Performance of the Contract

Question 1

What is the perfect tender rule?

Answer 1

Under UCC: the delivery and condition of the goods must be exactly as promised. If tender is not perfect, buyer has the right to reject the goods.

Question 2

How does option to cure apply?

Answer 2

Seller who fails to make a perfect tender may have the option to cure. If the time to perform the contract has not expired, the seller has an option to cure OR the contract has expired but previous dealings indicate that the buyer has accepted non-conforming goods.

Question 3

What is an installment contract?

Answer 3

An installment contract authorizes or requires seller to deliver in separate installments. The perfect tender rule does not apply for installment contracts and buyer can reject only for substantial impairment.

Question 4

T/F: If there’s a long delay between receipt/complaint, look for implied acceptance.

Answer 4

True.

Question 5

What is the effect of a buyer impliedly accepting goods?

Answer 5

Once the buyer accepts, it is too late to reject. But the buyer can still get damages for the seller’s breach.

Question 6

Can the buyer revoke the acceptance of goods?

Answer 6

No, a buyer cannot revoke acceptance of goods.

EXCEPTION: if the non-conformity substantially impairs the value of the goods and was difficult to discover (latent defect).

Question 7

I contract to sell J my car. Our contract requires her to pay me by 5 PM on Sunday. J gives me a check at 5 PM on Sunday. If I refuse her check, is she in breach?

Answer 7

No. I have reasonable time to get cash even though the contract deadline has passed.

Question 8

For common law, does performance have to be perfect?

Answer 8

No, for common law performance does not have to be perfect. Substantial performance is all that is required, otherwise lack of substantial performance is a material breach of the contract.

Question 9

How can one avoid the pre-existing duty rule?

Answer 9

Consideration is in any way new or different, such as payment before maturity or to one other than the creditor; or payment in a different medium (e.g., stock instead of cash), then sufficient consideration may be found.

Question 10

The owner of a summer cottage contracted to put new vinyl siding on the cottage for $10,500. Two weeks before the work was to start, however, the contractor called to say that there was a clerical error in the bid and that he could not do the work for less than $12,000 or he would lose money. The cottage owner agreed to pay the additional $1,500 but told the contractor that he was being unfair. After the work was completed, the cottage owner handed the contractor a check for $10,500, telling the contractor that that was all he would pay him because he had no right to raise the price.

If the contractor sues the cottage owner for the additional $1,500, who will prevail?

Answer 10

The cottage owner will prevail, because the contractor was already under a preexisting legal duty to replace the siding on the cottage for $10,500. Under the preexisting legal duty rule, the promise to perform or the performance of an existing legal duty will not be sufficient consideration. If the parties agree to modify their contract, consideration is usually found to exist where the obligations of both parties are varied. However, absent unanticipated circumstances, a modification solely for the benefit of one of the parties is generally unenforceable under the common law. Here, the contractor was already under a binding contract to replace the siding on the cottage for $10,500.

Question 11

A professional baseball player visited a sick boy in the hospital. The player told the boy that in consideration of the boy’s courage, he would hit a home run for him in his next game. As the player was leaving the hospital, the boy’s father stopped the player and told him how important the home run could be in improving his son’s spirits and health. The father told the player he would pay him $5,000 if he did hit a home run in his next game. The player agreed and took extra batting practice before his next game to improve his chances. In his next game, the player hit two home runs. The player’s contract with his ball club does not forbid him from accepting money from fans for good performance. The player has now asked the father for the $5,000.

If the father refuses to pay and the baseball player brings an action against him for damages, which of the following is correct under the prevailing modern rule in contract law?

Answer 11

The player can recover because the preexisting duty rule does not apply if the duty is owed to a third person. If the duty was just to the father, the player could not enforce the father’s promise to pay because the player gave no valid consideration in exchange for the father’s promise. A duty is a preexisting duty only if it is owed to the promisee. Thus, if the duty is owed to a third party (the son), a promise to perform given to another is valid consideration as long as it was bargained for.

