Module3-Contracts

Question 1

BATNA

Answer 1

best alternative to negotiated agreement

Question 2

What is a contract

Answer 2

 A legally enforceable promise.
 Performance is recognized as a duty
 Breach entitles non-breaching party to remedies

Question 3

Bilateral Contract

Answer 3

 Bilateral: promise for a promise
 Ex: “I promise to sell you my bike for $500. You promise to buy my bike for $500”
 K is formed upon exchange of promises.

Question 4

Unilateral Contracts

Answer 4

 Unilateral: promise for an act
 Ex: “If you wash my dog, then I’ll pay you $50.”
 K is formed upon performance (e.g., act of dog washing).
 Merely preparing for performance generally does not count as acceptance of a unilateral contract.

Question 5

Elements of a Contract

Answer 5

 For an enforceable contract, there must be:
 Offer & Acceptance 
 A.k.a. “Mutual Assent” to same terms
 A.k.a. “meeting of the minds”
 Consideration
 Capacity
 Legality

Question 6

Contract; Offer+Acceptance

Answer 6

 Meeting of the Minds: In order for an agreement
to be made, the parties must mutually assent to
the same terms.
 Objective standard to determine parties’ intent
 See Lucy v Zehmer – buzzed land sale case.
 Courts will look at:
 What the parties said when entering into the K.
 How the party acted or appeared.
 Circumstances surrounding the transaction.

Question 7

what is an offer

Answer 7

 Offer: a manifestation of an intent on behalf
of the offeror to be contractually bound upon
acceptance by another party (the offeree).
 Bob: “Joe, if you wash my car, I’ll pay you $20”

Question 8

Requirements of an Offer

Answer 8

 (1) Offeror’s serious intent to be bound Ask what a reasonable person in offeree’s position would conclude as to the meaning of offeror’s words and acts. Can’t be an obvious joke.
 (2) Reasonably definite terms Identity of the Parties Identity of the subject matter  Duration of K Consideration to be paid (aka Price) Time of payment, delivery or performance
 Note: Under the Uniform Commercial Code (governing sales of goods), an offer for the sale of goods may be found even though it contains only party names, subject matter and quantity.
 (3) Offer must be communicated to offeree

Question 9

Revoking Offers

Answer 9

 Usually, offer may be revoked by offeror any time prior to acceptance
 Generally, revocation is effective upon actual receipt by offeree or agent
 How to Revoke:
 Words that communicate to offeree that offeror doesn’t intend to be bound:
 “I hereby revoke my previous offer dated July 12…”
 Action by offeror inconsistent with intent to be bound once offeree learns it.
 But, in case of a unilateral K, revocation must occur prior to the start of performance.
 Offers to the general public (e.g., a reward for information or return) can usually be revoked in the same way they were offered (newspaper, TV)

Question 10

Rejecting Offers

Answer 10

 Offer is generally terminated when:
 The offeree rejects the offer by words or conduct, and the original offeror receives the rejection.
 The offeree proposes new/different terms.
 But note, an inquiry about an offer does not ordinarily constitute a rejection. (“Would you accept $50 instead?”)

Question 11

Accepting an Offer

Answer 11

 Acceptance is a voluntary act (in words or conduct) by
offeree to show assent to the terms of the offer.
 Must be unequivocal.
 Must be timely communicated to offeror.
 Silence is usually not implied acceptance.
 Exception: if you receive the benefit of services, even though you
could have rejected them, and knew that the other party supplying
the services expected compensation.

Question 12

Contract: Consideration

Answer 12

 “Consideration” is the value given in return for a promise.
 Consideration must consist of legally sufficient value
 To be adequate, consideration must consist of a legal detriment:
 Promise to do something you were not otherwise required to do.
 Performance of an action you were not otherwise required to do.
 Refraining from doing something you were legally allowed to do.
 Courts will usually not second-guess the adequacy of consideration.

Question 13

Illusory Promises

Answer 13

 Illusory Promises
 Agreement to buy as many widgets as I want is invalid
 But, K to buy as many as I need (requirements K) is valid.
 And, K to buy as many as you produce (output K) is valid.

A promise that is unenforceable due to indefiniteness or lack of mutuality, where only one side is bound to perform. An example of this would be an agreement between a seller and buyer which states that the seller “agrees to sell all of the ice cream he wants to” to the buyer.

