contracts rules Flashcards
Because the contract between the parties is a contract for the sale of goods (a boat), Article 2 of the Uniform Commercial Code (UCC) applies.
Parties to a contract are entitled to expect due performance of contractual obligations and are permitted to take steps to protect that expectation. Anticipatory repudiation occurs when there has been an unequivocal refusal of the buyer or seller to perform, or when a party creating reasonable grounds for insecurity fails to provide adequate assurances within 30 days of demand for such assurances.
Here, the news report that the builder’s workers were on strike and had been for about two weeks gave the sailor reasonable grounds for insecurity regarding the ability of the builder to complete their contract. Thus, the sailor was justified in sending the letter of concern and demand for assurances to the builder. Because the letter was received by the builder on November 1, the builder had a reasonable time (until November 30 at the latest) to provide the sailor with adequate assurances. Although the builder did respond within that 30-day timeframe, his response did not provide assurances but rather validated the sailor’s concern.
Repudiation of the Contract
The issue is whether the builder’s November 25 response acted as a repudiation of his contract with the sailor.
Under the UCC, anticipatory repudiation occurs when there has been an unequivocal refusal of the buyer or seller to perform, or when a party creating reasonable grounds for insecurity fails to provide adequate assurances within a reasonable time, not to exceed 30 days, of a demand for assurances.
Here, because the sailor’s insecurity and request for assurance was based on reasonable grounds, builder had an obligation to provide the sailor with adequate assurance within 30 days that the builder could complete the contract. Instead of providing assurance, the builder informed the sailor that the matter was out of the builder’s hands and that he hoped to be able to complete the contract. This response did not provide adequate assurance and acted as an anticipatory repudiation of the contract under the UCC.
Breach of Contract
Whether sailor’s refusal to take and pay for the boat on December 15 was a breach depends on whether builder’s December 3rd statement was a retraction.
Repudiation allows the nonrepudiating party to resort to any remedy given by the contract or code. But until the repudiating party’s next performance is due, he may retract the repudiation unless the aggrieved party has since accepted the repudiation, acted in reliance on the repudiation, or brought an action for breach. Retraction must include any assurances of performance that the other party has justifiably demanded about whether the retracting party will perform. A proper retraction reinstates the repudiating party’s contract rights.
On December 3, the builder called the sailor and told him not to worry, his boat would be delivered by December 15. Because this assurance occurred before builder’s next performance was due on December 15, the statement would serve as a proper retraction of his earlier repudiation, unless sailor had already canceled the contract, changed his position, or otherwise indicated a belief that the repudiation was final. When builder gave this assurance, the sailor responded that he considered the contract to be over and that he was going to buy his boat elsewhere. The sailor then entered into a contract with a different entity for a similar boat. Because he had not done anything in the weeks before receiving builder’s retraction, the sailor did not have the right to cancel the contract. Because the builder reinstated his contract rights with his retraction of his repudiation, he now has legal standing to claim that the sailor breached their contract.
Whether sailor’s refusal to take and pay for the boat on December 15 was a breach depends on whether builder’s December 3rd statement was a retraction.
Repudiation allows the nonrepudiating party to resort to any remedy given by the contract or code. But until the repudiating party’s next performance is due, he may retract the repudiation unless the aggrieved party has since accepted the repudiation, acted in reliance on the repudiation, or brought an action for breach. Retraction must include any assurances of performance that the other party has justifiably demanded about whether the retracting party will perform. A proper retraction reinstates the repudiating party’s contract rights.
On December 3, the builder called the sailor and told him not to worry, his boat would be delivered by December 15. Because this assurance occurred before builder’s next performance was due on December 15, the statement would serve as a proper retraction of his earlier repudiation, unless sailor had already canceled the contract, changed his position, or otherwise indicated a belief that the repudiation was final. When builder gave this assurance, the sailor responded that he considered the contract to be over and that he was going to buy his boat elsewhere. The sailor then entered into a contract with a different entity for a similar boat. Because he had not done anything in the weeks before receiving builder’s retraction, the sailor did not have the right to cancel the contract. Because the builder reinstated his contract rights with his retraction of his repudiation, he now has legal standing to claim that the sailor breached their contract.
The issue is whether Rancher is entitled to expectancy damages.
The baseline damages in breach-of-contract suits are expectancy damages, which are intended to put the injured party in the same position as he would have been had the contract been performed. Because the contract specified that Gasco was to return Ranch to its pre-exploration condition, Rancher would normally be entitled to damages equaling the market cost of that restoration—in this case, $500,000.