Question 12

A downtown department store engaged an electrician to service all electrical appliances sold by the store for a flat fee of $5,000 per month. Under a written contract signed by both parties, the store was responsible for pickup and delivery of the appliances to be repaired and the billing for the work. By its terms, the contract would continue until either party gave 180 days’ written notice of its intent to terminate. Several months ago the electrician informed the store that he was losing money on the deal and was in financial trouble. He requested in good faith that the fee for the next three months be increased by $1,000 and that this increase be paid to a local bank to help pay off a loan that the bank had made to the electrician. The store orally agreed to so modify the original contract. However, the store did not pay the bank and now the bank is suing the store for $3,000.

Who will prevail?

Answer 12

The store will prevail, because there was no consideration to support its promise to pay the bank the additional $1,000 per month. This question looks like it concerns third-party beneficiaries, but it actually presents a consideration issue. Generally, there must be consideration for modification of a contract, and a promise to perform an act that a party is already obliged to do is not sufficient consideration (the “preexisting legal duty” rule). Here, the electrician is promising to do exactly what he was obliged to do under his original contract with the store; thus, there is no consideration to support the promise to increase the fee.

While the modern view permits modification without consideration if it is fair and equitable in view of unanticipated circumstances, it is not applicable here. This exception contemplates an unanticipated circumstance arising in performance of the contract that makes performance more difficult or expensive.

Question 13

A manufacturing company was in the business of making copper tubing. A retail seller telephoned the manufacturing company’s sales department and placed an order for 10,000 linear feet of copper tubing at a sale price of $2 per foot. The tubing was to be used in the production of a custom order for one of the retail seller’s customers. The manufacturing company installed special equipment for the manufacture of the tubing to the retail seller’s specifications and had completed a portion of the order when the retail seller again telephoned the sales department. This time, however, the retail seller canceled its order, saying it no longer had need of the tubing because its customer had been declared bankrupt and refused to pay for the order.

If the manufacturing company sues for breach, will it win?

Answer 13

The manufacturing company will win because the contract is fully enforceable under the UCC.

The contract is for the sale of goods priced at $500 or more (10,000 linear feet at $2/foot), so ordinarily would require a writing. But a writing is not required where the contract is for “specially manufactured” goods not suitable for resale in the ordinary course of the seller’s business and the seller has made a substantial beginning of their manufacture or commitments for their procurement. Because the tubing is a custom order of unique specifications and the manufacturing company has begun manufacturing it, this exception to the SoF.

Manufacturing company is entitled to the full range of contract remedies to put it in the position it would have been in had the retail seller not breached (i.e., benefit of the bargain damages on the entire contract).

Question 14

In a single delivery contract, when a buyer rejects goods due to defects, the seller may cure within the time originally provided for performance in the contract:

Answer 14

In a single delivery contract, if the buyer has rejected goods because of defects, the seller may, within the time originally provided for performance, cure by giving reasonable notice of her intention to do so and making a new tender of conforming goods, which the buyer must then accept.

Question 15

Owner of a hardware store noticed that he was running low on bolts and their corresponding nuts. He called a screw manufacturer and ordered 1,000 half-inch carriage bolts and nuts to be delivered in two weeks. The screw manufacturer e-mailed the store owner a confirmation of the order that same day. Two weeks later, the bolts were delivered, but the nuts were missing. Store owner called the manufacturer and was told that they had been temporarily out of nuts when they had filled his order, and had reduced the amount he owed to reflect this, as they had done in the past with him in similar circumstances. The store owner protested and the manufacturer offered to send the nuts by overnight carrier so that he would get them the next day.

May the store owner cancel the contract?

Answer 15

The store owner may not cancel the contract, because the manufacturer has a reasonable amount of time within which to cure. The general rule in contracts for the sale of goods under the UCC is that the buyer is entitled to a perfect tender, which means that the goods and their delivery must conform exactly to the contract.

But the exception here applies because of their past dealings. Here, the manufacturer had reason to think the bolt-only delivery would be acceptable based on the parties’ past dealings. Thus, the manufacturer had a reasonable time to cure, and its offer to send the store owner the nuts by overnight carrier is a reasonable offer to cure, negating the store owner’s right to cancel the contract.

