Contracts

Question 1

Applicable Law

Answer 1

Article 2 of the Uniform Commercial Code (UCC) governs
all contracts for the sale of goods. Goods are defined as all
things that are movable at the time of identification to the
contract (other than money/currency), including crops and
the unborn young of animals. The Common Law governs all other contracts (i.e. service or construction contracts).

Question 2

Predominant Purpose / Mixed Contracts

Answer 2

For mixed contracts, the predominant purpose of the
contract determines which law governs. If the predominant
purpose is the sale of goods, the UCC will apply. If the
predominant purpose of the contract is for services, the
common law will apply. In some states, when a contract
divides payment between services and goods, the UCC is
applied to the goods section and the common law is applied
to the services section

Question 3

Requirements to Form a Valid Contract

Answer 3

A valid contract is formed when there is: (1) mutual assent
(an offer and acceptance of that offer by the other party); (2)
adequate consideration or a substitute; AND (3) no
defenses to formation that would invalidate an otherwise
valid contract entered into by the parties.

Question 4

Mutual Assent: Offer

Answer 4

An offer is (1) a manifestation of present intent to contract
by one party, (2) with definite and reasonably certain
terms, (3) that is communicated to an identified offeree.

Question 5

Mutual Assent: Acceptance

Answer 5

Acceptance is a manifestation of assent to the terms of the
offer, which indicates a commitment to be bound. Silence
generally DOES NOT manifest acceptance, but performance
may be adequate.

For bilateral contracts, the start of
performance manifests acceptance.

For unilateral contracts, the start of performance only makes an offer
irrevocable, and the offer is accepted only when
performance is complete.

Question 6

Termination / Revocation of Offer

Answer 6

Offers can be terminated before acceptance by: (a)
revocation by the offeror; (b) rejection or counter-offer by
the offeree; (c) lapse of time – the time for acceptance
expires after the time limit stated or a reasonable time (if no
time limit was stated); (d) death or incapacity of either
party; OR (e) supervening illegality – when the proposed
contract becomes illegal after the offer is made.

Most offers may be revoked at any time before acceptance
through unambiguous words or conduct by the offeror to the
offeree indicating an unwillingness or inability to contract.
A revocation of an offer is effective when received. An offer
can also be terminated when communicated indirectly –
when (1) the offeror takes definite action inconsistent with an
intention to enter into the proposed contract; AND (2) the
offeree acquires reliable information to that effect.

Question 7

Irrevocable Offers

Answer 7

Some offers are irrevocable including: (1) Option
contracts (when consideration is given for a promise to keep
an offer open); (2) a Merchant’s firm offer; (3) Offers that
were relied on to the offeree’s detriment; AND (4) the start of
performance on a unilateral contract, which makes the
offer irrevocable for a reasonable time to complete
performance (mere preparation is insufficient).

Question 8

Promissory Estoppel (Also a Consideration Substitute)

Answer 8

Occurs when (i) a party reasonably and substantially relied to their
detriment on the promise of the other party, (ii) the promisor
should have reasonably expected a change in position in
reliance of the promise, and (iii) enforcement of the promise
is necessary to avoid injustice;

Question 9

Common Law Mirror Image Rule

Answer 9

The common law mirror image rule holds that an
acceptance must exactly mirror the offer. Acceptance with
any additional terms or variations constitutes a counteroffer,
which revokes the initial offer.

Question 10

UCC - Battle of the Forms

Answer 10

The UCC states that acceptance does not have to mirror the
offer and the acceptance may include different or
additional terms, without revocation of the offer and thus
constituting a valid contract. However, the offeree’s
different or additional terms are deemed included in the
contract ONLY IF: (1) both parties are merchants; (2) the
term is not a material change; (3) the offer does not expressly
limit acceptance to the exact terms of the offer; AND (4) no
objection was made within a reasonable time. A material
change is any change that is likely to cause hardship or
surprise to the offeror (i.e. a disclaimer of warranties, an
arbitration clause, payment of shipping/handling charges).

Question 11

Output and Requirement Contracts

Answer 11

Output or requirement contracts are those in which the
quantity is measured by the output of the seller or the
requirements of the buyer.

An output contract requires a seller to sell all of the output of the particular goods to the buyer, and a requirement contract requires the buyer to purchase all of the particular goods that the buyer requires from the seller.

