Performance, Modification, and Excuse

Question 1

Obligations under UCC

Answer 1

Seller’s obligations = transfer + deliver

Buyer’s obligations = accept and pay in accordance with K.

Question 2

UCC Seller’s Obligations

Answer 2

Non-carrier cases – Seller has obligation to tender delivery.

Carrier cases (due to express terms or due to the circumstances, appears that parties intend for goods to be moved by common carrier):
\+ Absent other agreement, there is a presumption that K is a shipment K, under which seller need only put the goods in the possession of a carrier and make appropriate arrangements for them to be sent to the buyer, provide the buyer with any document necessary to enable him to obtain possession of the goods, and promptly notify the buyer that goods have been shipped.

Destination K - Seller has agreed to tender goods at a particular destination.

K’s that specify that delivery is F.O.B. (“free on board”), FOB point is the delivery point.
“FOB [location of seller]” = SHIPMENT K.
“FOB [any other location]” = DESTINATION K

K’s that specific delivery is FAS (“free alongside”), seller must deliver goods alongside vessel (in the manner usual at the port of delivery) or on a dock designated by the buyer and obtain and tender a receipt for the goods.

Question 3

UCC Buyer’s Obligations

Answer 3

Unless otherwise agreed-upon, buyer’s tender of payment is a condition to the seller’s duty to tender and complete delivery.

INSPECTION - generally, unless parties agree otherwise, buyer has a right to inspect goods upon tender/delivery before making payment/acceptance. Payment before inspection won’t constitute acceptance of goods or impair buyer’s right to inspect or any of his remedies.

Question 4

Risk of Loss

Answer 4

If seller is required/authorized to ship goods by carrier, risk of loss passes to the buyer:

(1) when goods are delivered to the carrier if K does not require the seller to deliver the goods at a particular destination (i.e. shipment K); OR
(2) when the goods are tendered at a particular destination by the carrier so that the buyer is able to take delivery if K requires the seller to deliver the goods at a particular destination (i.e. destination K).

In any other case:

(1) if seller is merchant, the risk of loss passes to the buyer when the buyer receives (physical possession)
(2) if seller is not a merchant, risk of loss passes to buyer upon tender of delivery.

Question 5

Effect of Breach on Risk of Loss

Answer 5

If seller breaches K by making a nonconforming tender/delivery, the risk of loss remains on the seller until cure or acceptance.

If buyer rightfully revokes acceptance, the buyer may treat the risk of loss as having been on the seller from the beginning.

If the buyer breaches before the risk of loss passes to the buyer, the seller may treat the risk of loss as resting on the buyer for a commercially reasonable time.

Question 6

Modification at Common Law

Answer 6

Preexisting Duty Rule

Promise to increase compensation under an existing K is an unenforceable modification to an existing K because there is no consideration offered for the modification under the preexisting duty rule.

MUTUAL MODIFICATION: A promise to increase compensation under an existing K is enforceable as a mutual modification to the K if:

(1) Both parties agree to a performance that is different from the one required by the original K; AND
(2) the difference in performance is not a mere pretense of a newly formed bargain.

UNFORESEEN CIRCUMSTANCES: Where promise of increased compensation is given in exchange for performance, and performance is rendered substantially more burdensome than reasonably anticipated by the parties when the entered the K, the preexisting duty full will not apply.

Question 7

Modification and Sales of Goods under UCC

Answer 7

Preexisting duty rule abolished under the UCC. An agreement modifying an existing K for the sale of goods needs no consideration to be binding.

Modifications must meet the UCC’s GOOD FAITH TEST and failure to do so will make them unenforceable.

Good faith test applies even to modifications that are supported by consideration.

A bargained-for medication is unenforceable under the UCC if the appearance of the mutual bargain is merely a pretext to hide a bad faith change of terms.

Question 8

Duress and Midterm Modifications

Answer 8

A party who agrees to a contractual modification in commercially extortionate circumstances may also be able to raise the defense of DURESS.

Available in both common law and UCC sales of goods cases.

Question 9

“No Oral Modifications” Clauses

Answer 9

Unless required by SoF, modifications can generally be oral or written. However, the enforceability of an oral modification to an agreement may depend upon whether the K contains a “no oral medications” clause.

No specific language required for this type of provision (i.e. can be “no oral modifications,” or “all medications must be in writing” or other similar language).

Common Law:
Most courts will refuse to enforce oral modifications clauses where a party has reasonable relied on the oral agreement at issue. However, enforcement of oral modifications clauses is becoming more likely, particularly in the construction context.

UCC:
§2-209, clauses prohibiting subsequent oral modifications are presumptively valid.
An oral modification made in violation of such a clause may nevertheless be enforceable if the disadvantaged party relies on the modification or the parties perform in accordance therewith.

