Contracts & Sales MBE

Question 1

Formation of K

Answer 1

binding K requires manifestation of mutual assent, consideration, and lack of valid defenses

Question 2

Offer

Answer 2

objective manifestation of a willingness by offeror to enter into agreement that creates power of acceptance in offeree

1. Intent—a statement is an offer only if: * Person to whom it is communicated could reasonably interpret it as an offer * Expresses present intent of a person to be legally bound by a K
2. Knowledge—offeree must know of the offer in order to have the power to accept
3. Terms—must be certain and definite or the K fails for indefiniteness * Under common law (CL) o Essential terms (parties, subject matter, price, quantity) must be covered in K o If the parties intended to create a K, the court may supply missing terms * Under UCC o Only essential term is quantity  Exception—requirements or output Ks (UCC implies “good faith”)  UCC “fills the gap” if other terms are missing o K formed if both parties intend to K and reasonably certain basis for giving remedy
4. Language—offer must contain words of promise, undertaking, or commitment, and be targeted to a number of people who could actually accept * If a return promise is requested—bilateral K * If an act is requested—unilateral K
5. Invitation to deal—advertisements are only an invitation to receive offers (but may qualify as an offer if sufficiently specific and limit who can accept or if associated with a stated reward)

Question 3

Termination of Offers

Answer 3

1. Lapse of time—specified termination date or reasonable period of time if none stated
2. Death/mental incapacity * General rule—offer terminates, even if offeree does not learn of offeror’s death until after the offeree has sent what he believes is an acceptance * Exception—offers for option Ks do not terminate because consideration was paid to keep the offer open
3. Destruction/illegality—offer terminated
4. Revocation * Offer can be revoked any time prior to acceptance (even if it states it will be open for specific amount of time) * Not effective until communicated * Revocation sent by mail not effective until received
5. Limitations on revocation * Option K—offeree must generally give consideration for option to be enforceable * UCC firm offer rule o Offer irrevocable (for reasonable time but no more than three months) if offeror is a merchant (or any business person), and assurances (in authenticated writing) are made that offer will remain open o No consideration needed to keep offer open
6. Revocation of general offers (to large number of people)—revocable only by notice given at least same level of publicity as offer (effective even if potential offeree acts in reliance on offer)
7. Rejection by offeree * Offeree clearly conveys to offeror that he no longer intends to accept the offer * Rejection usually effective upon receipt * Counteroffer—acts as rejection of original offer and creates new offer

Question 4

Acceptance

Answer 4

objective manifestation by the offeree to be bound by the terms of the offer

Question 5

Bilateral v. Unilateral Acceptance

Answer 5

Bilateral K o Exchange of promises that render both enforceable

• Unilateral K o Promise to do something by one party in return for an act of the other party o Starting to perform is not enough, but it will make offer irrevocable for a reasonable period of time to complete performance o Offeree must be aware of offer before acting

Question 6

Acceptance means of acceptance

Answer 6

unless offeror specifies, offeree can accept in any reasonable manner/means * Silence—is not acceptance unless offeree has reason to believe offer could be accepted by silence or previous dealings make it reasonable to believe that offeree must notify offeror if he does not intend to accept * Shipment of goods o Buyer’s request that goods be shipped is inviting acceptance either by seller’s promise to ship or by prompt shipment of goods o Nonconforming goods shipped—both an acceptance and a breach, unless seller seasonably notifies buyer that goods are an accommodation (counteroffer); buyer may then accept or reject the nonconforming goods

Question 7

Mailbox rule

Answer 7

(applies only to acceptance; almost exclusively applies to bilateral Ks)

• Acceptance—effective when sent (not upon receipt), unless offer provides otherwise
• Rejection following acceptance—acceptance will control even if offeror receives rejection first (but if offeror detrimentally relies on rejection then offeree estopped from enforcing K)
• Acceptance following rejection—mailbox rule does not apply; first one received (i.e., in possession of offeror or her agent, or deposited in mailbox) will prevail; offeror need not actually read the received communication
• Revocation—effective upon receipt
• Options and other irrevocable offers—mailbox rule does not apply; acceptance must be received by offeror by a certain date or before offer expires

Question 8

Notice of Acceptance

Answer 8

• Unilateral K
  o Offeree not required to give notice after completing performance, unless:
   Offeror wouldn’t learn of performance with reasonable certainty and promptness; or
   Offer requires notice.

o Notice required but not provided—offeror’s duty is discharged, unless:
 Offeree exercises reasonable diligence to give notice;
 Offeror learns of performance within reasonable time; or
 Offer indicates notice of acceptance is not required.