Question 12

Consideration: Bargained for Exchange

Answer 12

Contracts are NOT enforceable without consideration by
BOTH parties. Consideration is a bargained for exchange
of a promise for a return promise or performance that
benefits the promisor or causes detriment to the promisee.
For example, the money paid for goods is consideration for
the seller, and the goods sold is consideration for the buyer.
Generally, past or moral consideration is NOT sufficient
to support a contract.

Question 13

Unconscionability

Answer 13

Unconscionability occurs when a contract or term shocks
the conscience of the court. Unconscionability usually
occurs if the contract/term is BOTH substantively and
procedurally unconscionable.

If a contract or term is found unconscionable a court may:
(a) refuse to enforce the contract; (b) enforce the contract
without the unconscionable term; OR (c) limit the application
of any unconscionable term.

Question 14

Procedural unconscionability

Answer 14

Occurs when one party to the contract (usually the party who wrote the contract) has a superior bargaining position over the other party
and uses that power to their advantage.

Question 15

Substantive unconscionability

Answer 15

Substantive unconscionability occurs when the contract contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power.

Question 16

Mutual Mistake

Answer 16

A contract is voidable (it may be rescinded or reformed) when there is a mutual mistake. Mutual mistake occurs when: (1) both parties are mistaken as to a basic assumption on which the contract is made; (2) the mistake is material to the contract; AND (3) the person asserting the mistake did not bear the risk of the mistake (by agreement,
negligence, or by a party treating their limited knowledge as
sufficient).

Question 17

Unilateral Mistake

Answer 17

A unilateral mistake is (1) a mistake made by one party, (2) that is unknown to the other party, (3) concerning a basic assumption, (4) that has a material effect. A unilateral mistake is generally NOT a valid defense to formation of a contract. However, if one party knew or had reason to believe that the other party was mistaken OR the mistake would make enforcement of the contract unconscionable, the contract is voidable by the mistaken party. When the mistake
involves price or value, the equitable remedy of rescission or
reformation will NOT be allowed because price/value is NOT considered material.

Question 18

Statute of Frauds - Type of Contracts Requiring a Signed Writing

Answer 18

Under the Statute of Frauds, the following contracts are not valid UNLESS they are in a writing signed by the party to be charged:
(1) Marriage contracts – a promise in consideration of marriage;

(2) Suretyships (where a guarantor promises to take on the debt of another if that person fails to pay) unless the main purpose exception applies (the surety’s main purpose in making the promise
was to benefit himself);

(3) Contracts that Cannot be fully performed in 1 year from the date the contract is entered into (there must be no possible way the contract can be performed within 1 year);

(4) Contracts for the Sale of real property or creating an interest in real property (e.g. easements over 1 year, leases over 1 year, mortgages, fixtures);
(5) Promises to pay an estate’s debt from the personal funds of the executor/Administrator; AND

(6) Contracts for the Sale of goods for $500 or more (the writing must state the parties, quantity and nature of the goods, and be signed).

Question 19

Statute of Frauds - Satisfaction

Answer 19

In order to satisfy the Statute of Frauds, a writing MUST: (1) be signed by (or on behalf of) the party to be charged; (2) reasonably identify the subject matter of the contract; (3) indicate that a contract has been made by the parties; AND (4) state the essential terms with reasonable certainty. The statute of frauds DOES NOT require that an agreement be contained in one signed document; it may consist of several writings.

Question 20

Statute of Frauds - Exceptions to Writing Requirement

Answer 20

Under the Common Law, a contract that violates the statute of frauds may still be enforceable in the following situations: (1) Full Performance; (2) Partial Performance in Land Contracts; (3) Judicial Acknowledgement – the party admits to the agreement in pleadings or testimony; (4) Estoppel – reasonable and foreseeable detrimental reliance on a promise (only some jurisdictions allow the doctrine of estoppel to be used in order to circumvent the statute of frauds).

Under Article 2 of the UCC, four exceptions exist: (1) Merchant’s Confirmatory Memorandum; (2) Goods Accepted or Paid For – A
seller may enforce the contract price of any goods accepted
or paid for by the buyer, but NOT the whole contract price if
only a portion of the total quantity of goods to the contract
are accepted; (3) Custom Made Goods – A seller may
enforce the contract price for custom made goods, which are
goods in which the seller has made a substantial start AND
are not suitable for sale in the ordinary course of the seller’s
business; (4) Admission During Judicial Proceeding – A
sale of goods contract for $500 or more is enforceable
without a writing when the party to be charged admits that
there was a contract during a judicial proceeding (i.e. in a
deposition or courtroom testimony).