Question 10

Excusing Performance due to Faulty Assumptions

Answer 10

Faulty assumption regards PRESENT facts – Mistake

Faulty assumption regards FUTURE facts - Impossibility, impracticability, frustration of purpose

Question 11

Mistake

Answer 11

When a party or parties make a faulty assumption about PRESENT circumstances and thus enter a K on that basis.

Will excuse performance only where the mistaken facts are MATERIAL to that K. This requires that mistaken facts will significantly impact the value of the transaction to one or both parties.

Doctrine of mistake originated under common law, but is also available insoles of goods cases governed by the UCC.

Question 12

Unilateral Mistake

Answer 12

When only one of the parties to a K is operating under a faulty assumption about material facts as they exist at the time of contracting.

Party operating under a faulty assumption about material facts as they exist at the time of contracting is NOT excused from his contractual performances UNLESS:
+ the other party knew or had reason to know of the mistake; OR
+ the mistake was based on a clerical error.

Did you know? OR was it a typo?

Question 13

Mutual Mistake

Answer 13

When both parties labor under a common faulty assumption.

Under the rules of mutual mistake, the K will be voidable by the disadvantaged party where:
+ the fact about which the parties were mistaken is essential to the K (i.e. goes to the heart of the exchange);
+ both parties were mistaken; AND
+ the disadvantaged party did not bear the risk of mistake under the parties’ agreement.

Question 14

Impossibility

Answer 14

Doctrine of impossibility excuses both parties from their obligations under a K if the performance has been rendered impossible by events occurring after the K was formed.

Requires:

(1) OBJECTIVELY impossible performance; AND
(2) the occurrence of the contingency must no the known to the parties at the time of contracting. Can occur in two ways: (a) supervening contingency - performance was possible at the time of contracting, but afterward a contingency occurs that renders performance impossible; OR (b) existing contingency - where a contingency existed at the time of contracting, but was unknown to parties until after K was formed.

Doctrine of impossibility does NOT apply where:

(1) parties have allocated risk of the contingency and provided remedial measures in the event of its occurrence; OR
(2) events render performance only temporarily impossible (typically suspends obligations of parties until impossibility ends).

TYPES:

(1) destruction of the subject matter of the K;
(2) death or incapacity (if the existence of a particular person is necessary for performance of K); and
(3) illegality

Question 15

Objective v. Subjective Impossibility

Answer 15

OBJECTIVE Impossibility: Performance under K becomes literally impossible because of circumstances beyond the control of the parties.

SUBJECTIVE Impossibility: Performance under K becomes impossible because of some failure or fault on the part of the performing party. Performance obligation is NOT excused and will be considered as a breach of K.

Question 16

Impracticability

Answer 16

A promisor may be excused from performance where unforeseen difficulties have made performance prohibitively expensive or otherwise extremely burdensome.

Elements required to show performance would be impracticable:

(1) impracticability of performance caused by some unforeseen contingency;
(2) risk was neither assumed nor allocated by the parties; AND
(3) the increase in the cost of performance would be far beyond what either party anticipated.

Contingencies excusing performance:
+ Where a severe shortage of raw materials or supplies is cased by: war or embargo, local crop failure, or unforeseen shutdown of major sources of supply.
+ Where severe shortage either caused a marked increase in cost or prevents seller from securing supplies necessary for performance.

Contingencies NOT excusing performance:
+ Increased cost alone, unless due to an unforeseen contingency and it alters the essential nature of performance.
+ Rise or collapse in the market.

Parties free to allocate risk of contingency/specify remedial measure to dictate performance in event of contingency.

If contingency was foreseeable at the time of K and K is silent, it may suggest that the absence of a term excusing performance was an affirmative decision to allocate risk to performing party.

Payment of supra-market premium by non-performing party may reflect that parties bargained for contingency.

Question 17

Frustration of Purpose

Answer 17

Where a contingency occurs that dramatically reduces the value of performance to the receiving party, the doctrine of frustration of purpose may be available to excuse the receiving party from its contractual obligations.

MODERN Test: Will discharge party’s contractual obligations when following 3 conditions are met:

(1) the party’s principal purpose in entering the K is frustrated;
(2) there is substantial frustration; AND
(3) the non-occurrence of the event precipitating frustration was a basic assumption of K.

Where parties contractually allocate the risk of non-occurrence of the event, the doctrine of frustration of purpose will not be available.

Frustration of purpose doctrine is followed under common law and available to supplement UCC in sales of goods K’s.

Question 18

Rescission

Answer 18

Parties may agree to discharge each other’s remaining duties of performance under an existing K that is at least partly executory on each side.