Courts may refuse to enforce an award that is economically wasteful—for example, as in this case, where the cost of restoration ($500,000) greatly exceeds any diminution in value ($20,000). If a court finds that restoration will be wasteful, then the measure of damages may be the difference in value. Courts may refuse to use the diminution in value measure of damages, however, when the breach appears to be willful, and only completion of the contract will enable the nonbreaching party to use the land for its intended purposes. Here, the court could reasonably find that Gasco’s breach was willful and in bad faith. Therefore, it most likely did not err by awarding to Rancher the cost of restoring Ranch.
The issue is whether Rancher’s losses were foreseeable, calculable, and should be lessened for any reason
Foreseeability of Rancher’s Losses (5-10%)
The issue is whether damages were foreseeable at the time the contract was created. Contract damages are recoverable only if they were in the contemplation of the parties at the time of contract formation or were otherwise foreseeable. Here, it is likely that Gasco knew that Rancher would not be able to hold his roping clinics if the land was not restored to its pre-exploration condition. Rancher told Gasco executives of his intention to hold clinics on the specified pasture area, and it is likely that those same executives knew that his intentions would be thwarted if the restoration was not performed. Consequently, a court should determine that the damages were foreseeable.
Calculating Rancher’s Damages with Reasonable Certainty (5-10%)
Contract damages are recoverable only if they can be proven with reasonable certainty. To that end, courts are hesitant to award damages for lost profits—especially in the case of new businesses—because profits are often speculative. Rancher will argue that he has successfully run roping clinics in the past and that his prior success provides a reasonable template for a court to award damages. Gasco would argue in response that Rancher’s estimates on the number of students he expected, and the fees he would collect, were entirely self-serving. Furthermore, Rancher planned to change his business from one in which he conducts clinics around the country to one in which he instructs at a centralized location, and so his past results have limited predictive value. It is difficult to predict how a court would rule on this issue.
Lessening Rancher’s Damages by the Amount of Expenses Avoided (10-20%)
If the nonbreaching party avoids specific costs because a breach has occurred, those costs are subtracted from any damage award. To receive $300,000 in gross revenue from the clinics, Rancher surely would have incurred expenses. Because he cannot conduct the clinics, he has avoided those expenses. The court should have offset the amount of expenses that Rancher avoided against the $300,000 total.
Rancher’s Damages Lessened by the Amount of Loss (10-20%)
A nonbreaching party has the obligation to mitigate damages by taking steps that do not result in undue risk, expense, or burden. The amount of damages that the nonbreaching party could have mitigated, but failed to mitigate, should be offset against the total damage award. In this case, Rancher conducted clinics throughout the country prior to his purchase of Ranch. Gasco will argue that Rancher had the responsibility to mitigate his damages by resuming his traveling clinics. Rancher will argue in response that his intention was to settle down in one place and avoid conducting his clinics throughout the country, and so resuming his traveling business would be an undue burden. Again, this will be a close call for the fact-finder. If it is determined that Rancher had a responsibility to mitigate damages by conducting the traveling clinics, then his award should be reduced by the amount he could have earned by offering those clinics
Formation of Contract
The Uniform Commercial Code (UCC) Article 2 governs transactions in goods. Here, because the agreement concerned a transaction in carving knives, which are goods, the UCC applies. Under the UCC, a contract is formed if both parties intend to contract and there is a reasonably certain basis for giving a remedy. The only essential term is quantity, and as long as the parties intend to create a contract, the UCC “fills the gap” if other terms are missing, such as the time or place for delivery. Here, at the trade show, the chef asked the manufacturer to deliver 10 knives to his restaurant within the month, and promised to send the manufacturer a check for $1000 upon receipt. The manufacturer agreed to do so. Therefore, there has been an offer, acceptance, and consideration, and a contract was formed.
Statute of Frauds: Sale of Goods for $500 or More
At issue is whether the agreement between the manufacturer and the chef must satisfy the Statute of Frauds (SOF) to be enforceable.
Although a valid contract for the sale of goods may be oral, contracts for the sale of goods over $500 must be in writing and signed by the party to be charged (or her agent) to satisfy the SOF; otherwise, the contracts are not enforceable against the party who did not sign. The writing need only be sufficient to indicate that the parties entered into a contract.
Here, the manufacturer and the chef agreed to the chef’s purchase of ten knives for $100 each, which is a contract for the sale of goods with a total cost of $1,000 and within the SOF. Therefore, unless an exception applies, the agreement will be subject to the SOF’s writing requirement to be enforceable.