Question 16

T/F: A contract can be rescinded for unilateral mistake only when the other party knew of the mistake or when the mistake was so obvious that the other party should have known that the first party made a mistake.

Answer 16

True.

Question 17

Common law has a pre-existing duty rule and a requirement for additional consideration to support a modification. Does the UCC have the same?

Answer 17

No. UCC Article 2 abolished the pre-existing duty rule and the requirement of additional consideration to support a modification. To have an enforceable modification under the UCC, it just need to be of good faith and fair dealing.

Question 18

The parol evidence rule generally bars oral evidence contradicting a written agreement which was intended to be a final and exclusive embodiment of the parties’ agreement.

What is the exception?

Answer 18

Parol evidence is admissible to show a condition precedent (even if oral) to the existence of a contract.

Question 19

O contracted with C to rebuild O’s dock. They signed a written contract to begin work on May 1. On March 1, C notified O that he would not proceed with the work unless O paid more.

O did not respond and instead made contract with P to rebuild the dock on May 1. On May 1, C and P showed up to rebuild the dock but O dismissed C.

Is C likely to prevail in a contract action against O?

Answer 19

No. C’s later saying that he would not proceed with the work until paid more is an anticipatory breach. The breach gave O the right to terminate the contract and to engage with a new contractor to complete the work. O was not required to give C notice of this.

Question 20

GP entered into an employment agreement with a country club to run the shop and provide private lessons from April to September of each year for the next five years.

On March 10, the club’s manager received an email from GP stating: “Made the final cut in the winter open. May not be able to get to club by April 1. Could be delayed until April 5.” The club’s manager asked his attorney whether he should bring an immediate action against GP for breach of contract.

Why should the club not file suit?

Answer 20

This email does not constitute an anticipatory repudiation. Language may constitute an expression of doubt as to one’s ability to perform under the contract without being an outright refusal. This will not be an anticipatory repudiation, but a prospective inability to perform.

Question 21

S loaned long-time employee E $1,500 from S’s personal bank account. Because E was trustworthy, there was no writing evidence of the loan or a pay date.

N asked S for money for a start up. S asked E for the money and E promised to repay the loan on the following Monday, so S told E to pay the $1,500 directly to N. Immediately after, S told N to expect $1,500 from E. On Monday, E decided he would rather tender the money to S instead of N. S accepted the money.

If N never receives any money from S, will he succeed in an action against E for $1,500?

Answer 21

No. N will not succeed in an action against E because S’s acceptance of $1,500 from the employee revoked the S’s gift to N.

S validly assigned his right to receive the money to N. But this assignment was revocable (and was revoked by S’s acceptance of the money). A writing nor consideration are required for this type of assignment.

There is no indication that N detrimentally relied on this money. The general rule of revocability is that a gratuitous assignment may be terminated by the assignor taking performance directly from the obligor.

Question 22

A manufacturer of down coats and jackets entered into a written agreement with a distributor, whereby the distributor agreed to distribute the manufacturer’s products statewide for a one-year period to begin on June 1. Before the manufacturer signed the distribution contract with the distributor, the distributor told the manufacturer that their deal was exclusive, but nothing to that effect was in the written agreement. However, in the outerwear industry it has been a custom for many years for distributors to distribute only one brand of outerwear.

On September 1, the distributor began distributing coats and jackets manufactured by one of the manufacturer’s chief competitors. These coats and jackets were sewn with man-made fabrics, were as warm as the manufacturer’s jackets, and were less bulky. The competitor’s advertising campaign throughout the state emphasizes that “you don’t have to look fat to stay warm.” Seasonally adjusted sales figures showed that the manufacturer’s sales in the state dropped 6% after its competitor’s products were introduced.

The manufacturer of the down coats and jackets complained to the distributor, demanding that it stop distributing the man-made coats and jackets made by the manufacturer’s competitor. The distributor refused, and the manufacturer of the down coats and jackets brought suit against the distributor.