Question 21

Partial Performance (Common Law)

Answer 21

Partial performance is allowed in land sale contracts if a party has done at least two of the following: (i) made a payment for land; (ii) took possession of land; (iii) made valuable improvements to land);

Question 22

Merchant’s Confirmatory Memorandum

Answer 22

In a sale of goods contract between two merchants (two people dealing in goods of the kind), a writing that confirms an agreement is
sufficient if it is signed by the party enforcing it (not the party whom it is enforced against), as long as the party against whom it is enforced did not promptly object within 10-days after receipt;

Question 23

Modification (Common Law)

Answer 23

Under Common Law, contract modifications MUST be supported by consideration. When modifying an agreement, past performance or performance of a preexisting duty owed to a party is NOT treated as adequate consideration.

However, several exceptions exist: (1) an addition or change in the performance or promise; (2) unforeseen circumstances – a fair and equitable modification due to unanticipated changed circumstances and the contract is NOT yet fully performed by either party (usually the unanticipated circumstances must be severe or far beyond what was foreseen); OR (3) a third-party promise – when the duty was owed to a third-person, not the promisor.

Question 24

Modification (UCC)

Answer 24

Under the UCC, there is NO consideration requirement for contract modifications made in good faith. However, modifications must be in writing if: (a) they fall within the Statute of Frauds; OR (b) the original contract states that modifications must be made in writing. Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.

Question 25

Parol Evidence Rule

Answer 25

Under the Parol Evidence Rule, a binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. As such, a party CANNOT introduce evidence of a prior or contemporaneous agreement (either oral or written) that contradicts a later writing. However, there are four exceptions where a court will permit such evidence: (1) to correct a clerical error or typo; (2) to establish a defense against formation (that the contract wasn’t valid in the first instance); (3) to interpret vague or ambiguous terms, but courts will interpret words to represent their ordinary or plain meaning (the plain meaning rule); and (4) to supplement a partially integrated writing. The Parol Evidence Rule DOES NOT apply to subsequent agreements.

Question 26

Partially Integrated Writing

Answer 26

A partially integrated writing DOES NOT contain a complete statement of all the terms the parties agreed to. As such, proof of additional terms is allowed if the terms DO NOT contradict the writing. Under the UCC, ALL writings are presumed to be partial integrations, unless the writing is fully integrated.

Question 27

Fully Integrated Writing

Answer 27

A fully integrated writing is a complete and exclusive statement of the terms, and discharges prior agreements to the extent that they are within its scope. A merger clause is evidence that the writing is complete on its face (fully integrated) and cannot be supplemented with additional consistent terms.

Question 28

Free on Board / Risk of Loss

Answer 28

Free on board (FOB) is a shipping condition that passes the risk of loss to the buyer at the named location. The seller bears the risk and expense of getting the goods to the named location. The contract can be a shipment or destination contract, depending on the location named. Shipment K: FOB Seller's location. Risk of Loss passes to buyer when goods delivered to Carrier. Buyer's responsibility. Destination K: FOB Buyers location. Risk of Loss passes to buyer when goods are delivered to Buyer. Seller's responsibility.

Question 29

Condition Precedent

Answer 29

A condition precedent in a contract makes performance conditional upon the completion of the condition. Usually, a condition precedent is expressly stated in a contract. If a condition fails, no obligation of performance arises, and thus no breach has occurred. Exceptions: However, occurrence of a condition may be excused by the later action or inaction of the person who is protected by the condition. This occurs in 2 instances: (1) A Protected Party’s Failure to Cooperate or Make a Good Faith Effort – the protected party can lose protection of the condition if he does not make a good faith effort to satisfy the condition (this implied duty of good faith will be satisfied when reasonable steps to satisfy the condition are taken); and (2) Waiver – waiver occurs when a protected party voluntarily gives up the protection of the condition. The protected party can retract waiver for future conditions to the extent that the other party has not relied on the waiver.

Question 30

Frustration of Purpose

Answer 30

The Frustration of Purpose Doctrine discharges performance under a contract if the purpose of the contract no longer exists. Performance is excused if: (1) a party’s principal purpose is substantially frustrated without their fault (the contract is virtually worthless to the party); (2) by an unforeseeable supervening event outside of the parties’ control (the event’s non-occurrence was a basic assumption of the contract); AND (3) both parties knew the purpose at the time of formation.

