damages

Answer 56

can be recovered only if at the time of contract formation the defendant had reason to foresee the damages as a probable result of the breach

Question 57

Incidental damages

Answer 57

reasonable costs incurred in an effort, whether successful or not, to mitigate losses associated with the breach

Question 58

Parol evidence rule

Answer 58

A parol evidence rule issue arises only when a party offers evidence of a term or obligation that is allegedly part of the parties’ agreement.

It follows that the parol evidence rule is not applicable when the evidence is offered for some other purpose. These purposes include:

A separate enforceable agreement
An issue of interpretation
A modification
A formation issue
A condition precedent
A Consumer Protection Act claim

Remember to ask: For what purpose is the evidence offered? A parol evidence rule issue arises only when a party offers evidence of an obligation that is extrinsic to the parties’ agreement in order to show that it is part of the parties’ agreement.

Remember this distinction when you take your exam. If the facts say, “Just before they signed a written contract, John and Mary orally agreed to the following term …” you probably have a parol evidence rule issue. If the facts say, “After they signed a written contract, John and Mary orally agreed to the following term …” you probably have a modification issue.