• Bilateral K—offeree must give notice of acceptance
  o Mailbox rule—acceptance valid when sent (even though offeror hasn’t received it)
  o UCC—if acceptance is made by beginning performance, notice is required within a reasonable time; failure to give notice results in offer’s lapse

Question 9

Additional or Different Terms

Answer 9

1. CL mirror-image rule—acceptance must mirror the terms of the offer, so any change or addition to the terms acts as a rejection and a new counteroffer * Conditional acceptance terminates the offer and acts as new offer from original offeree
2. UCC (no mirror-image rule)—acceptance containing additional or different terms generally treated as acceptance

• One or both parties not merchants—definite and seasonable expression of acceptance sent within a reasonable time is usually acceptance of original offer, and new/different terms are treated as proposed additions to the K that must be separately accepted by offeror
  o Exception—an acceptance expressly conditioned on assent to new/different terms is treated as a counteroffer
• Both parties are merchants (battle of the forms)
  o Additional terms—automatically included in the K, unless:  Term materially alters original K (i.e., would result in surprise or hardship);  Offer expressly limits acceptance to terms of the offer; or  Offeror objects to new terms within a reasonable time after notice of new terms is received.  If one of these exceptions is met, original terms of offer control.
  o Different terms (“knock-out” rule)—different terms in offer/acceptance nullify each other, and court uses Article 2’s gap-filling provisions to patch holes in K
• Acceptance based on conduct—if offer and purported acceptance differ too much to create a contract but the parties begin to perform anyway, then UCC allows for a contract to be recognized with the following terms: o Any terms actually agreed upon in the parties’ writings, and o Any supplementary terms filled in by the UCC

Question 10

Consideration

Answer 10

1. Bargain and exchange—must be a bargained-for legal detriment to the promisee * Legal detriment and bargained-for exchange o To constitute sufficient consideration, must be bargained-for in exchange for the promise, promise must induce the detriment, and detriment must induce the promise o Consideration can be return promise to do or refrain from doing something, or performance of or refraining from doing some act

• Gift o Test to distinguish gift from valid consideration is whether offeree could reasonably believe intent of offeror was to induce the action (if YES, then there is consideration and promise is enforceable) o Promissory estoppel—if promisor/donor knows that promise to make a gift will induce substantial reliance by promisee and failure to enforce it would cause substantial injustice, promise is enforceable

Question 11

Adequacy of Consideration

Answer 11

• Subjective value—benefit to promisor need not have economic value; if promisor wants it, giving of it will constitute adequate consideration
• Preexisting-duty rule o CL—does not qualify as consideration unless promisor gives something in addition to what is owed, or varies preexisting duty in some way o Exception for third party—party’s promise to a third party to perform an act the party is contractually obligated to perform for another is sufficient consideration
• Past consideration—modern trend toward enforcing past promises under the material benefit rule
• Executory contract—exchange of promises is adequate consideration
• Modification o CL—must be supported by consideration, and agreements to modify K are enforceable if:  Rescission of existing K and entering into of new K  Unanticipated difficulties arise and modification is fair and equitable, or  New obligations arise on both sides o UCC  Requires only good faith  No consideration is necessary
• Accord and satisfaction o Accord—one party agrees to accept a different performance from the other party to satisfy the other party’s existing duty o Satisfaction—performance of the accord agreement will discharge both the original K and the accord K o Original K not discharged until satisfaction is complete o An unliquidated or disputed claim may be discharged by negotiable instrument (e.g., a check with the note “Payment in full”)
• Illusory promise—not legally binding because it is vague or promisor can choose whether or not to honor it
• Voidable/unenforceable promises—can still constitute consideration
• Requirements (buyer agrees to buy all that he requires) and output (seller agrees to sell all that she manufactures) Ks o There is consideration because promisor suffers legal detriment o Quantities may not be unreasonably disproportionate to estimates
• Legal claim settlement—a promise not to assert (or a release of) a claim or defense is not consideration, unless the claim or defense is doubtful or the party promising not to assert (or releasing) the claim believes in good faith that it is valid

Question 12

Promises binding without consideration

Answer 12

1. Pay a debt barred by statute of limitations (SoL)—new promise to pay debt after SoL has run is enforceable without new consideration
2. Perform voidable duty—new promise to perform voidable duty is enforceable if it doesn’t suffer from an infirmity rendering it voidable
3. Material benefit rule—when a party performs an unrequested service for another party, the modern trend permits the performing party to enforce the promise of payment for material benefits received to extent necessary to prevent injustice (unless donative intent)
4. Promissory estoppel (consideration “substitute”)—a promise is binding if: * Promisor should reasonably expect it to induce action on the part of the promisee or a third person * Promise does induce such action, and * Injustice only avoided by enforcement of promise

Question 13

Enforceability

Answer 13

a defense to formation or a defense to enforcement may render K void, voidable, or unenforceable

1. Void Ks—entire transaction is null, as if no K existed
2. Voidable Ks—operates as valid K until/unless one party takes steps to avoid it
3. Unenforceable Ks—valid K that cannot be enforced if one party refuses to carry out its terms

Question 14

Defenses to formation

Answer 14

no “meeting of minds” due to mistake or misunderstanding, misrepresentation or fraud, undue influence or duress, or lack of capacity

