K & Sales Flashcards
K
A legally enforceable agreement or promise
• The law recognizes a duty to perform and provides a
remedy in the event of a breach
Unilateral K Revocation
Start of performance makes the offer irrevocable for a reasonable time to complete performance
» Start of performance must go beyond mere preparation
Bilateral K
Anything other than a unilateral contract (promise for a promise)
Quasi K
Not a K, more like an equitable remedy • Usually arises when there is an unenforceable agreement, but one side has realized a benefit Look for: 1) P has conferred a benefit to D 2) P reasonably expects to be paid 3) D knowingly accepted the benefit 4) D will be unjustly enriched if P is not compensated
Void K
K never had any legal effect
Voidable K
One party may elect to void the K
Applicable Law CL
Applies to most Ks, except sales of goods
• Any K not involving the sale of goods should be treated
under common law contract principles
Applicable Law UCC
Governs the sale of goods
• If both parties to a K are merchants, the UCC has additional special rules (e.g., perfect tender, acceptance with additional terms)
Mixed K
For Ks involving both goods and services, the predominant purpose of the K dictates the applicable law
• Exception — if K terms divide payment between the goods
and the services, apply the UCC to the sale of goods portion of the K and common law to the remainder
Offer
An objective manifestation of a present intent to contract
• Demonstrated by a promise, undertaking, or commitment;
definite and certain terms; and communication to an offeree
• Creates power of acceptance in the offeree
Objective Manifestation of Intent
Offer must give offeree a reasonable expectation that offeror is willing to enter into a K
• Would a reasonable person believe that the communication
is an offer inviting acceptance?
Definite and Certain Terms
Not all material terms are required
• Terms must only be sufficient to allow enforcement of the K
• Vague terms or terms of negotiation are not allowed
UCC Offer
Quantity must be certain or capable of being
made certain
Requirement/Output K
May state quantity of goods in terms of the buyer’s requirements, the seller’s output, or in terms of exclusivity
• No unreasonably disproportionate increase in quantity is allowed
Communication to an identified offeree
Offeree must know of the offer and have the power to accept it
Ads as Offers
Generally not offers, unless highly specific as to quantity and clearly indicate who may accept
Revocation
An offeror may revoke her offer, which effectively terminates the offer and the offeree’s power of acceptance
Methods of revocation
1) Unambiguous statement by the offeror to the offeree
2) Offeree becomes aware of offeror’s unambiguous conduct or statement indicating an unwillingness or inability to contract
Limitations on Revocation
Revocation is only effective upon receipt by offeree
• An offer cannot be revoked once it has been accepted
Irrevocable Offers
Offer is irrevocable if:
a) Option K — promise to keep an offer open
• Requires consideration in exchange for the option
b) UCC firm offers — if a merchant offers to sell goods in a signed writing and gives assurances that the offer will be held open, it is irrevocable for up to three months
• No consideration is required
c) Detrimental reliance by offeree — reliance must be reasonable
Rejection of Offer
Rejection by offeree terminates the offer and the offeree’s power of acceptance
Counteroffer
Terminates the original offer and becomes a new offer; bargaining is not a counteroffer
» If response to an offer is a statement — counteroffer
» If response to an offer is a question — bargaining
Conditional Acceptance
Terminates the original offer and becomes a new offer
» Indicated by terms such as “if,” “only if,“ “but,” “provided,” “so long as,” “on condition that,” etc.
CL Acceptance
Acceptance must mirror the offer’s terms; it cannot omit or add new terms
UCC Addt’l Terms
An acceptance that proposes additional or different terms is valid, giving rise to an enforceable K, unless the acceptance expressly requires assent to the different or additional terms
» Both parties are merchants — additional terms become part of the K unless they materially change the offer or the offeror objects within a reasonable time
UCC Acceptance by Prompt Shipment
A merchant may accept an offer to buy goods by either:
a) Providing a promise to ship goods (usually by written confirmation), or
b) Promptly shipping conforming goods
• Shipment of nonconforming goods may give rise to breach
Mailbox Rule Offer
Effective upon receipt
Mailbox Rule Acceptance
Effective upon dispatch
Silence as Acceptance
Generally silence is not an acceptance unless (1) the offeree has reason to believe the offer could be accepted by silence, was silent, and intended to accept by silence or (2) based on prior dealings, it is reasonable to believe the offeree must notify the offeror if there is an intent not to accept.