Which of the following facts would provide a basis for the manufacturer’s best case against the distributor?

A - The competitor’s advertising campaign throughout the state alluding to the unattractive bulkiness of the manufacturer’s coats and jackets.

B - The 6% drop in seasonally adjusted sales figures in the state after the competitor’s products were introduced.

C - The distributor’s oral statement to the manufacturer about their deal being exclusive.

D - The long-standing custom in the outerwear industry for distributors to distribute only one brand of outerwear.

Answer 22

Of all the alternatives listed, (D) is the only one that presents any real basis for supporting the manufacturer’s case. One of the general rules of contract construction, including contracts for goods under the UCC, is that courts will look to see what custom and usage are in the particular business and in the particular locale where the contract is either made or to be performed. The manufacturer could claim that when he and the distributor entered into the distribution contract, both parties implicitly understood that the custom of distributing only one brand of outerwear would be followed in their transaction. Under such circumstances, the manufacturer may be able to successfully assert that the distributor’s distribution of the competitor’s outerwear constitutes a breach of contract. The fact that the competitor’s advertising campaign at least impliedly denigrates the appearance of the manufacturer’s outerwear (as in (A)), or that the manufacturer’s sales have dropped since the introduction of the competitor’s products (as in (B)), establishes no cause of action against the distributor. Absent some provision in the contract, or some reference to custom and usage as mentioned in (D), there is no basis for holding that the distributor was prohibited from distributing other companies’ products, or that the distributor can be held liable for a decline in the manufacturer’s sales figures due to sales or advertisements made by a company whose products are being distributed by the distributor. (C) is incorrect because the written agreement between the distributor and the manufacturer would probably be deemed to be a final expression of the bargain, so that evidence of the distributor’s prior expression would be inadmissible to vary or supplement the writing under the parol evidence rule. Under UCC section 2-202, a party cannot offer consistent additional terms if the writing was intended as a complete statement of the terms of the agreement. (In contrast, evidence of custom in the trade can be offered regardless of the completeness of the written agreement.) Also, the distributor’s statement about their deal being exclusive is not specific enough on its face to establish whether he meant that the distributor would distribute only the manufacturer’s products, or that the manufacturer would have its products distributed in the state only by the distributor, or perhaps some other meaning. The statement, even if admissible, is not definite enough to form a basis for a cause of action against the distributor.

Question 23

An insurer offered a plan to cover an insured’s catastrophic illnesses for the remainder of the insured’s life in exchange for a large one-time payment at the inception of coverage. Because the program was experimental, the insurer would accept only a fixed number of applications during the enrollment period. A recent retiree in good health was one of the applicants accepted, and he enrolled in the program. He paid the one-time premium of $30,000 a few days before coverage began. The day after his coverage started, he was struck by a bus and killed. The executor of the retiree’s estate reviewed the policy and immediately notified the bank to stop payment on it. The insurer then filed suit against the retiree’s estate.

Will the court compel the estate to pay the premium to the insurer?

A - Yes, because the insurer necessarily declined to take another applicant during the enrollment period because of the retiree’s promise to buy the policy.

B - Yes, because the risk of the timing of the retiree’s death was assumed by both parties and built into the cost of the contract.

C - No, because the purpose of the contract between the retiree and the insurer had been frustrated.

D - No, because it is unconscionable for the insurer to have charged the retiree so much for so little value received.

Answer 23

In entering into the contract, the possibility that the retiree would die shortly after paying the premium and therefore receive virtually nothing in return should have been apparent to both parties. Actually, both parties took risks in this regard, as the retiree could have incurred medical expenses for a catastrophic illness during his lifetime that would have required the insurer to make payments far exceeding the one-time $30,000 premium. The retiree and the insurer were equally aware of these various possibilities, yet they freely entered into an agreement with this knowledge and on terms that were apparently acceptable to each of them. Despite the apparent unfairness of the result, a court generally will not interfere with the parties’ right to make their own deal. Thus, the insurer is entitled to the premium. (B)

(A) is incorrect because the insurer is entitled to the payment of the premium regardless of whether it declined to take another applicant. As detailed above, the possibility of the retiree’s death occurring in the time frame that it did was part of the risk voluntarily undertaken by the parties, and, as such, will not afford a basis for preventing the insurer from recovering the premium payment. The payment of $30,000 in return for the insurer’s promise of catastrophic insurance coverage was part of a bargained-for exchange.