Statute of Frauds: Exception for Goods Accepted and Paid For (20%)
At issue here is whether the contract between the manufacturer and the chef, or any portion thereof, falls within an exception to the SOF’s writing requirement.
A contract is outside the UCC Statute of Frauds to the extent that goods are received and accepted, and to the extent that payment has been made and accepted. Here, six knives were delivered to the chef pursuant to the parties’ agreement. The chef delivered payment for those six knives, and the merchant accepted that payment. However, this will only remove the contract from the SOF with respect to the six knives received by the chef and for which payment was made. Therefore, a writing is still required to enforce the parties’ agreement as to the last four knives.
Statute of Frauds: Writing Requirement (25%)
The next issue is whether there is a writing that satisfies the Statute of Frauds.
When the price of goods is at least $500, the UCC requires a memorandum of the sale that must (i) indicate that a contract has been made, (ii) identify the parties, (iii) contain a quantity term, and (iv) be signed by the party to be charged. A signature includes any authentication that identifies the party to be charged, such as a letterhead on the memorandum. A mistake in the memorandum or the omission of other terms does not destroy the memorandum’s validity. An omitted term can be proved by parol evidence. However, enforcement is limited to the quantity term actually stated in the memorandum.
Here, the manufacturer included a document with the shipment of six knives. That document was on manufacturer’s letterhead, used the language “pursuant to our agreement,” and reiterated the basic understanding of the oral agreement. Although the facts are silent as to whether the agreement was signed, it was on the manufacturer’s letterhead, it was intended as a memorandum of the agreement, and would likely be found to meet the requirements of the UCC. However, the document clearly indicates an agreement to sell six knives, not ten. Therefore, even if the document meets the SOF requirements, it could only be enforced as to the six knives that were already delivered.
Statute of Frauds: Merchant’s Confirmatory Memo (20%)
If the note contained in the shipment does not satisfy the usual SOF writing requirement, the last issue is to determine whether a merchant’s confirmatory memo exists to enforce the agreement as to the last four knives.
A merchant is a person who regularly deals in the type of goods involved in the transaction or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. In contracts of $500 or more between merchants, if a memorandum sufficient against one party is sent to the other party, who has reason to know its contents, and the receiving party does not object in writing within 10 days, then the contract is enforceable against the receiving party even though he has not signed it.
Both the manufacturer and the chef are merchants; the manufacturer regularly deals in knives, and the chef has knowledge and skill particular to chef’s knives based on his occupation. After receiving and paying for six knives, the chef sent a note to the manufacturer requesting the remaining four knives on May 17. The manufacturer did not object to this note in the next ten days. Therefore, if the note would be sufficient under the SOF to be enforced against the chef, it could be used to enforce the agreement against the manufacturer for the last four knifes. However, this note was not signed and was not on letterhead, and therefore was not a writing which would have satisfied the SOF if the document needed to be enforced against the chef. For this reason, the unsigned note would not serve as merchant’s confirmatory memo, and the agreement appears to be unenforceable by the chef as to the last four knives.
At issue is whether an offeror is entitled to revoke an offer prior to acceptance if it contains a promise to remain open.
In general, an offer can be revoked by the offeror at any time prior to acceptance. A promise to hold an offer open is governed by statute; here, the UCC applies to the tomatoes. Under the UCC firm offer rule, an offer to buy or sell goods is irrevocable if: (i) the offeror is a merchant, (ii) there is an assurance that the offer is to remain open, and (iii) the assurance is contained in a signed writing from the offeror. A firm offer in a form prepared by the offeree, however, must be separately authenticated by the offeror to protect against inadvertent signing.
Here, although the offer was in writing and signed by the gardener, because the cook prepared the offer for the gardener’s signature, the gardener must also separately authenticate the 14-day option. The facts are not clear as to whether the assurance itself is separately signed or initialed. Further, the facts indicate that the gardener had never sold tomatoes before, which indicates the gardener is not a merchant for the purposes of the UCC. Therefore, the offer does not meet the UCC firm offer requirement to make the offer irrevocable.
Finally, it is still possible for an offer to be irrevocable if the offeree reasonably and detrimentally relies on the offeror’s promise prior to acceptance. It must have been reasonably foreseeable that such detrimental reliance would occur in order to imply the existence of an option contract. Here, there are no facts indicating that the gardener should have known the offer would induce action or forbearance in the cook and the gardener was indeed entitled to revoke the offer at any time.