Question 14

Past Consideration

Answer 14

Promises made in return for actions or events that have already occurred are
unenforceable; they’re gifts!

Question 15

Promissory Estoppel

Answer 15

 Promissory estoppel – a legal doctrine providing that a person who has reasonably and substantially relied on a promise of another to his detriment may be able to obtain recovery.
 Elements:
 Clear and definite promise
 Promisor should have expected that promisee would rely on it.
 Promisee did, in fact, rely.
 Promisee’s reliance was reasonable.
 Promisee’s reliance resulted in substantial detriment.
 Enforcement of promise is necessary to avoid injustice.

Question 16

Unjust Enrichment

Answer 16

 An equitable claim in which the petitioner
asks a court to order the respondent to
disgorge and pay over benefits unfairly
retained.

Question 17

Contractual Capacity

Answer 17

 Capacity is an element of a valid contract, and the lack of capacity is also a defense to enforcement:
Types-Minors, Intoxication, Mental Incompetence

Question 18

Contract Legality

Answer 18

 To be valid and enforceable, a contract must
serve a legal purpose.
 Illegal contracts are void, and thus illegality
is a defense to enforcement of a contract.

Question 19

Unconscionability

Answer 19

gross unfairness)
 Procedural: unfair surprise due to small print,
legalese, contracts of adhesion that unreasonably
favor the drafter.
 Substantive: oppressive, grossly imbalanced,
overly harsh terms without justification

Question 20

Basic Arguments for lack of voluntary consent

Answer 20

4 basic arguments: Fraudulent Misrepresentation (you lied to me) Usually must be affirmative lie not just silence, unless you’re a fiduciary.
 Undue influence (I’m feeble and you overcame my freewill)
 Duress (you forced me)
 Mistake (I didn’t realize what we were agreeing to)

Question 21

Status of Frauds

Answer 21

 By statute, some contracts must be in writing (at least electronic) and signed by the person against whom enforcement is sought in order to be valid and enforceable.

Question 22

Contract: Assignments

Answer 22

Assignment: the transfer of contractual rights (e.g., the right of payment) from the a party (the assignor) to a third party (the assignee).

Question 23

Contract:Delegations

Answer 23

 Delegation – the transfer of contractual duties from a contractual party (the delegator) to a third party (the delegatee).

Question 24

Contracts: Types of Performance

Answer 24

 Complete performance – performance exactly as agreed.
 Substantial performance –a party in good faith performs
most of the terms (Example: Reading Pipe Case)

Question 25

Material Breach

Answer 25

 Material breach:
 Occurs when performance is not, at least, substantial.
 Excuses the nonbreaching party from performance.
 Allows the nonbreaching party to sue for damages.

Question 26

Minor Breach

Answer 26

 Minor breach:
 Nonperformance but it is not material.
 Does not excuse the nonbreaching party from performance, but sometimes allows the nonbreaching party to suspend performance until breach is “cured”
 Allows the nonbreaching party to sue for damages.

Question 27

Anticipatory Repudiation

Answer 27

 Refuses to carry out obligations before they are due.
 A party may repudiate by:
 Stating that he will breach the contract
 Engaging in a voluntary affirmative act that renders him unable to perform the duty
 Not providing assurance of due performance upon request when there exists reasonable grounds to believe that the obligor will not perform.
 Generally treated as material breach – allows the non-breacher to sue immediately, even if performance is not yet due.

Example 1: John owns a large fleet of classic cars and decides to sell one of the cars to Bob. John and Bob enter into a contract in which Bob agrees to purchase the car for $50,000 on January 1st. On December 29th, Bob calls John to say he will not be able to come up with the entire purchase price of $50,000 by the set date. Since direct communication took place, John can reasonably determine that Bob is in anticipatory repudiation, or will breach the contact, releasing him from his duty to hold the vehicle. John can now sell the car to another party, or file a lawsuit against Bob for breaching the contract.