Question 24

A dairy farm operated a small processing plant that supplied premium ice cream to nearby specialty shops and ice cream parlors. It entered into a written agreement with a local ice cream parlor to sell “all output” of its Extra Rich ice cream to the ice cream parlor, and the ice cream parlor agreed to sell exclusively the dairy farm’s Extra Rich frozen desserts. The agreement stated that the ice cream parlor would pay $25 for each five-gallon container of Extra Rich ice cream that it ordered from the dairy farm. Several months after the parties entered into this contract, demand for high-fat ice creams dropped sharply among the health-conscious consumers who had formerly patronized the ice cream parlor, and the proprietor had to throw out some of its product because the reduced demand meant that opened containers were not used up before the taste of the ice cream became affected. The ice cream parlor wanted to stop selling the dairy farm’s Extra Rich ice cream and instead sell a frozen yogurt product produced by another dairy.

Can the dairy farm enforce its agreement against the ice cream parlor?

A - Yes, because changing demand is one of the standard risks of business that both parties assumed.

B - Yes, because the court will imply a promise on the part of the ice cream parlor to use its best efforts to sell the dairy farm’s Extra Rich ice cream.

C - No, because there was no consideration on the part of the ice cream parlor to support an enforceable contract.

D - No, because the total price and total quantity terms were never established.

Answer 24

The ice cream parlor has no grounds for avoiding its obligations under the contract with the dairy farm. In effect, the ice cream parlor is advancing the position that its duty to perform under the contract is discharged by impracticability. In contracts for the sale of goods under the UCC, a party’s duty to perform may be discharged where performance would be impracticable. Impracticability exists where a party encounters extreme and unreasonable difficulty and/or expense, and such difficulty was not anticipated. Duties will not be discharged where performance is merely more difficult or expensive than anticipated. The facts giving rise to impracticability must be such that their nonoccurrence was a basic assumption on which the contract was made. Where, as here, parties enter into a contract for the sale of goods to be supplied to the public through a retail outlet, both parties must anticipate the possibility that there will be a change in market conditions, resulting in either an increased or decreased demand for the product. Thus, the ice cream parlor does not have the right to no longer buy any of the dairy farm’s ice cream.

Note that under the UCC, a shutdown by a requirements buyer for lack of orders may be permissible if the buyer is acting in good faith, but this right would arise only if there were no longer a market for frozen desserts entirely, and that is not the case here. Here, the ice cream parlor simply wants to curtail its losses by selling a more popular type of frozen dessert, which is forbidden by the exclusivity provision. Thus, the ice cream parlor continues to be bound by its duties under the agreement with the dairy farm.

Question 25

A jeweler sent a fax to a gold dealer offering to sell the dealer 100 ounces of gold at $900 per ounce. The dealer immediately responded via fax, “What are your terms of shipment?” The jeweler faxed back, “F.O.B. my store.” The dealer faxed back, “I accept.”

Who must pay the freight charge from the shop to the dealer?

A - The jeweler, because of the F.O.B. term.

B - The jeweler, because he is a merchant seller.

C - The gold dealer, because of the F.O.B. term.

D - The gold dealer, because both parties are merchants.

Answer 25

(C) The gold dealer must pay the freight because that is what the offer stated, and he accepted the offer. The term “F.O.B.” is a delivery term under the UCC, which governs the contract here because it is a contract for the sale of goods. That term means “free on board,” and it obligates the seller to get the goods to the location indicated after the term. Here, the term indicates that the goods are “F.O.B. [jeweler’s] shop,” so the jeweler is not obligated to pay for costs of shipment beyond his shop.

