R5 M3 - Contracts: Part III (Notes)

Question 1

What makes a contract legally enforceable?

Answer 1

You need to meet all the three requirement for a contract to be enforceable.

• An offer must be made and accepted
• Something must be exchange ( money for service, exchange of goods)
• No defense ( meaning that nobody was forced , influence , put under duress to sign a contract)

Question 2

What is an express contract vs implied in fact contract?

Answer 2

An express contract is a contract that can be done orally or in writing.

Implied in fact contract is a contract formed by conduct (nobody says anything and nothing is written).

For example: You visit the doctor it is assumed that you are sick and he may prescribe you medicine.

Question 3

Modification of a sales contract under the uniform commercial code?

Answer 3

If a sale contract has been modified, it is the contract as it has been modified that determines whether it has to be written or not.

Example:

I signed a contract for $540 and I asked that the price be reduced in good faith to $480. The modification is done without a writing because the contract is below $ 500 or more.

Three Statute of Frauds that require a written contract would be:

-Section R5 M2: Contracts: Part II

1. Contracts for the sales of goods for $500.00 or more
2. Contracts which by their terms can’t be performed in a year.
3. Contracts by an executor or representative to pay estate debt out of personal funds.

Question 4

Grill deals in the repair and sale of new and used clocks. West brought a clock to Grill to be repaired. One of Grill’s clerks mistakenly sold West’s clock to Hone, another customer. Under the Sales Article of the UCC, will West win a suit against Hone for the return of the clock?

A.	Yes, because Grill could not convey good title to the clock.

B.	No, because Grill is a merchant to whom goods had been entrusted.

C.	No, because the clerk was not aware that the clock belonged to West.

D.	Yes, because the clerk was negligent in selling the clock.

Answer 4

Choice “B” is correct. Generally, a person cannot pass on better title than the person has. However, if the owner of goods entrusts them to a merchant who deals in goods of that kind, and the merchant sells them in the ordinary course of the merchant’s business, then the merchant has the power to transfer title to the goods. West was the owner of the clock, and he entrusted the clock to Grill, who deals in new and used clocks. Grill sold the clock to Hone in the ordinary course of business. Thus, Grill had the power to pass on good title to the clock and did so when one of Grill’s clerks mistakenly sold the clock to Hone. Because Hone has title to the clock, West cannot recover it from Hone. However, West does have an action for damages against Grill.

Choice “A” is incorrect. As discussed above, a seller can convey better title than he has under the entrustment doctrine, which applies under the facts here.

Choice “C” is incorrect. Although “C” gives the correct result, it is irrelevant whether or not the clerk was aware that the clock belonged to West.

Choice “D” is incorrect. It is irrelevant whether the clerk was negligent.

Question 5

Method of contract formation:

Answer 5

Unilateral Contract

Question 6

Please list item that are not considered Sales of Article of the Uniform commercial code?

Answer 6

• Person service and real estate
• Intangible personal property (investment, sales of stock, bond, patent, copyrights
  -Contract to sale land or things attached to land

Question 7

The Sale Article of the UCC (Article 2) applies only to sales of good (regardless of price).

UCC Sales Article applies to sale of goods that is moveable.
- Most tangible personal property

• The followings that are not sale article, but a common law contracts.
  -Personal Service & Real Estate
  - Contract for intangible personal property like investments, stock, bonds, patents.

Answer 7

Merchants (Considered an expert) –> Higher Standard
- Special knowledge regarding the goods being sold

Obligation of Good faith
- The UCC _ imposes an obligation of good faith_ on both parties to sale contract

Merchant seller must abide to reasonable standard of fair dealing in the trade.

Question 8

What is the Firm’s offer rule?

Answer 8

The firm’s offer rule also known as the merchant firm’s offer is the seller has to be a merchant for the sale of goods and the agreement must be done in writing, signed by the merchant, and also the offer being given or promoted in TV, newspaper etc must give time to customer.

Please note that sale of land is not a sale of goods

Question 9

Agreement ( Mutual assent) - Offer and Acceptance
- Offer merchant’s firm offer

In common law, pay consideration is needed to make an offer irrevocable.
- Consideration is used when you want to keep an offer open you have to buy time.

Under the UCC Merchant’s firm offer rule you don’t need to pay consideration to keep an offer open.

Answer 9

If a merchant promise to keep an offer open he has to abide by it. If no time is specified it can be no longer than three months.
- It only applies for the sale of goods, the seller is a merchant

Question 10

Acceptance under UCC is similar to common law

• Under the sales article if an offer does not specify the means of acceptance maybe accepted by any mean reasonable under the circumstances.