Question 15

Formation - Mistake

Answer 15

• Mutual o Both parties mistaken as to essential element o K generally voidable by party adversely affected if:  Mistake existed when K was formed  Mistake relates to basic assumption of K  Mistake has material impact on transaction, and  Adversely affected party did not assume the risk of mistake o Neither party can avoid K if reformation available to cure mistake
• Unilateral o One party is mistaken as to essential element of K, but either party can enforce K on its terms o Mistaken party can void K if he did not bear risk of mistake and either:  Mistake would make enforcement of K unconscionable, or  Non-mistaken party caused the mistake, had duty to disclose or failed to disclose mistake, or knew or should have known the other party was mistaken o Must be absence of serious prejudice to other party to rescind K
• Reformation (mutual mistake) o Court can reform writing except to extent that rights of third parties who relied on K would be unfairly affected

Question 16

Formation - Misunderstanding

Answer 16

—both parties believe they are agreeing to same material terms, but they in fact agree to different terms

• Neither party knows or has reason to know—no K if material term involved
• One party knows or has reason to know—K formed based upon meaning of material term as understood by unknowing party
• Both parties know terms ambiguous at time of K formation—no K unless both parties intended same meaning
• Waiver—one party can choose to enforce K according to other party’s understanding
• Subjective determination of misunderstanding—each party’s knowledge or reason to know of the misunderstanding governs (i.e., not what a reasonable person would know)

Question 17

Formation - Misrepresentation

Answer 17

an untrue assertion of fact (i.e., present event or past circumstance)

• Fraudulent misrepresentation—requires proof that: o The misrepresentation is fraudulent:  Knowing or reckless false assertion of fact  With intent to mislead o The misrepresentation induced assent to the K, and o Justifiable reliance on the misrepresentation by the adversely affected party
• Nondisclosure—conduct to conceal a fact or nondisclosure of a known fact is tantamount to an assertion that the fact does not exist
• Effect o Fraud in the factum (execution)—fraudulent misrepresentation prevents party from knowing character/essential term of transaction, so no K is formed and apparent K is void unless reasonable diligence would have revealed K’s true terms o Fraud in the inducement—fraudulent misrepresentation is used to induce another to enter into a K; K voidable by adversely affected party if she justifiably relied on the misrepresentation
• Nonfraudulent misrepresentation (innocent/negligent)—renders K voidable by adversely affected party who justifiably relied on material misrepresentation and was induced to assent to K because of it
• Effect of party’s fault—a party’s fault in not knowing or discovering facts before entering into the K does not prevent the party’s reliance on the misrepresentation from being justified (unless it constitutes a failure to act in good faith)
• Cure of misrepresentation—K not voidable if facts cured before deceived party has avoided the K
• Avoidance/reformation for misrepresentation—when content/legal effect of K is misrepresented, deceived party can avoid K or reform it to express what was represented

Question 18

Formation - Undue influence

Answer 18

unfair persuasion of a party to assent to a K

• Unfair persuasion o Relationship between dominant party and dependent party due to lack of expertise or experience, or diminished mental capacity o Persuasion of one party seriously impairs the free and competent judgment of other party
• Confidential relationship—dominant party has burden of proving K was fair (may be held to higher standard of disclosure)
• Third-party undue influence—victim may void K unless nonvictim party to K gave value or materially relied on K in good faith and without knowledge of undue influence
• Damages—restitution available

Question 19

Formation - Duress

Answer 19

—improper threat that deprives party of meaningful choice

• Improper threat o Threats of criminal or civil action (made in bad faith), or o Threats to breach K in violation of good faith and fair dealing
• Deprivation of meaningful choice—person has no reasonable alternative such that threat induced his assent
• Effect on K—K is void when duress is through physical compulsion and voidable in other instances

Question 20

Formation - Capacity to K

Answer 20

• Infancy (under 18)—voidable by infant but not by adult (except for reasonable value of necessaries)
• Mental illness—K is void for one who is adjudicated mentally incompetent, but only voidable if there has been no adjudication
• Guardianship—K is void for individuals under guardianship (except for reasonable value of necessaries)
• Intoxication—K is voidable by intoxicated party if she was unable to understand nature/consequences of K and other party knew of intoxication

Question 21

Defenses to enforcement

Answer 21

illegality, unconscionability, public policy

Question 22

Enforcement - Illegality

Answer 22

• K is unenforceable if consideration/performance under K is illegal
• K is void if it contemplates illegal conduct
• Duty to perform is discharged if K becomes illegal after formation
• If one party is justifiably ignorant of facts making K illegal or lacks illegal purpose he can recover (assuming guilt of other party)
• Exceptions:
  o Ignorance of illegality—a promisee may recover if the promisee is justifiably ignorant of the facts making K illegal and the promisor had knowledge of the illegality; if both parties are excusably ignorant, the promisee may have a claim in restitution
  o Lack of illegal purpose—a party who has substantially performed may recover if:  K does not involve illegal consideration/performance—the party is unaware of the other party’s illegal purpose  The party knows of the other party’s illegal use—unless the party furthered the illegal use or the use involves grave social harm
  o Divisible Ks—if K can easily be divided into legal and illegal parts, a party may recover on the legal part(s)
  o Licensing violation—depends on the purpose of the licensing requirement:  Regulatory purpose—the party who fails to comply cannot enforce the K  Raise revenue—the party who fails to comply can enforce the K
  o Restitution  Not in pari delicto—when parties are not equally at fault, the less guilty party may recover under restitution  Withdrawal—a party who withdraws from an illegal K before the improper purpose has been achieved may recover under restitution when the party has not engaged in serious misconduct