At issue is whether the gardener successfully revoked the offer and prevented the formation of a contract.
An offer is revoked when the offeror makes a manifestation of an intention not to enter into the proposed contract before the offeree accepts. A revocation may be made in any reasonable manner and by any reasonable means, and it is not effective until communicated. Under the UCC, a person receives notice when: (i) it comes to that person’s attention, or (ii) it is duly delivered in a reasonable form at the offeree’s place of business.
Here, the gardener manifested an intention not to enter into the contract with the cook when he informed her that he could not sell to her because he had sold to someone else. He communicated the revocation by reasonable means (it is not an issue that the revocation was not in writing), and did so before the cook had accepted the offer. Therefore, the gardener revoked the offer and prevented formation.
The issue is whether the buyer’s letter is sufficient to satisfy the Statute of Frauds (SOF) requirement, given that the doll costs more than $500.
Because the contract between the parties is a sale of goods contract, Article 2 of the UCC applies. Under the UCC, a contract for the sale of goods for a price of $500 or more is governed by the SOF, and is therefore unenforceable unless evidenced by a writing. The writing need not be formal, but must be signed by the party to be charged and contain the essential elements of the deal. The only essential term is quantity, and as long as the parties intend to create a contract, the UCC “fills the gap” if other terms are missing, such as the time or place for delivery, or even the price for the goods. Specifically, the UCC requires that a memorandum of such a sale must indicate that a contract has been made, identify the parties, contain a quantity term, and be signed by the party to be charged. No writing is required for certain specially manufactured goods, when part of the purchase price for a single item has been paid, for received and accepted goods, if the party judicially admits to the contract, or when a merchant fails to properly respond to a memorandum from another merchant.
Here, the doll is a good valued at more than $500, and none of the exceptions to the SOF apply. Thus, the UCC and SOF apply, and a writing is required to enforce the contract against the buyer. The buyer sent a signed letter to the seller on May 2 indicating that an oral contract for sale was made between the parties the day before. The letter also refers to the 1820 doll, showing that the contract was for the sale of only one doll. The price is not indicated, but since this is not an essential term, this does not make the letter an insufficient memorandum of the deal.
Thus, the SOF is met, and the contract is enforceable against the buyer.
The issue is whether the seller has a cause of action against the buyer for breach of contract after the buyer’s attempt to retract his repudiation of the contract
The doctrine of anticipatory repudiation is applicable when a promisor repudiates a promise before the time for performance is due. The repudiation must be clear and unequivocal, and the promisee can then treat the repudiation as a breach or ignore it and demand performance. A repudiating party may not retract his repudiation after the other party acts in reliance on the repudiation, signifies acceptance of the repudiation, or commences an action for breach of contract.
Here, the buyer’s letter is a clear and unequivocal repudiation of the contract indicating that he will no longer buy the doll. Thus, the buyer’s letter constitutes repudiation and entitles the seller to pursue remedies for breach. The seller then indicated in her reply that she considered the repudiation to be “the final end to our deal.” She also materially changed her position in reliance on the repudiation by agreeing to sell the doll in another transaction inconsistent with the contract with the repudiating buyer. On these facts, the seller both accepted the repudiation and relied on the repudiation to sell the doll to another party prior to the buyer’s attempt to retract.
Thus, the buyer’s repudiation cannot be retracted, and the seller may treat the repudiation as a breach of contract.
The issue is how to calculate compensatory damages.
Compensatory damages are meant to compensate the nonbreaching party for actual economic losses and put the nonbreaching party in as good a position as performance would have done, plus consequential and incidental damages, if any, less possible mitigation of damages. When a buyer breaches or repudiates, the seller may resell the goods and sue for the contract price minus the resale price. If the resale is made in good faith and in a commercially reasonable manner, the seller can recover the difference between the contract price and the resale price plus incidental and consequential damages. In the sale of goods, such damages may include the cost of transporting the goods.
Here, the facts indicate that when the seller sold the doll to the collector, the seller acted in good faith and in a commercially reasonable manner. The seller resold the doll for $1,000 less than the buyer had promised and is entitled to damages equal to the $1,000 difference between the contract price and the resale price. The seller also spent $150 to transport the doll, constituting an incidental cost she would not have had to spend if the buyer had not breached the contract. However, there are no facts indicating that the seller suffered any consequential damages.
Therefore, the seller is entitled to damages equal to the $1,000 difference between the contract price and the resale price plus incidental damages of $150.