Exceptions to Mailbox Acceptance Rule
1) A requirement that the terms of the offer control
2) An option contract is effective upon receipt; not dispatch
3) If an acceptance and a rejection is sent and the rejection is sent first, then acceptance controls if it is received first. If the acceptance is sent first, then the acceptance controls.
Acceptance by Performance
An offeree may accept by partial performance (for bilateral Ks)
or complete performance (for unilateral Ks), unless acceptance is limited by terms of the offer
Consideration
A bargained-for legal detriment incurred by each party to a K by promise, forbearance, or performance
Bargained-for Legal Detriment
• The promise must induce the detriment and the detriment
must induce the promise
• Legal detriment — obligation to do or refrain from doing
something one would not otherwise be obligated to do or
refrain from doing
• Pre-existing legal duty — a promise to perform a preexisting legal duty is not valid consideration, unless there is a
new written promise to fulfill a debt obligation (see below)
Reliance/Estoppel
Courts may enforce a promise if:
1) Promisor reasonably expects reliance by promisee
2) Promisee acts or refrains from acting such that his reliance is detrimental
3) Injustice will occur without enforcement of the promise
UCC Modification
Consideration is not necessary for good-faith written modifications to a K governed by the UCC
Incapacity
Infants and mentally incompetent persons lack capacity to
contract
• Intoxication — intoxicated persons may lack capacity to
contract if the other party has reason to know of intoxication
Consequences of Incapacity
Right to disaffirm — person who lacked capacity to contract
(i.e., infant) may disaffirm the K, which renders it void
Implied affirmation (ratification) — a K can be enforced
against an infant at the time of K formation if she has since
gained capacity and retained benefits of the K
Infant Liability for Necessities
Infants are legally obligated to pay for necessities (e.g., food, clothes, medical care)
K Required under SoF
1) Marriage Ks — promises made in consideration of marriage
2) Service Ks incapable of being performed within 1 year
» SoF does not apply to: “lifelong” deals or Ks that say nothing about time for performance — both are technically capable of performance within one year
3) Land-related Ks — transfers of property interests, including
leases for terms greater than one year
4) Executor promises — promises by executors/administrators to personally answer for the debts of the decedent’s estate
5) Guarantees — promises to pay the debt of another
6) Sales of goods of $500 or more
Requirements of SoF
Writing
Essential Terms
Signed by party against who the claim is being asserted
Exceptions to SoF
Service K — only full performance satisfies the SoF
» Sale of goods K — delivery of goods satisfies the SoF
• Custom-made goods — SoF satisfied once seller
makes a substantial beginning toward performance
» Real estate — part performance by the buyer satisfies
SoF if buyer has done two of the following three:
a) Full or part payment
b) Possession of property
c) Improvements to property
Illegality
Look for an illegal subject matter or purpose for the K
• Illegal subject matter — K is not enforceable
• Legal subject matter but illegal purpose — K only enforceable
by one who did not know about its illegal purpose
• Legality is based on the existing law at the time of K formation
Misrepresentation
Includes false assertions, concealment, or misstatements about a material fact before K formation
• K will be voidable if A induces B into a K by misrepresentation and B relies on the misrepresentation
Duress
Includes both economic and physical duress
• Ks induced by duress or coercion are voidable
Unconscionability
Courts may refuse to enforce all or part of a K that is either:
a) Procedurally unconscionable — usually involves unfair surprise (e.g., a new material term)
b) Substantively unconscionable — usually involves oppressive terms, which are often hidden
» Arises with contracts of adhesion, exculpatory clauses for intentional acts, etc.