Question 23

Enforcement - Unconscionability

Answer 23

K is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would agree to it (e.g., hidden, complex boilerplate language, adhesion Ks)

Question 24

Enforcement - Public Policy

Answer 24

K may be unenforceable if it violates significant public policy

Question 25

Implied in fact K and Quasi-K

Answer 25

1. Implied-in-fact—conduct, not words, indicates assent or agreement
2. Quasi-Ks—a plaintiff confers benefit on a defendant and the plaintiff has reasonable expectation of compensation and court implies K to prevent unjust enrichment * Requirements: o Plaintiff conferred measurable benefit on o Plaintiff acted without gratuitous intent, and o Unfair to let defendant retain benefit.

Question 26

Warranties in sale-of-goods Ks

Answer 26

1. Express warranty * Any promise, affirmation, description, or sample that is part of the basis of the bargain, unless it is merely the seller’s opinion * Disclaimers—disclaimers that unreasonably negate or limit express warranties are inoperative
2. Implied warranty of merchantability * Implied whenever seller is a merchant (i.e., seller dealing in goods of the kind sold) * Goods must be fit for their ordinary purpose
3. Implied warranty of fitness for a particular purpose * Implied whenever seller has reason to know (from any source) buyer has particular use for goods and buyer is relying on seller’s skill to select the goods * Warranty can be disclaimed by conspicuous writing
4. Disclaimer of implied warranties * Implied warranty of merchantability—oral or written disclaimer using the term “merchantability”; writing much be conspicuous * Implied warranty of fitness for a particular purpose—disclaimer may use general language but must be in writing and conspicuous * All implied warranties—language makes plain that there is no implied warranty (e.g., sold “as is); buyer’s inspection of goods; excluded/modified by course of dealing, course of performance, or trade usage

Question 27

Discharge - Impracticability

Answer 27

1. Defense available if: * Performance becomes illegal after K is made; * Specific subject matter of K is destroyed; * Performing party to the K dies or becomes incapacitated (personal services K); or * Performance becomes impracticable.
2. Elements: * Unforeseeable event has occurred; * Non-occurrence of event was basic assumption on which K was made; and * Party seeking discharge is not at fault.
3. Timing—usually arises after K formation, but a fact making K performance impractical can exist when K is made if the party has no reason to know of the fact
4. Assumption of risk—impracticability defense not available to a party who assumes the risk of an event happening
5. Partial impracticability * Temporary impracticability only suspends duty; discharged if performance is materially more burdensome after impracticability ends * If seller is able to deliver some of the goods, they must be apportioned among all of the buyers with whom the seller has contracted * Buyer may refuse to accept and may cancel K
6. Failure of a particular source—if K specifically identifies a source, and source of supply fails, performance is discharged even if other sources are available

Question 28

Discharge - Frustration of Purpose

Answer 28

1. Applies when unexpected events arise that destroy one party’s purpose in entering into K, even if performance of K not rendered impossible
2. Frustrated party entitled to rescind K without paying damages
3. Unexpected event need not be completely unforeseeable, but must be so severe it’s not within assumed risks inherent under K
4. Timing—can arise at the time of K if a party has no reason to know a fact exists

Question 29

Discharge - Rescission

Answer 29

canceling of K so as to restore parties to their positions before K was made

1. Parties may seek to rescind for a variety of reasons but grounds for rescission must have existed at the time the K was made
2. Rescission also possible by mutual agreement of the parties—surrender of rights under the original K is consideration for the rescission * Third-party beneficiaries—K not discharged by mutual rescission if third-party rights have already vested

Question 30

Discharge - Release

Answer 30

1. Writing that manifests intent to discharge another party from an existing duty * CL—release must be supported by consideration * UCC—written waiver or renunciation signed/delivered by aggrieved party is enough (no consideration necessary)

Question 31

Discharge - Destruction/damage to identified goods

Answer 31

1. Destruction—goods identified when K made are destroyed by no fault of either party before risk of loss passes to buyer; K is avoided, both parties are discharged, and neither party is in breach
2. Goods damaged but not destroyed—K avoided or buyer can choose to take goods at reduced price without any other claim against seller
3. Risk of loss—if risk of loss has passed to buyer, K is not avoided and seller may demand performance by buyer

Question 32

Third-party beneficiary contracts

Answer 32

when two parties contract with the understanding and intent that performance by one of the parties is to benefit a third person

A. Intended and incidental beneficiaries—third party can recover if she is an intended beneficiary
1. Intended beneficiary—one to whom the promisee wishes to satisfy an obligation or otherwise benefit by the promised performance; has the right to bring an action on the K
2. Incidental beneficiary—one who benefits from a K even though there is no contractual intent to benefit that person; no right to enforce K

B. Vesting of beneficiary’s rights—rights of intended beneficiary vest when beneficiary:
1. Detrimentally relies on rights created;
2. Manifests assent to K at one of the party’s request; or
3. Files lawsuit to enforce K.