Ex: You can call and accept the offer, give money, send an email, text message etc.

But if the offeror does specify the method of acceptance you better abide by it if not your offer is considered a counteroffer.

Answer 10

Question 11

What is the UCC Auction Reserve vs UCC without reserve?

Answer 11

UCC with reserve is when the seller only accepts a bid that is acceptable to him.

UCC without reserve is when the seller accepts the highest bidder bid.

Question 12

Under the sales article (merchants)
- Bilateral contract - verbal promise to ship
- Prompt shipment (complete performance) –> You ship the product – Unilateral contract

If the merchant ship the goods in unilateral contract (Complete performance) but shipped the wrong stuff (nonconforming goods) it is considered an Acceptance & Breach of Contract.

If you as a merchant sends a _letter explaining that you sent 2 pink shoes instead of red in your shipment. It is considered a counteroffer.

This only applies when it is a unilateral contract. You never promise but accepted by action shipment to send the 2 red shoes and you send pink shoes (counteroffer).

In a bilateral contract both parties agreed, and you send 2 pink shoes instead of red ones than it is a breach of contract not a counteroffer.

Answer 12

UCC Auctions

With reserve –> the seller does not have to sell unless an adequate bid is made.

Without reserve –> Good are sold to the highest bidder.

UCC Modifications of contracts
–> Under UCC a modification to contract is allowed without consideration (you don’t have to give something)

—> Common law a modification to contract is not allowed without consideration (sth must be given).

Question 13

If defrauded, you can sue for damages and seek rescission = cancel contract.

Common law you either sue for damages or seek rescission.

Common law statute of limitations is 4-6 years

UCC Statue of limitations is 4 years.

UCC Statue of Frauds
- Contracts for the sale of goods for $500 or more must be evidence by a writing signed by party being sued.

Question 14

What are four exceptions to the statue of Frauds?

Answer 14

Four exceptions to this SWAPS:

Contracts for _S_pecial manufactured goods where a merchant send another merchant a _w_ritten confirmation memo contract that is sufficient to bind the seller, it will also bind the recipient if she does not object within 10 days

A –> Contract that parties have admitted in court

P–> Contract has been performed

Question 15

Under the UCC, quantity is generally the only essential term that cannot be omitted.

• Exceptions:
  A requirement contract, the seller agrees to supply all the buyers needs for a period of time.

Output contract:

• Buyer agrees to buy everything the seller produce over a period of time.

Question 16

What is defense statue of Frauds for common law and UCC?

Answer 16

Common law –> Impossible
UCC —> Impracticable

Under the sale article a contract will be _discharge for mere impracticability.

This applies to UCC (Article 2) Commerical impracticable is when a contract cannot be done due to unforeseen circumstances (events). It is very burdensome to do

This applies to common law (contract law) Impossibility of performance is when both parties cannot do the job. No one can perform.

Failure of agreed upon method of transportation is not a defense. If you can’t use UPS use FedEx.

Question 17

Delivery & Risk of Loss & Title

What is the seller’s basic duty?

Answer 17

Hold conforming good for the buyer and give the buyer reasonable notice (to enable the buyer) to take delivery

If goods are destroyed or damaged after risk of loss has passed to the buyer, the buyer is not discharged from the contract; rather the buyer must pay.

Question 18

Noncarrier cases vs Carrier cases

Question 19

Noncarrier –> seller is not a merchant

If the seller is not a merchant, risk of loss passes to the buyer upon the seller’s tender of delivery

Answer 19

Noncarrier —> is a merchant

If the seller is a merchant risk of loss passes only upon actual delivery to the buyer (when the buyer take possession.)

Question 20

Carrier case can be a shipment contract (F.O.B SHIP) or a destination contract –> (F.O.B Buyer)

With shipment contract risk of loss passes to the buyer when the goods are delivered to the carrier (placed inside the truck).

With destination contracts, risk of loss passes to the buyer when the goods reached destination and seller tender delivery.

Answer 20

Question 21

Question 22

Carrier cases –> Effect of Breach on risk of loss

• If the seller sends nonconforming good (goods that do not meet the contract description), the risk of loss remains on the seller, regardless of shipping terms, unless the buyer accepts the defects.

Answer 22

Question 23

Delivery, Risk of loss & Title Part II

What are the types of sales that are nonfinal?