Mutual Mistake
Both parties are mistaken about an
underlying factual assumption at the time of K formation
• K is void if:
1) Both parties are mistaken
2) Mistake concerns a basic assumption of fact
3) Mistake materially affects the agreed-upon exchange
4) Adversely affected party did not bear risk of the mistake
Unilateral Mistake
Only one party is mistaken concerning
underlying facts of the agreement
• Unilateral mistake will not prevent K formation
• Exception — K is voidable if the non-mistaken party knows
or should have known of the other party’s mistake
Parol Evidence
Evidence extrinsic to a written agreement is inadmissible to
supplement or contradict the written agreement
• Applies if the writing is a complete integration — parties
must intend the writing to express their final agreement
Statements barred by Parol Evidence
• Negotiations before K becomes integrated
• Agreements before K becomes integrated (oral or written)
• Exceptions — parol evidence will be allowed if either:
a) Agreement was only partially integrated, or
b) Additional terms would ordinarily be in a separate
agreement
Allowances under Parol Evidence
• Evidence of oral agreements made after the writing
• Evidence necessary to determine if there was a mistake in
the process of reducing an agreement to writing
• Evidence concerning a party’s defense based on
misrepresentation, fraud, or duress
• Evidence used to resolve ambiguities about the meaning
parties intended to give particular terms in the writing
Shipment K
Indicated by “FOB — [seller’s city]”
» Seller’s delivery obligation is satisfied when seller:
1) Delivers goods to a common carrier
2) Makes reasonable arrangements for delivery
3) Notifies the buyer
» Once complete, risk of loss passes to the buyer
Destination K
Anything not “FOB — [seller’s city]”
» Seller’s delivery obligation is complete only when goods
arrive at buyer’s location
Risk of Loss
Arises if goods are lost or destroyed by no fault of either party
after K formation but before buyer receives the goods
Factors for Risk of Loss
(in order of priority)
1) Prior agreement of the parties
2) Breach — breaching party is liable for any uninsured loss, even if unrelated to the breach
3) Common carrier — risk shifts to buyer once seller completes delivery obligations
4) Default — apply if the above factors are inapplicable
• Merchant seller — risk of loss shifts to buyer once he takes physical possession of goods
• Non-merchant seller — risk of loss shifts to buyer upon tendering delivery
Express Warranty
When seller makes promises or describes facts about a product or its use
• Warranty will be breached if the product falls short of the
seller’s promise or description
Implied Warranty of Merchantability
Merchant selling goods automatically warrants goods are fit for their ordinary purpose
Implied Warranty of Fitness for Particular Purpose
Seller warrants that goods are fit for buyer’s purpose if:
1) Buyer has a particular purpose
2) Buyer relies on seller to select suitable goods
3) Seller has reason to know of buyer’s purpose and reliance on seller
Disclaimer in K
Limits liability only for implied warranties
» “As is” or “with all faults” language is enforceable
» Disclaimers will not limit liability for express warranties
Remedy Limitation
Limits recovery upon breach of warranty
» Generally valid for all warranties, unless the provision
is unconscionable (e.g., breach causes serious injury)
UCC Perfect Tender
Buyer can retain or reject nonconforming goods
• If seller’s performance is not perfect, buyer can either:
a) Retain goods delivered and sue for damages, or
b) Reject some or all goods and sue for damages
UCC Rejection
Buyer must notify seller of rejection in a reasonable time
• Buyer must hold the rejected goods using reasonable care
• Buyer must give seller reasonable time to arrange for removal of the goods
» If seller gives no information regarding removal, buyer can return the goods to seller, store the goods for seller, or resell the goods on behalf of seller (i.e., for seller’s profit)
UCC Acceptance
a) Buyer, after a reasonable opportunity to inspect the goods,
indicates to seller that the goods conform or that he will keep them despite their nonconformance
» Payment without an opportunity to inspect is not acceptance
» If buyer accepts goods, he cannot later reject them
b) Buyer fails to reject or notify seller of rejection within a
reasonable time (no more than one month)
UCC Revocation of Acceptance
• Buyer generally cannot reject goods once he has accepted
• Exceptions — buyer can revoke acceptance if:
1) The nonconformity substantially impairs the value of the goods
2) Buyer is excusably ignorant of the grounds for revocation or reasonably relies on the seller’s assurance of satisfaction
3) Buyer revokes within a reasonable time after discovering a nonconformity
UCC Seller Right to Cure
1) Time for performance has not yet expired OR
2) Seller had reasonable grounds to believe the nonconforming goods sent would be acceptable
» Reasonableness is usually based on seller’s prior
dealings with buyer
3) Seller gives buyer notice of intent to cure
» Seller must give buyer reasonable notice and deliver conforming goods
Note — buyer cannot compel seller to cure