SoF will not prevent an oral agreement of rescission that discharges unperformed duties from being enforced unless rescission of a transfer of property is involved.

Question 19

Accord and Satisfaction

Answer 19

ACCORD: K under which obligee promises to accept substituted performance in satisfaction of obligor’s existing duty.

SATISFACTION: performance of the accord.

The parties may make an accord. Satisfaction will discharge the original duty.

Accord alone is not enough. Once accord is made, original duty will be suspended subject to the terms of the accord until the obligor has the chance to make the substituted performance.

If obligee breaches accord, the original duty is not discharged, but the obligor can seek specific performance of the accord (in addition to damages for partial breach).

Consideration is required for the validity of an accord. there may be sufficient consideration if the substituted consideration differs significantly from the original duty, or because the original duty was doubtful or the obligor believed it to be doubtful.

Generally, there may be an A&S when a creditor agrees to accept part payment of an unliquidated debt that the debtor danders in full satisfaction of the debt; however, for party payment to be sufficient consideration, there must be a bona fide or good faith dispute as to the debt.

Question 20

Anticipatory Repudiation

Answer 20

Occurs when, prior to the time that performance is due under the K, a party announces his intention not to perform, or circumstances make such an intention reasonably clear to the aggrieved party.

May be established by:

(1) a party’s definitive statement indicating that he will commit a breach of K; OR
(2) a party’s voluntary or affirmative act that renders the party unable to perform or apparently unable to perform.

A party who has made an anticipatory repudiation to the other party MAY RETRACT THE REPUDIATION unless and until the other party:

(1) acts in reliance on the repudiation;
(2) positively accepts the repudiation by signifying this to the breaching party; OR
(3) commences a suit for damages or specific performance.

Question 21

Adequate Assurance of Performance

Answer 21

If anticipatory repudiation can’t be established but there are reasonable grounds for insecurity, the insecure party may make a demand for adequate assurance of performance.

Adequate assurance of performance must be provided in the following forms:

(1) UCC requires that a demand for adequate assurance of performance on a sale of goods K be made in writing; AND
(2) under Restatement of Contracts, an adequate assurance of performance may be made either: (a) by oral communication OR (b) in writing.

Upon making a demand for assurances, a party with reasonable grounds for insecurity may SUSPEND its own contractual performance so long as:

(1) suspension is commercially reasonable; AND
(2) the insecure party has not yet received the agreed-upon return for the performance in question.

Failure to respond with reasonable assurances constitutes a repudiation of the K by the non responding party.

Question 22

Rights of Aggrieved Party upon Repudiation

Answer 22

If the aggrieved party chooses to treat the anticipatory breach as a breach of K, he may:

(1) cancel the K and terminate all rights and obligations under it; OR
(2) bring an action for damages or specific performance.

If aggrieved party chooses to ignore repudiation, then he is prevented from continuing to perform on the K if performance would increase his damages from the K.

If the aggrieved party can prove to the K that he was willing, ready, and able to render performance had the anticipatory repudiation not occurred, then the aggrieved party is relieved of:

(1) performance of contractual obligations; AND
(2) performance of any conditions precedent.

Question 23

Promissory v. Pure Conditions

Answer 23

PROMISSORY CONDITIONS: K performance is conditioned on the occurrence of the promised performance by the other party.

PURE CONDITION: K performance is conditioned on the occurrence of events beyond the control of either party..

Question 24

Express v. Implied Conditions

Answer 24

EXPRESS CONDITIONS: Those which the parties expressly include in K provisions.

IMPLIED CONDITIONS: Those created under common law or UCC to address order of performance and rights upon breach when the parties have not done so expressly.
Often referred to as implied-in-fact, since their existence is determined by the process of K interpretation rather than express language of K.

Question 25

Common Law Rules Governing Order of Performance

Answer 25

If the K contains express conditions specifying order of performance, then those specifications will control order of performance.

If K is silent as to order of performance:

(1) where one party’s performance requires period of time to be completed and the other party’s doesn’t, then performance over time is treated as an implied condition of the latter; and
(2) where the parties can exchange performance more or less simultaneously, then the performances are treated as concurrent conditions of each other.

Question 26

UCC Rules Governing Order of Performance

Answer 26

Under the UCC, parties are free to specify the order of performance, and where the K contains those specifications, performance obligations will be performed accordingly.

Because sales K’s most commonly involve delivery and payment of goods, performance is treated as concurrent, and so each performance is conditioned on the performance of the other.

Question 27

Common Law - Failure of an Express Condition

Answer 27

Where a party’s performance is subject to an express condition, the failure of that condition will discharge the party’s obligation to perform.