C. Defenses—promisor can raise any defense against third party that he had against original promisee

Question 33

Assignment of rights

Answer 33

1. Not allowed when it materially increases duty or risk of obligor or materially reduces obligor’s chance of obtaining performance
2. Need present intent to transfer the right immediately
3. If assignment is for consideration, it is irrevocable
4. Assignee takes all of the rights of assignor as the K stands at time of the assignment, but she takes subject to any defenses that could be raised against the assignor
5. A prohibition on assignment does not affect the assignment of rights, but bars delegation of duties (unless circumstances indicate otherwise)

Question 34

Delegation of Duties

Answer 34

1. Generally allowed, except when other party to K has substantial interest in a specific individual’s performance (for example, personal services K involving special skill)
2. When obligations are delegated, delegator is not released from liability, so he is still liable if delegate doesn’t perform (unless there is a novation)
3. Delegate’s acceptance of a delegation constitutes a promise to perform the delegated duties; promise is enforceable if there is consideration or a consideration substitute
4. Delegation in contracts for the sale of goods may be treated by the other party as creating reasonable grounds for insecurity; the other party may demand assurances from delegate; conforming promises by permitted delegates must be accepted
5. A prohibition on assignment does not affect the assignment of rights, but bars delegation of duties (unless circumstances indicate otherwise)

Question 35

Assignment of contract

Answer 35

assignments not limited to contractual rights (e.g., “this contract is assigned to”) are generally treated as both an assignment of rights and a delegation of duties

Question 36

Statute of Frauds

Answer 36

A. Writing required—memorandum must:
1. Be in writing;
2. Be signed by the party to be charged (i.e., any authentication that identifies the party);
3. Contain the essential elements of the deal.

B. Types of Ks within the SoF
1. Marriage—any agreement in consideration of marriage
2. Suretyship—K to answer for debt/duty of another
3. One year—K that cannot be performed within one year after K is made
4. UCC—when K for the sale of goods is at least $500, memo must indicate that K has been made, identify parties, contain a quantity term, and be signed by the party to be charged * Exceptions—writing not required under UCC for: o Specially manufactured goods, o Part payment, o Receipt and acceptance, o Judicial admission, or o Failure to object to memo within 10 days of receipt (when both parties are merchants)
5. Real property K—applies to Ks providing for subsequent conveyances of an interest in property (subsequent acts showing existence of K may also make oral Ks for transfers of interest enforceable)

C. Exceptions
1. Promissory Estoppel
2. Judicial Admissions

Question 37

Parol evidence rule

Answer 37

prevents introduction of prior extrinsic evidence that contradicts terms of written K

A. Integration—parties intended writing to be their final agreement (P/E rule applies)
1. Total integration (complete expression of all terms of parties’ agreement)—parties cannot introduce extrinsic evidence of prior/contemporaneous understandings or negotiations
* Partial—if writing sets forth only some terms, then parties are permitted to introduce supplementary extrinsic evidence of other terms that are consistent with writing (not contradictory)

2. Intent of the parties—determines if there is total, partial, or no integration
   * CL (“four corners” rule)—can only look to writing itself for intent
   * Second Restatement—if an extrinsic term of agreement would naturally be omitted from a writing, then term can be introduced so long as it isn’t contradictory
   * UCC—assumes written K is only a partial integration and allows almost any outside terms

B. When P/E is inapplicable—does not apply to communications occurring after the execution of the written K and when parties are (partial list):
1. Raising a defense to formation
2. Raising a defense to enforcement
3. Proving condition precedent to existence of the K
4. Interpreting/clarifying ambiguity in K
5. UCC—supplementing even apparently unambiguous terms by evidence of trade usage or course of dealing (priority, highest to lowest: express terms, course of performance, course of dealing, trade usage)

Question 38

Condition

Answer 38

future event that must take place before rights or obligations are created, destroyed, or enlarged

1. Failure of a condition—relieves a party of the obligation to perform
2. Express—K includes words like “on the condition that” or “provided that” * Condition must be complied with fully unless excused; substantial performance will not suffice * Enforceable even when the failure to meet the condition results in the denial of compensation
3. Implied—those deemed to be part of K because agreement suggests that parties truly intended the condition but failed to expressly include it, or because fairness requires its inclusion * Only substantial performance required to satisfy condition * UCC—implies duty of cooperation when performance of one party depends on the cooperation of the other party