Installment K
Authorizes or requires delivery of goods in
separate lots
Rejection of Installment
Buyer can only reject a delivery/installment if:
1) Nonconformity substantially impairs the installment
2) Nonconformity cannot be cured
• Rejection is limited to the nonconforming installment, not
the entire K
» Buyer can only cancel the entire K based on a nonconforming installment if that installment substantially impairs the value of the entire K
CL Substantial Performance
If one party has substantially performed, the other party is obligated to perform and complete performance
• I.e., less than perfect performance by one party does not
excuse the other party from his obligation
• “Substantial” is usually considered at least halfway complete
• Thus, substantial performance by A obligates B to perform;
but B may seek money damages for the difference between
the performance rendered and the performance expected
CL Material Breach
• Material breaches by the other party excuse performance
• Substantial breach ≠ material breach
• Materiality of breach is a question of fact (and thus unlikely
to be tested on the MBE)
• Damages are recoverable for any breach
CL Timeliness of Performance
Failure to perform by the time stated in a K is not a material
breach if performance is rendered within a reasonable time
after the time stated
• Exception — “time is of the essence” clauses
» If timely performance is essential, failure to perform by that time is a material breach
» Arises if one party indicates as a term of the K that performance by a given date is essential
Condition of K
Conditions are agreed-upon limitations on performance
• I.e., conditions make an obligation to perform contingent on
the occurrence of some specific event or condition
Condition Precedent
Performance is not obligated unless the condition occurs; non-occurrence excuses performance
Condition Subsequent
A condition that occurs after
performance has begun and excuses further performance
Excuse of Condition
If a condition exists, it must be strictly complied with; but substantial performance of the condition may suffice if it fulfills the condition’s purpose
Insecurity
Excuse by insecurity arises if A gives B reasonable grounds for insecurity or uncertainty (e.g., by words or conduct) regarding whether A will perform under the K
• Grounds for insecurity or uncertainty must be reasonable
Demand for Adequate Assurances
If party is insecure, she may
1) Demand adequate assurances
2) Suspend performance (if commercially reasonable) until
she receives adequate assurances
3) Treat the K as repudiated if she does not receive adequate
assurances within 30 days
Anticipatory Repudiation
Arises if one party to a K (the repudiating party):
1) Makes an unambiguous statement or conduct
2) Prior to the time performance is due
3) Which indicates he (i.e., repudiating party) will not perform
Effect of Anticipatory Repudiation
If repudiation occurs, the non-repudiating party’s duty to
perform is excused; he may treat the K as breached and sue
» E.g., A hires B to remodel A’s kitchen. B is almost
finished with the remodel when A tells B she does not
want the remodel and will not pay B
• Anticipatory repudiation can be reversed or retracted if
the non-repudiating party has not materially changed his
position
Impossibility
Performance is objectively impossible
Commercial Impracticability
Performance is only possible with extreme and unreasonable difficulty or expense
Mutual Rescission
Mutual cancellation of a K
• Arises if some performance obligation remains for each
party and they both agree to rescind the K
• Agreement to rescind is itself a new K that excuses further
performance for both parties on the original K obligations
• Consideration required, unless the K is governed by the UCC
» UCC — no consideration required for good-faith modifications
Modification
Substitute agreement
• Parties to a K agree to accept a new agreement in satisfaction of the existing K
• Distinguish accord and satisfaction:
» Under accord and satisfaction, satisfying the accord is a condition for fulfillment of the original K obligations
» Modification is a new agreement replacing the old K
Novation
Parties agree to substitute a new party to perform
• The original party is excused from performance and no
longer has any K obligations
Accord
Agreement to accept alternative performance in
satisfaction of the existing obligation
Satisfaction
Completion of the alternative performance
Effect of Accord & Satisfaction
Excuses the original obligation
» If the accord is not satisfied, a party may sue on
either the original obligation or the accord
Third Party Beneficiary
If two parties contract with some intent of benefiting a third
party, that third party is a third-party beneficiary (TPB)
Incidental Beneficiary
If a third party does not meet the above, she is an incidental beneficiary and does not have any rights under the K
Vesting of TPB Rights
Occurs when either:
a) The TPB assents to the promise in a manner requested by
the parties to the K
b) The TPB brings suit to enforce the promise
c) The TPB materially changes position in justifiable reliance
on the promise
TPB Enforcing the K
TPB can sue promisor
» Promisor can assert any of his own defenses