Question 28

Remedies for Breach

Answer 28

 A legal remedy is the relief that an innocent party seeks when other party has breached.
 Remedies can be legal or equitable & may include:
 Damages
 Compensatory, incidental, consequential, punitive, nominal
 Rescission (un-do agreement)
 Restitution (pay for benefits taken)
 Specific Performance (get what you asked for)
 Reformation (court changes names/terms)

Question 29

Compensatory Damages

Answer 29

 Designed to compensate nonbreaching party for benefit of what he would have received if the K had not been breached, minus any amount he would have spent in performance of the contract.
 In contract cases, compensatory damages are also known as “expectation damages”
 Difference between value of what you bargained-for and value of what you received, minus the loss you avoided.

Question 30

Consequential Damages

Answer 30

 Damages flowing from a party’s breach arising
from unique circumstances of non-breaching
party.
 Ex: A agrees to supply B with coal, so that B can sell
power to C. Without the coal from A, B loses the
ability to sell power to C for profit, and B may end up
breaching his contract with C.
 To recover, must be (1) foreseeable and (2)
reasonably certain. A must know of B’s situation.
 These may be expressly limited in contract.

Question 31

Incidental Damages

Answer 31

 Costs associated with the breach (e.g., finding
a replacement, transportation of rejected
goods)

Question 32

Reliance Damages

Answer 32

 Reliance damages compensate injured party for
losses resulting from reasonable reliance on a
promise, which is usually not enforceable.

Question 33

Punitiv Damages

Answer 33

 Generally not recoverable in contract cases,
even for an intentional breach.
 Contract damages are all about compensation,
not punishment.

Question 34

Liquidated Damages

Answer 34

 A liquidated damages provision in a K that specifies the amount
that must be paid in the event a future breach occurs.
 Thus, for an LD clause to be enforceable:
 Must have been difficult at the time of contract to estimate
the losses that would occur in the event of breach.
 Must be reasonable estimate of actual damages, not
excessive.

Question 35

Specific Performance

Answer 35

 An equitable remedy that requires a party to perform the act they promised (instead of just paying damages).
 Usually only awarded in cases where monetary damages are insufficient or there is something particularly unique about the item contracted.

Question 36

Uniform Commerical Code

Answer 36

 In nearly all states, the common law has been replaced by the Uniform
Commercial Code (statute) in matters of:
 Sales of Goods (moveable personal property)
 Transactions involving Software (e.g., licensing)
 UCC covers sales/purchases of goods by average joes and by merchants:

Question 37

Warranties

Answer 37

 Warranty: An express or implied representation that goods sold have certain
qualities or would perform in certain way.

Question 38

Implied Warranty of Merchantability

Answer 38

 Guarantees that goods are reasonably fit for
the general purpose for which they are sold,
and that they’re properly packaged & labeled.

Question 39

Implied Warranty of Fitness for Particular Purpose

Answer 39

 Guarantees that goods are fit for particular purpose
beyond ordinary purpose for which seller
recommended them.

Question 40

Disclaiming Warranties

Answer 40

 To disclaim warranties:
 Implied warranty of merchantability can be disclaimed only by mentioning
merchantability and usually being conspicuous in writing.
 Implied warranty of fitness for particular purpose must also in writing & conspicuous
 Use “AS IS” or “WITH ALL FAULTS”

Question 41

Recitals

Answer 41

 Although there are no necessary “magic words,” recitals help clarify the intention of the parties and identify the existence of consideration.
NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, agreements and other good and valuable consideration set forth herein, the undersigned parties hereby agree as follows:”

Question 42

Indemnifications

Answer 42

An “indemnity” or “hold harmless” clause is a provision in a contract pursuant to which one party (or both) agrees to compensate the other (or each other) for certain harms, liabilities or losses arising out of the contract.

Question 43

Representations and Warranties

Answer 43

 Representations are statements of fact made to induce someone to act (i.e., enter into a contract)
 Warranties are promises, assurances or guarantees that something in a contract is guaranteed by one of the contracting parties.

Question 44

Limitation of Liability Clauses

Answer 44

 Contracts sometimes include provisions stating that no damages can be recovered for certain types of breaches or only certain types of damages may be recovered, but not others.

Question 45

Integration Clauses

Answer 45

 An integration clause is a contractual provision
stating that the contract represents the “complete
and final agreement and supersedes all informal
understanding and oral agreements.”

Question 46

Severability Clauses

Answer 46

 If a portion of the contract is declared unconscionable, void or otherwise unenforceable, the parties may wish to ensure that the remainder of the contract remains intact and is not rescinded.