Question 39

Timing of conditions

Answer 39

1. Condition precedent—condition precedes the obligation to perform
2. Condition subsequent—condition excuses the duty to perform after a particular event occurs
3. Concurrent conditions—each party’s duty to perform is conditioned on the other party’s duty to perform (each party must perform simultaneously)

Question 40

Satisfaction of conditions

Answer 40

examined against objective, reasonable person standard unless aesthetic taste is involved (then subjective standard; the party must use good faith when assessing satisfaction; dissatisfaction must be honest, but may be unreasonable)

Question 41

Order of performance

Answer 41

unless the language or circumstances indicate otherwise, performance is due:

• When one party’s performance requires a period of time—that party must complete his performance before the other party is required to perform
• When both parties’ performance can be rendered at the same time—both parties must perform at the same time; one party’s failure to perform excuses the other party’s performance

Question 42

Substantial performance (does not generally apply to Ks for sale of goods)

Answer 42

• Express condition precedent—parties are generally held strictly to the condition; full compliance is required before other party’s performance is due
• Implied or constructive condition precedent—a party who substantially complies with the condition can trigger the other party’s obligation to perform
• Damages—K price minus any amount it will cost other party to obtain complete performance as promised o Even if no substantial performance, potential recovery through restitution o Failure to substantially perform is a material breach
• Willful breach—more likely to be treated as a material breach (i.e., substantial performance is less likely to be found when the breach is willful)

Question 43

Perfect tender under UCC

Answer 43

• Seller must transfer ownership and tender goods conforming to warranty obligations
• Buyer may inspect goods and, upon acceptance, has an obligation to pay for them
• Perfect-tender rule—substantial performance insufficient (except for installment Ks and when parties agree)
• Transferring ownership o Automatic warranty of good title, rightful transfer, and goods free of security interest of which buyer is unaware o Actual knowledge of security interest nullifies warranty of title
• Seller’s obligation to tender goods—must be in accordance with K provisions or with UCC if K is silent on tender
• Method of tender o Seller’s place of business—seller must place goods at the disposition of the buyer and give the buyer notice, if necessary o Shipment contract (e.g., “FOB seller’s place of business”)—seller must deliver goods to a carrier and make a contract for their shipment; when the K is silent, a shipment K is presumed when the K requires shipment by third-party carrier o Destination contract (e.g., “FOB buyer’s place of business”)—seller must deliver goods to the place specified in contract and tender them there by holding them at the buyer’s disposition
• Buyer’s obligations—once conforming tender is made, buyer generally obligated to accept and pay K price; rejection amounts to breach of K
• Buyer’s right to inspect before payment—generally, a right to inspect goods that are tendered, delivered, or identified to the K for sale, unless K provides otherwise
• Contract specifications left to one party—otherwise valid K not invalid merely by omitting details to be specified by one of the parties; specifications must be commercially reasonable and made in good faith

Question 44

Divisible or Installment K

Answer 44

• CL—various units of performance divisible into distinct parts o Recovery limited to amount promised for the segment of K performed o Damages recoverable for breach of other segments
• UCC—goods delivered in multiple shipments, each to be separately accepted o Perfect-tender rule does not apply o Right to reject determined by “substantial conformity” standard—buyer can only reject if nonconformity substantially impairs the value to buyer and cannot be cured o Buyer may cancel K only if nonconforming tender substantially impairs the value of the entire K

Question 45

Implied duty of good faith and fair dealing

Answer 45

• Imposed on each party in any contract (common law or UCC)
• “Good faith”—honesty in fact and the observance of reasonable commercial standards of fair dealing”

Question 46

Suspension or excuse of conditions

Answer 46

1. Waiver—party whose duty is subject to a condition can waive a nonmaterial condition by words or conduct; conditions material to party’s primary purpose may be reinstated by the party; nonmaterial condition may be reinstated if: * The waiving party communicates the retraction of the waiver before the condition is due; and * The other party has not suffered detrimental reliance.
2. Wrongful interference—if party whose duty is subject to a condition wrongfully prevents or interferes with occurrence of that condition, then the condition is excused and interfering party has absolute duty to perform (per implied duty of good faith and fair dealing)
3. Election—a party who chooses to continue with a K after a condition is broken effectively waives that condition
4. Estoppel—once a party waives condition, he can be estopped from using that condition as a defense if other party reasonably relied on waiver
5. Forfeiture—court may excuse nonmaterial condition if non-occurrence would cause disproportionate forfeiture

Question 47

Breach of K

Answer 47

once duty to perform exists, nonperformance is a breach unless duty is discharged

1. CL * Material breach (nonbreaching party does not receive substantial benefit of bargain)— allows nonbreaching party to withhold any promised performance and to pursue remedies for breach, including damages * Minor breach (breaching party has substantially performed)—nonbreaching party entitled to pursue remedies for nonmaterial breach (damages) but must perform under the K
2. UCC * In general, seller must strictly perform all obligations under K or be in breach o Material breach only applies to installment Ks or when parties stipulate it in K