Question 31

Impossibility

Answer 31

Performance is discharged when it is objectively impossible to perform a contract because of: (1) death or physical incapacity of the person necessary to effectuate the contract (if the person can easily be replaced, performance is NOT excused); (2) unanticipated destruction of the subject matter necessary to fulfill the contract; OR (3) a new law or regulation that was unanticipated makes performance extremely and unreasonably difficult or expensive. Under Common Law, if the risk of loss is on the buyer, then destruction of the subject matter does NOT excuse performance. Under the UCC, performance is excused ONLY IF: the destroyed goods were special AND were destroyed before the risk of loss shifted to the buyer.

Question 32

Impracticability

Answer 32

Performance is discharged as impractical when (1) an event occurs after contract formation, (2) that is unanticipated by both parties at contract formation (the event’s nonoccurrence was a basic assumption of the contract), (3) making performance extremely and unreasonably difficult or expensive. This doctrine is interpreted narrowly by the courts. Generally, an increased cost to perform a contractual obligation is NOT sufficient to render the contract excused due to impracticability.

Question 33

Waiver

Answer 33

A waiver is a voluntary and intentional relinquishment of a contract right by words or conduct. Performance is excused when it is waived. Conditions are waived when: (1) a party indicates through words or conduct that a condition does not need to be satisfied; AND (2) the other party detrimentally relies on that waiver.

Question 34

Minor vs. Material Breach

Answer 34

Under the Common Law, a material breach will excuse the non-breaching party’s performance. A minor breach, however, will NOT excuse performance, and the nonbreaching party must still perform (though he may bring a separate action for damages resulting from the breach). A material breach occurs when a party DOES NOT render substantial performance (the party did not perform major parts of the contract). To determine whether a breach is material, courts will consider: (1) the extent of the benefit deprived to the injured party (what was the extent of performance); (2) the adequacy of compensation for loss to the non-breaching party; (3) the extent the breaching party will suffer forfeiture (hardship); (4) the likelihood that the breaching party will cure; and (5) absence of good faith or fair dealing by the breaching party (was the breach intentional, negligent, or innocent).

Question 35

Time is of the essence clause

Answer 35

K performance is required within a reasonable time as specified in the K. However, if the K contains a "time is of the essence" clause, failure to perform by that date results in a material breach of K.

Question 36

UCC Perfect Tender Rule

Answer 36

Under Article 2 of the UCC, a seller must deliver conforming goods. The smallest non-conformity is a breach and the buyer may reject all or a portion of the goods. However, two exceptions to this rule exist under the UCC: (1) if the seller has the right to cure; and (2) in the Installment contract context. A rejection of non-conforming goods must be made within a reasonable time after their delivery or tender.

Question 37

UCC Perfect Tender Rule - Right to Cure

Answer 37

A seller has a right to cure in 2 situations: (a) If the time for performance has NOT yet expired, the seller can cure within the contract time period remaining; OR (b) The seller is allowed additional reasonable time to substitute tender if it had reasonable grounds that the goods would be accepted (i.e. when the same type of non-conforming goods were accepted by the buyer in the past).

Question 38

UCC Perfect Tender Rule - Installment K

Answer 38

Installment contracts may only be cancelled where an installment is so defective that it substantially impairs the value of the entire contract. Similarly, a buyer may reject an installment only if the nonconformity substantially impairs that installment and the time to cure has past.

Question 39

UCC Acceptance of Goods

Answer 39

Acceptance of goods occurs when the buyer: (a) after a reasonable opportunity to inspect the goods, signifies to the seller that the goods are conforming or that he will take/retain them despite the non-conformity; (b) fails to reject the goods after a reasonable opportunity to inspect them; OR (c) does any act inconsistent with the seller’s ownership of the goods. Acceptance of a part of any commercial unit is acceptance of that entire unit. The buyer is obligated to pay for the purchase once acceptance occurs (unless a revocation of acceptance is allowed), but may still sue for breach of contract if the buyer notifies the seller of the breach within a reasonable time.