Answer 23

Question 24

Sale on Approval

Answer 24

Sale or Return Contract

Question 25

Answer 25

Question 26

4 Types of warranties

Answer 26

Question 27

Express warranties (can’t be disclaimed) is that goods will conform to:
Any statement of fact by the seller, description of the goods made by the seller

Answer 27

Question 28

Implied Warranty of Title

Answer 28

Question 29

Implied warranty of merchantability

Answer 29

Easy to disclaim
- It can be disclaimed orally or in writing (in big print)

can be disclaimed by using the word “merchantability” , “as is” or with all faults”

Question 30

Implied warranty of fitness for a particular purpose

Answer 30

Question 31

Anticipatory Repudiation –> sue or wait

• When they buyer or seller let you know in advance, they won’t be able to perform their contract.

What can the innocent party do?
- Can sue
- wait until performance and sue
- Cancel Contract
- Demand assurance of performance will you do to your contract.

Answer 31

If they buyer breaches what can the seller do?

Seller is entitled to the full contract price if buyer breaches.

Question 32

Liquidated damages

Question 33

Seller breach the contract
- The buyer has the right to reject for any nonconformity
- Under the UCC, the seller must make perfect tender” a delivery free from any defects
- Buyer can cancel the contract and sue

Answer 33

Buyer’s remedies - For accepted Nonconforming Goods

Question 34

Question 35

Entrusting
- Stolen good can be recovered from a third party
- This is difference if you entrust your goods to a merchant who knowingly or unknowingly sold it to an innocent 3rd party.
- You can sue the merchant, but you can’t get your stuff back.

Question 36

Question
Wally, a CPA and a neighbor of Rita’s, offered to sell Rita his chain saw for $400. Rita stated that she knew nothing about chain saws, but would buy the saw if it is capable of cutting down the trees in her backyard, which had an average diameter of three feet. Wally assured Rita that the saw “would do the job.” Relying on Wally’s assurance, Rita purchased the saw. Wally has created a warranty that:

A.	The saw is of an average quality.
B.	The saw is capable of cutting trees in Rita's backyard.
C.	Is unenforceable because it is not in writing.
D.	The saw is fit for the ordinary purposes for which it is used.

Answer 36

Choice “B” is correct. Wally has created a warranty of fitness for a particular purpose. To create this implied warranty, the buyer must rely on the seller to select suitable goods and the seller must know of this reliance. With fitness for a particular purpose, the goods must be fit for the buyer’s specified purpose. Rita relied on Wally to select a saw capable of cutting down trees with a three foot diameter. Wally knew Rita was relying on him because she told him she knew nothing about chain saws and asked if the saw was capable off cutting trees in her backyard. Thus, Wally has created a warranty that the saw is capable of cutting down trees in Rita’s backyard.

Choice “A” is incorrect because it is the implied warranty of merchantability that warrants the goods are of an average fair quality, not fitness for a particular purpose. Wally did not make such a warranty because he is not a merchant who deals in chain saws.

Choice “C” is incorrect because no implied warranty requires a writing. Implied warranties require no written or oral words. They are implied into the contract.

Choice “D” is incorrect because fitness for a particular purpose warrants the goods are fit for the specific purpose of the buyer, not the ordinary purposes for which it is used. Again it is the warranty of merchantability that warrants goods are fit for the ordinary purposes for which they are used, not fitness, and Wally is not a merchant.

Question 37

Smith purchased a table from Rex Furniture Store. Rex tendered delivery of the table after receiving payment in full from Smith. Smith informed Rex that Smith would be unable to take possession of the table until later that day. Thieves stole the table before Smith returned. The risk of loss:

A.	Passed to Smith at Rex's tender of delivery.
B.	Passed to Smith at the time the contract was formed and payment was made.
C.	Remained with Rex because Smith made payment in full.
D.	Remained with Rex because Smith had not yet taken possession of the table.

Answer 37

Choice “D” is correct. In sales without a common carrier, risk of loss will pass from a merchant seller to the buyer only when the buyer gets possession of the goods.

Choices “A” and “B” are incorrect because the seller has the risk of loss, not Smith because the seller, here, is a merchant and the buyer did not take possession.

Choice “C” is incorrect because Rex has the risk of loss due to Smith not having possession. The fact that Smith made payment in full is irrelevant.

Question 38

What happens if Paul agreed to send $10,000 to Bill for pots, F.O.B Bill upon finding out that Paul’s business is insolvent what action needs to be made on Bill’s side?

Answer 38

Bill has the right to ask the carrier to return the packaged if it owns its way and ask for cash instead of credit payment.

Paul is entitled to the pots if he pays cash.