Question 48

C/L Anticipatory repudiation

Answer 48

• Promisor repudiates before time of performance is due—repudiation must be clear and unequivocal through words or acts
• Nonbreaching party’s options: o Treat repudiation as a breach o Ignore repudiation and demand performance of promisor, but suspend any performance by promisee if it would increase promisor’s damages o If date of performance has not passed and the only performance left is payment, must wait for actual breach before filing suit
• Retraction of repudiation—can be retracted until promisee acts in reliance on repudiation, accepts repudiation, or commences action for breach of K
• Unilateral Ks—anticipatory repudiation does not apply

Question 49

UCC Anticipatory Repudiation

Answer 49

• Anticipatory repudiation occurs when there has been an unequivocal refusal of buyer/seller to perform or when reasonable grounds for insecurity arise and the other party fails to provide adequate assurances within reasonable time (not to exceed 30 days)
• Retraction of repudiation—permitted if other party has not canceled the K or materially changed position

Question 50

Anticipatory Repudiation prosepctive inability to perform

Answer 50

party’s expectations of performance may be diminished by an event occurring after K formation

• UCC
  o A party can demand assurances if reasonable grounds for insecurity about other party’s ability to perform (and may suspend performance until provided); the demand must be in writing
  o Failure to provide adequate assurances within reasonable time (limited to 30 days) treated as repudiation

Question 51

Remedies

Answer 51

damages for breach of K

Question 52

Expectation damages

Answer 52

In general o Intended to put nonbreaching party in same position as if K had been performed o Must be calculated with reasonable certainty o Expectation damages = loss in value + other loss – cost avoided – loss avoided  If using this formula, plaintiff should not recover separately calculated consequential and incidental damages

• Partial performance—partially performing party recovers work performed + expectation damages for work not yet performed
• Defective performance o Construction Ks—damages; generally the cost to correct the defect o Sale of goods—damages equal to the difference between the value of the goods as warranted and the actual value of the tendered nonconforming goods o Real estate—damages for failure to perform = difference between K price and market value; damages for late delivery = fair market rental value
• Economic waste—applies to construction contracts o Occurs when the cost to fix or complete construction is clearly disproportional to any economic benefit/utility gained as a result; court can award damages equal to the diminution in the market price of property o If the breach is willful and only completion of the K will give the nonbreaching party the benefit of its bargain, court can award damages to fix or complete construction even if it results in economic waste
• UCC Breach of warranty damages—difference between the value of the goods accepted and the value they would have had if they had been as warranted (often, repair costs)

Question 53

Consequential damages and foreseeability

Answer 53

• Direct damages—necessary and usual result of D’s wrongful act (i.e., “loss of value)
• Consequential damages—damages that result from the breach, but arise out of special circumstances unique to the parties to the contract; must be reasonably foreseeable to the breaching party (but need not be a usual result of D’s conduct), caused by the breach, and reasonably certain in value to be recovered
• Foreseeability o Unforeseeable—not recoverable unless the breaching party had some reason to know about the possibility of the unforeseeable consequential damages o Damages are recoverable if they are natural and probable consequences of breach, or if they were contemplated by the parties at K formation, or if they were otherwise foreseeable
• Causation—D’s defense that P’s losses would have occurred regardless of D’s breach
• Reasonable certainty o Dollar amount of damages must be proven with reasonable certainty o If lost profits are too speculative, courts may limit recovery to reliance damages (reasonable expenditures made in connection with the K)
• Limitation by agreement o An agreement to expressly exclude or limit consequential damages is generally enforceable
• UCC o Only buyers can seek consequential damages under the UCC; sellers permitted to seek consequential damages based on common law or other statutes o Limitation of consequential damages for personal injury in the case of consumer goods is prima facie unconscionable o Limitation of damages when the loss is commercial is not prima facie unconscionable

Question 54

Incidental damages

Answer 54

—compensation for commercially reasonable expenses incurred as a result of other party’s breach

• Seller’s breach—expenses incurred in inspection, receipt, transportation, care, and custody of goods rightfully rejected; expenses in effecting cover; and any other reasonable expense incident to the delay or other breach
• Buyer’s breach—any expenses incurred in stopping delivery; in the transportation, care, and custody of goods after the buyer’s breach; in connection with return or resale of the goods; or otherwise resulting from the breach

Question 55

Liquidated damages and penalties

Answer 55

damages stipulated by the parties to the K as a reasonable estimation of actual damages to be recovered in the event of a breach

• Enforceable if: o Parties intended to agree in advance to damages that might arise from breach o Stipulated amount was reasonable at time of K, bearing some relation to damages that might be sustained, and o Actual damages would be uncertain in amount and difficult to prove

Question 56

Punitive damages

Answer 56

rarely available in K actions but may be available if conduct constituting breach is also recoverable under tort theory

Question 57

Nominal damages

Answer 57

when no damages are alleged/proven

Question 58

Attorney’s fees

Answer 58

in K, not recoverable absent express agreement or specific law

Question 59

Mitigating damages

Answer 59

• Party to K must avoid or mitigate damages to the extent possible by taking steps that do not involve undue risk, expense, or inconvenience
• Nonbreaching party held to standard of reasonable conduct in preventing loss
• Services K—a party is generally not required to accept any type of employment (only employment of the same type as the party was contracted to perform)
• Failure to mitigate reduces damages that may be recovered by nonbreaching party