Performance will NOT be excused in these situations:
+ WAIVER - When discharged party waives the condition, the waiving party’s obligation becomes absolute because it is no longer subject to the condition.
+ BAD-FAITH CONDUCT - will excuse the condition where the benefitting party interferes with the fulfillment of a K, or where the benefitting party fails to take steps necessary for the condition’s fulfillment.
+ AVOIDING FORFEITURE - where the fulfillment of a condition may result in forfeiture or great loss to one of the parties, a court may excuse the condition to avoid forfeiture.

Question 28

Common Law - Failure of an Implied Condition

Answer 28

When the possibility of breach is not addressed by an express condition, it is still a breach; however, under the law of implied conditions, courts can treat that breach in one of two ways: as material breach or as substantial performance.

Question 29

Material Breach of an implied condition

Answer 29

If breach of an implied condition is serious enough, the court will treat the breach the same way it would treat the breach of an express condition.

Aggrieved party is free to walk away from his own obligations and sue the breaching party for damages.

Question 30

Substantial Performance of an implied condition

Answer 30

In certain cases, if the breach of an implied condition is less serious, the court will treat the party’s performance as “close enough.” Substantial performance of that condition.

Aggrieved party will NOT be discharged of his performance obligation. Doctrine of substantial performance applies to K’s for services and, in particular, to construction K’s.

Even where courts find substantial performance of a condition, aggrieved party may still sue for damages as remedy for breach.

Question 31

Distinguishing between Material Breach and Substantial Performance

Answer 31

Restatement of Contracts lists 5 factors:

(1) the extent to which aggrieved party will be deprived of benefit, which he reasonably expected under terms of K;
(2) the extent to which aggrieved party can adequately be compensated via damages for defective performance;
(3) the extent to which breaching party will suffer forfeiture if a material breach is found;
(4) the extent to which the breach was willful or in bad faith, rather than merely negligent or innocent; and
(5) likelihood the breaching party will cure his failure within a reasonable time and in a manner consistent with the reasonable purposes of the K.

Question 32

Total Breach v. Partial Breach

Answer 32

Material breach can be partial or total.

Claim for damages for TOTAL breach is one for damages based on all of the injured party’s remaining rights to performance.

Claim for damages for PARTIAL breach is one for damages based on only part of the injured party’s remaining rights to performance.

Nonmaterial breach can ONLY be a partial breach.

Question 33

Perfect Tender Rule

Answer 33

UCC - Terms of a K for the sale of goods are enforced exactly. Every K term is thus treated as an express condition, and a breach of the performance obligation by the seller will relieve the payment obligation of the buyer.

ANY deviation from the performance specified by K constitutes a breach by the seller.

Question 34

Buyer’s possible responses to seller’s failure to make perfect tender

Answer 34

(1) reject the good - exercise right of rejection within a reasonable time after delivery and notify seller within reasonable period of time (if not effectuated this way it is an IMPERFECT rejection)
(2) accept the goods; OR
(3) reject part and accept part of the goods (then has rights of acceptance for goods he kept, duties of rejection for the goods he rejected).

Question 35

Accepting imperfect tender

Answer 35

Occurs when buyer has reasonable opportunity to inspect goods and signifies acceptance either through:

(1) stating to seller that goods conform to K;
(2) taking the goods despite non-conformance;
(3) failing to make an effective rejection of goods; OR
(4) taking any action that would be inconsistent with seller’s ownership of the goods.

If buyer accepts goods, he has the following rights/duties:

(1) must pay K price
(2) may seek damages for nonconformity if he noticed seller within a reasonable time, seller is not prejudiced by lack of notice, or his rights would not be affected; and
(3) may revoke his acceptance if the nonconformity substantially impairs the value of the goods, and he was initially unaware of it because of difficulty of discovery or because of seller’s assurances of conformity or that nonconformity would be cured.

Question 36

Seller’s ability to cure

Answer 36

Seller makes nonconforming tender but the time of performance has not yet expired under K - seller may sub conforming goods so long as:

(1) seller gives buyer seasonable notice of intention to substitute; AND
(2) seller makes conforming delivery within the time specified in K.

If seller makes nonconforming delivery and had reasonable rounds that delivery would be acceptable to buyer, he may substitute a conforming delivery if:

(1) seller gives buyer reasonable notice of intention to substitute; AND
(2) seller makes conforming delivery within a reasonable time.

Question 37

Installment Contracts

Answer 37

Under UCC, installment contracts are contracts that contemplate the delivery of goods in separate lots to be separately accepted by the buyer.

If nonconforming installment substantially impairs value of whole K, there is a breach of the whole K.

If the nonconforming installment substantially impairs the value of that installment, and seller cannot cure, the buyer may reject that installment.

If nonconforming installment does NOT substantially impair value of the K as a whole, and seller gives adequate assurance that he will cure, the buyer must accept the installment.