Question 40

UCC - Acceptance and Revocation of Acceptance

Answer 40

After the acceptance of goods, a buyer may later revoke that acceptance only if: (1) the nonconformity substantially impairs the value of the goods; AND (2) either (a) the defect was difficult to discover (a latent defect), (b) acceptance was reasonably induced by the seller’s assurances, or (c) the buyer accepted the goods on the reasonable assumption the defect would be cured. Revocation of acceptance MUST occur within a reasonable time after the buyer discovers or should have discovered the nonconformity. The revocation is NOT effective until the buyer notifies the seller. In addition, the revocation of acceptance must occur before there is any substantial change in the goods, not caused by their own defects. If a buyer successfully revokes acceptance, he is entitled to return of the purchase price. A buyer who revokes acceptance has the same rights and duties with regard to the goods involved as if he had rejected them.

Question 41

Anticipatory Repudiation

Answer 41

Generally, a party must wait for the other party to breach before bringing an action to demand performance or for damages. However, a non-breaching party may seek damages before the time of performance is due if there is an anticipatory repudiation by the other party. An anticipatory repudiation occurs when a party unequivocally communicates that he is unable or unwilling to perform. A party that anticipatorily breaches a contract may retract its repudiation and restore the contract UNLESS the aggrieved party has: (a) cancelled; (b) materially changed his position; OR (c) indicated that he considers the repudiation final. When an anticipatory repudiation occurs, the non-breaching party may do any of the following: (a) treat the contract as repudiated and sue for damages; (b) treat the contract as discharged; (c) wait until performance is due and sue when performance does not occur; OR (d) urge the party to perform.

Question 42

Adequate Assurances

Answer 42

A party with reasonable grounds for being insecure about the other party’s performance may demand in writing adequate assurances from the other party that it will perform in accordance with the contract. If a party DOES NOT give adequate assurances within a reasonable time after it is asked to do so, the asking party may treat that as an anticipatory repudiation. In sales of goods contracts, the time given to respond cannot exceed 30 days.

Question 43

Implied Warranty of Merchantability

Answer 43

Under Article 2 of the UCC, the Implied Warranty of Merchantability is implied in all sales of goods contracts, and requires that all goods sold by a merchant (a person dealing in goods of the kind) MUST be fit for their ordinary purpose. Once a buyer discovers the breach of a warranty, he may sue for breach of contract. DISCLAIMER: While it is possible to disclaim the implied warranty of merchantability, a merchant must do so expressly with conspicuous language (oral or written disclaimers under the UCC are permitted).

Question 44

Implied Warranty of Fitness for a Particular Purpose (Low Priority)

Answer 44

Under the UCC, an implied warranty of fitness for a particular purpose is created when: (1) a seller knows or has reason to know of the buyer’s particular purpose for which the goods are required; AND (2) the buyer relies on the seller’s skill or judgment to select or furnish suitable goods. If the above elements are met, the goods MUST be fit for the particular purpose of the buyer, otherwise there is a breach of warranty. An implied warranty of fitness may be disclaimed or excluded: (a) by a conspicuous writing; (b) by conspicuous “as is” type language; (c) through waiver if certain fitness defects can be reasonably discovered upon inspection by the buyer; OR (d) by course of dealing, performance, or usage of trade.

Question 45

Intended third-party beneficiary

Answer 45

An intended third-party beneficiary is not a party to the contract, but has rights under the contract because the contracting parties contemplated that their respective performances were intended to benefit an identified third-party.

Question 46

Incidental third-party beneficiary

Answer 46

An incidental beneficiary is a person that just happens to benefit from the contract, but has NO legal rights because the purpose of the contract was not intended to benefit them.

Question 47

Assignment

Answer 47

Rights and benefits under a contract may be transferred to a third-party if: (1) the assignor manifests his intent to transfer the rights; AND (2) the assignee assents to the assignment. Consideration is NOT required for an assignment, BUT if consideration is provided, the assignment becomes irrevocable. Gratuitous assignments may subsequently be revoked (unless an exception applies). Limitations: An assignment is valid UNLESS: (a) it materially alters what is expected under the contract; (b) it is prohibited by law or public policy; OR (c) it is precluded by contract. Materially altering what is expected under the contract occurs when the assignment: (a) materially changes the duty of the obligor; (b) materially increases the burden or risk imposed on the obligor; (c) materially impairs the obligor’s chance of obtaining return performance; OR (d) materially reduces the value of the return performance.

Question 48

Novation

Answer 48

A novation occurs when: (1) all parties to a contract, (2) agree to discharge an original party to the contract; and (3) substitute a third-party in the original party's place.