Question 60

Restitution and reliance recoveries

Answer 60

1. Restitutionary damages (restores to a party the benefit conferred on the other party) * Measured by either the reasonable value of the D obtaining that benefit from another source, or increase in the D’s wealth from having received that benefit * Recovery by nonbreaching party o Nonbreaching party may recover for any benefit conferred on breaching party by way of part performance or reliance o Nonbreaching party may not recover restitution if he has fully performed and the only remaining performance by the other party is the payment of a definite sum of money * Recovery by breaching party o If P has not substantially performed, P cannot recover under the contract, but if D has benefited from P’s performance, P can recover restitution for benefit conferred less the D’s damages for the breach o P generally cannot recover if P’s breach was willful or if K provides that nonbreaching party may retain the value of the breaching party’s performance as liquidated damages
2. Reliance damages (reasonable out-of-pocket expenses incurred by nonbreaching party) * Recoverable if nonbreaching party incurs expenses in reasonable reliance upon the promise that other party would perform * Party cannot recover both reliance and expectation damages

Question 61

Specific performance

Answer 61

an equitable remedy possible when damages are an inadequate remedy

1. Factors considered in determining whether damages are adequate * Difficulty of proving damages with reasonable certainty * Hardship to D * Balance of the equities * Wishes and understandings of the parties * Practicality of enforcement * Mutuality of agreement
2. Real property—specific performance granted because real property is considered unique
3. UCC—specific performance may be granted to the buyer when goods are rare or unique
4. Equitable defenses—laches (prejudicial delay in bringing the action) or unclean hands (nonbreaching party guilty of some wrongdoing in the transaction) may be raised by breaching party

Question 62

UCC Remedies - Buyer

Answer 62

when seller fails to perform or makes a nonconforming tender

• Failure to tender goods o Cancel K—if breach of installment K goes to entire K
  o Recovery of payments—upon cancelation, buyer entitled to recover payments made for tender; on rejection or revoked acceptance, also gets security interest in goods in buyer’s possession
  o Damages—market price minus K price plus incidental and consequential damages
  o Cover—buyer may purchase similar goods elsewhere and recover replacement price minus the K price
  o Specific performance—for unique goods
  o Replevin—buyer can obtain undelivered goods from seller if at least partial payment is made or the buyer is unable to effect cover
• Nonconforming tender—buyer has right to accept or reject all or part of the goods (and the right to inspect before making that decision)
  o Rejection—buyer can reject goods if he gives notice to seller within a reasonable time and before acceptance, and is then entitled to a return of any payments made or to seek same remedies as if no tender was made
  o Acceptance—buyer accepts goods by expressly stating acceptance, using the goods, or failing to reject the goods; to recover damages, buyer must give seller timely notice of breach; damages measured by difference between value of nonconforming goods and value of conforming tender (usually cost of replacement or repair), plus consequential and incidental damages
  o Right to cure—seller has right to cure defective tender if time of performance under K has not yet elapsed or seller had reasonable grounds to believe that buyer would accept despite the nonconformity

Question 63

UCC - Seller’s remedies

Answer 63

• Right to price—seller may recover the full price if buyer has accepted goods; conforming goods are destroyed or lost after risk has shifted to buyer; seller cannot reasonably sell identified goods
• Right to reclaim goods—from insolvent buyer if he makes a demand within 10 days after buyer receives goods
• Stoppage of goods in transit—permitted if buyer breaches or is insolvent
• Wrongful rejection by buyer—seller can collect damages, resell the goods, or recover the price, and, if the seller is a “lost volume” seller, lost profits; seller can also collect incidental damages

Question 64

Risk of Loss

Answer 64

• Unidentified goods—if goods are damaged/destroyed and there is no breach, risk of loss is on seller until he satisfies delivery obligations (and then risk shifts to buyer)
  o Shipment K—risk of loss passes to buyer when the seller gives possession of the goods to the carrier and makes proper contract for their shipment
  o Destination K—risk of loss passes to buyer when the seller tenders the goods at the place specified in the K
• Identified goods—seller is excused if goods are totally destroyed through no fault of the seller prior to the risk of loss being shifted to the buyer
• Effect of a breach of K
  o Seller’s breach—if seller delivers nonconforming goods, risk of loss remains on the seller until buyer accepts or there is cure
  o Buyer’s breach—if buyer breaches/repudiates after goods have been identified but before risk of loss shifts, then risk immediately shifts to buyer (to extent of lack of insurance coverage by seller)

Question 65

SoL on a breach of a sales K or warranty

Answer 65

• Four years after cause of action accrues
  o Generally, cause of action accrues when breach occurs, regardless of whether aggrieved party knows
• Parties may reduce four-year limitations period to not less than one year, but they may not extend it