Question 26

The owner of an apartment building contracted with a painter to paint the porches of the apartments for $5,000. The contract was specifically made subject to the owner’s good faith approval of the work. The painter finished painting the porches. The owner inspected the porches and believed in good faith that the painter had done a bad job. The painter demanded payment, but the owner told him that the paint job was poor and refused to pay. The painter pleaded that he was desperately in need of money. The owner told the painter that she would pay him $4,500, provided he repainted the porches. The painter reluctantly agreed, and the owner gave the painter a check in the amount of $4,500. The painter went to his bank, indorsed the check “under protest” and signed his name, then deposited the check in his account. He never returned to repaint the porches.

The painter sues the owner for $500, which he believes is still owed to him on his contract to paint the porches. Will he prevail?

A - Yes, because he indorsed the check “under protest.”

B - Yes, but only if he repaints the porches.

C - Yes, because he performed the contract by painting the porches the first time.

D - No, even if he repaints the porches.

Answer 26

The painter will be unable to recover the $500 because he did not satisfy the condition precedent to payment under the contract. A party does not have a duty to perform if a condition precedent to that performance has not been met. Here, the parties made the owner’s satisfaction with the painter’s paint job a condition precedent to the owner’s duty to pay the $5,000. Because the owner was not satisfied with the paint job, her duty to pay the painter never arose. The fact that the owner offered to give the painter $4,500 if he repainted the porches has no effect on this analysis, because the offer constituted a new contract, the owner having been excused from the old one.

(B) is wrong because the old contract, which provided for payment of $5,000, is considered to be at an end. Under the terms of the new contract, the painter is entitled to only $4,500, provided he repaints the porches.

(C) is wrong because the condition precedent to the payment of $5,000, the owner’s satisfaction, was not met. The courts have held such conditions to be valid-not illusory promises-because of the promisor’s duty to exercise good faith in assessing satisfaction. Here, the facts state that the owner believed in good faith that the painter had done a bad job; thus, the painter is not entitled to payment under the original contract. Note that since he has not performed under the new contract, he is in breach and not entitled to the $4,500 already paid.

Question 27

A hardware store ordered 200 cans of wood stain in various shades. The written contract between the store and manufacturer provided that 100 cans of stain would be delivered on April 30, and the remaining 100 cans would be delivered on June 30. Payment would be due at the time of each delivery. The first shipment arrived on April 30. Sales of the stain were brisk, but 25 customers almost immediately returned their stain, complaining that it was not the color indicated on the can. The store owner called the manufacturer and informed it of the problem. The manufacturer truthfully told the owner that they had had a small problem with their labeling machine and a few cans in the store owner’s lot must have been mislabeled before they caught the problem. The manufacturer offered to replace all 100 cans from the original order. The store owner refused the offer and told the manufacturer not to deliver the second lot, because he could no longer trust the manufacturer. The owner was very sensitive to the hardware store’s good reputation, which he felt was harmed by this incident.

If the manufacturer brings a claim of breach regarding the second shipment which was due on June 30, how will the court likely rule?

A - The buyer had the right to cancel the second shipment, because of legitimate fears that it would contain the same defects as the first shipment.

B - The buyer had the right to cancel the second shipment, because the first delivery was defective.

C - The buyer did not have the right to cancel the second shipment, because the defects in the first shipment did not substantially impair the value of the entire contract.

D - The buyer did not have the right to cancel the second shipment, because he failed to make a demand upon the manufacturer for adequate assurances that the second shipment would be free of defects.

Answer 27

The buyer did not have the right to cancel the second shipment, because the defects in the first shipment did not substantially impair the value of the entire contract. This case involves an installment contract, i.e., the contract authorizes or requires deliveries in separate lots. Under Article 2, a buyer may declare a total breach of an installment contract only if the defect substantially impairs the value of the entire contract. The problem with the first shipment of the stain was discovered and corrected by the manufacturer. The manufacturer offered to cure the defect in the first shipment. In whole, the defect in the first shipment did not substantially impair the value of the entire contract.