» Promisor can assert any of the promisee’s defenses if
promisor made an absolute promise to pay
• Promisee can sue promisor at law and in equity for specific
performance
• TPB can only sue promisee if TPB is a creditor beneficiary
Assignment of K
A transfer of rights to a third party after a K is formed
• Consideration is not required
CL Limitations on Assignment
Common law bars assignments that substantially change
the duties of the obligor
» Assignment of payment is not a substantial change
» Assignment of rights to performance is a substantial
change
K Limitations of Assignment
• K provisions prohibiting assignments — take away the right
to assign, but not the power to assign
» I.e., an assignee can still enforce the assignment if he was unaware of the provision
• K provisions invalidating assignments — take away both the right and power to assign
» I.e., any assignment is invalid and unenforceable
Enforcement of Assignment
An assignee can recover from the obligor
• An assignor for consideration cannot recover from the obligor
• Payment by the obligor to the assignor is effective until obligor knows of the assignment
Delegation of K
Generally, all duties may be delegated, subject to exceptions
Delegator must simply manifest a present intent to delegate
Enforcement of Delegation of K
• Obligee must accept performance from delegee
• Obligee may sue delegator for non-performance by delegee
• Obligee may only sue delegee if the delegee has assumed
duties of the entire K
Non-Delegable Duties
a) Duties involve personal judgment and skill
b) Delegation changes the expectancy in a requirement or
output K
c) A party has placed special trust in the delegator
d) A contractual provision restricts delegation
Specific Performance
Only available for Ks involving real estate or unique goods (e.g., antiques, art)
• For service Ks, injunctions preventing breach of service K
may be available (e.g., non-compete clauses)
UCC Reclamation
Unpaid sellers in UCC Ks may reclaim goods from an insolvent buyer (i.e., who cannot pay damages)
• Unpaid seller may reclaim goods if:
1) Buyer is insolvent at the time of delivery
2) Seller demands the return of goods within a reasonable time (usually 10 days), and
3) Buyer still has possession of the goods
• Unpaid seller can never reclaim goods from later buyers
» In such a case, the unpaid seller is limited to money
damages from the first buyer
Unauthorized Resale of Goods
The owner may have a claim against the seller for conversion
Expectation Damages
Puts the parties in the same economic position as if the K
had been performed (i.e., if the breach never occurred)
• Note — when in doubt, look for the answer that most
closely gives P (i.e., non-breaching party) the money she
would have received absent the breach
Reliance Damages
Alternative measure of damages used when expectation damages are too speculative
• Designed to compensate P based on the value of her
performance (i.e., puts the parties in the same economic
position as if the K had never been formed)
• Only applicable when expectation damages are overly
speculative (i.e., P’s expected profits are too uncertain)
Duty to Mitigate
All parties must mitigate damages
• A party may not recover for avoidable damages
• D bears the burden of showing P’s failure to mitigate
Consequential Damages
Foreseeable losses indirectly resulting from the breach; recoverable if:
1) Damages are a foreseeable result of the breach, and
2) When K was formed, D had reason to know P would suffer special, unpreventable, or unexpected damages in the event of a breach
» UCC Ks — only buyers can recover
Incidental Damages
Commercially reasonable expenses incurred by the non-breaching party in UCC Ks (e.g., costs of inspecting, returning, storing, reselling goods)
» UCC Ks — recoverable by both buyers and sellers
Restitution Damages
Arise in quasi-K situations
• Applies if there is no enforceable K and a party has been unjustly enriched
• Awarded based on value of the benefit wrongfully conferred
Liquidated Damages
Agreed-upon K provisions that stipulate specified damages upon the occurrence of a breach
• Liquidated damages provisions are valid only if:
1) Damages are difficult to project at time of K formation
2) The provision is a reasonable estimate of actual
damages
Breach by seller & buyer keeps goods
» Damages = fair market value (FMV) of perfectly-delivered
goods minus FMV of the goods actually delivered
» Note — if seller breaches by delivering non-conforming but
superior goods, buyer is not responsible (i.e., it does not
reduce buyer’s damages)
Breach by seller & seller keeps or buyer returns goods
» Damages = whichever of the following is higher:
a) FMV of goods at the time of breach minus K price, or
b) Buyer’s costs of covering/replacing goods minus K price
Breach by buyer & buyer has goods
» Damages = K price
Breach by buyer & seller has goods
Damages = either:
a) K price minus market price at the time of delivery, or
b) K price minus resale price plus provable lost profits
Lost Profits
A seller can recover the lost profits from a buyer’s breach, even though she resold the item that was the subject of
buyer’s breach, if she can prove that she would have made a sale to the second buyer regardless of the first buyer’s breach
