Contracts And Sales

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Unilateral Contract

Back 1

Results from an offer that expressly requires performance as the only possible method of acceptance.

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Bilateral Contract

Back 2

Results from all other offers.

Bilateral contract unless (1) reward, prize, contest, or (2) offer expressly requires performance for acceptance.

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Definition of Contract

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A contract is an agreement that is legally enforceable.

Look for agreement, determine if legally enforceable.

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General test for an offer

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One person's manifestation of a willingness to contract.

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Missing price term in a sales contract:

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1- for sale of real estate (common law), price and land description required, so missing price means no offer.

2 - for sale of goods (UCC Article 2), no price requirement, look to intent of the parties.

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Requirement or Output Contracts

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A contract for the sale of goods can state the quantity of goods to be delivered under the contract in terms of the buyer's requirements or seller's output. These are valid, not vague or ambiguous.

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General Rule and Exceptions for Advertisement or Price Quote

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General: Advertisement or price quotation not an offer.

Exceptions: (i) ad can be unilateral offer if it is in the nature of a reward.

(ii) ad can be an offer if it specifies quantity and expressly indicates who can accept.

(iii) price quote can be offer if sent in response to an inquiry.

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Methods of offer termination - Lapse of time

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Offer must be accepted in the time stated, if applicable, or within a reasonable time if no time is stated.

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Methods of offer termination - Death of a party prior to acceptance.

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Death or incapacity of either party after the offer, but before acceptance, terminates offer.

Exception: irrevocable offers.

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Methods of offer termination - Words or conduct of OFFEROR

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(a) Later unambiguous statement by offeror to offeree of unwillingness or inability to contract, or (b) later unambiguous conduct by offeror indicating an unwillingness or inability to contract that offeree is aware of.

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Four ways an offer can be irrevocable

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1. Option - offer can't be revoked if (i) promised not to revoke (or promised to keep open) and (ii) payment or consideration.

2. UCC "Firm Offer Rule" - Offer can't be revoked for up to 3 months if (i) offer to buy or sell goods, (ii) signed, written promise to keep the offer open, and (iii) party is merchant.

3. Reliance - Offer can't be revoked if there has been (i) reliance that is (ii) reasonably foreseeable and (3) detrimental.

4. Unilateral Contract - Start of performance pursuant to an offer to enter into a unilateral contract makes that offer irrevocable for a reasonable time to complete performance. Mere preparation not enough to make irrevocable.

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Methods of offer termination - Words or conduct of the OFFEREE

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1. Counteroffer - generally terminates the offer and creates new offer. Does not distinguish option. *be sure to distinguish bargaining.

2. Conditional Acceptance - terminates the offer. Under common law it becomes counteroffer, under UCC, it's a rejection.

3. Additional terms to a common law contract (Mirror Image Rule) - Under common law, response that adds new terms is treated like counteroffer.

*4. Additional/different terms not rejection under Article 2. Looking for "seasonable expression of acceptance." Additional term only part of contract if both are merchants, and even then term can't be material or objected to.

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Methods of Acceptance - Offeree starts performance

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General rule: Start of performance is acceptance. Starting to perform is treated as an implied promise to perform.

Exception: Start of performance is not acceptance of unilateral contract offers. Completion of performance is required.

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Effects of Distance and Delays in Communications

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1. All communications other than acceptance are effective only when received.

2. Acceptance is generally effective when mailed.

3. If a rejection is mailed before the acceptance is mailed, then neither is effective until received.

4. You cannot use the mailbox rule to meet an option deadline.

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Seller sends "wrong" goods

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General rule: Acceptance and breach.

Accommodation exception: counteroffer and no breach.

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Who can accept?

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Generally, an offer can be accepted only by (1) a person who knows about the offer at the time she accepts (2) who is the person to whom it was made. Offers cannot be assigned; options can be assigned unless the option otherwise provides.

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Legal Reasons for Not Enforcing Agreement

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1. lack of consideration or a consideration substitute for the promise at issue.

2. lack of capacity of the person who made that promise.

3. Statute of frauds.

4. existing laws that prohibit performance of the agreement.

5. public policy.

6. misrepresentations.

7. nondisclosure.

8. duress.

9. unconscionability.

10. ambiguity in words of agreement.

11. mistakes at the time of the agreement as to the material facts affecting the agreement.

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Promissory estoppel (detrimental reliance)

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(a) Elements: (i) promise; (ii) reliance that is reasonable, detrimental, and foreseeable; (iii) enforcement necessary to avoid injustice.

(b) Comparison of consideration and promissory estoppels.

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Who lacks capacity to contract?

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1. Infant - under 18;

2. Mental incompetents - lacks ability to understand agreement, or

3. Intoxicated persons if other party has reason to know.

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Consequences of Incapacity

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1. Right to disaffirm by person without capacity;

2. Implied affirmation by retaining benefits after gaining capacity;

3. Quasi-contract liability for necessaries.

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Four Contracts Within the Statute of Frauds

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1. Promises to answer for the debts of another ("answer for" is tightly constrained)

2. Service contract not "capable" of being performed within a year from the time of the contract.

3. Transfers of interest in real estate (with exception for leases of year or less)

4. Sale of goods for $500 or more.

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How to satisfy the Statute of Frauds: Performance (5 rules)

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1. Performance and transfers of real estate: part performance satisfies the Statute of Frauds in transfers of real estate. Part performance requires any two of three: (i) improvements to the land, (ii) payment, and (iii) possession.

2. (Services Contracts) Full performance by either party satisfies Statute of Frauds.

3. (Services Contracts) Part performance of a services contract does not satisfy Statute of Frauds.

4. (Sale of Goods) Seller's part performance of a contract for the sale of goods satisfies SoF, but only to extent of the part performance.

5. (Sale of Goods) Seller's part performance of a contract for sale of goods that are to be specially manufactured, SoF is satisfied as soon as the seller makes "substantial beginning."

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How to satisfy the Statute of Frauds: Writing

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a. Statute of Frauds other than Article 2: All material terms test, looks at contents of writing(s). Writing satisfies if signed by defendant.

b. Article 2 Statute of Frauds: Writing must simply indicate that there is a contract for the sale of goods and contain the quantity term. Generally must be signed by defendant with the exception of when it is between 2 merchants and there is a delay in responding.

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How to satisfy the Statute of Frauds: Delay in Responding

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Only applies if both are merchants.

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How to satisfy the Statute of Frauds: Judicial admission

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If defendant asserting a SoF defense admits in a pleading or testimony that he had entered into an agreement with the plaintiff, the purpose of the SoF is fulfilled and so the SoF is satisfied.

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How to satisfy the Statute of Frauds: Estoppel

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Some cases hold that the plaintiff's reliance on the defendant's oral promise to put the agreement in writing can estop the defendant from asserting a SoF defense.

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Parol Evidence Rule: General premise

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Triggering Facts: (1) final written contract, (2) earlier words of one or both parties.

Policy: final written version of a deal replaces earlier agreements, negotiations, and conversations.

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Parol Evidence Rule: Changing/Contradicting Terms

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Evidence of earlier agreements cannot be considered for the purpose of contradicting the terms in the written contract.

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Parol Evidence Rule: Mistake in integration

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A court may consider evidence of such terms for the limited purpose of determining whether there was a mistake in integration.

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Parol Evidence Rule: Defenses

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Parol evidence rule does not prevent a court from considering evidence of earlier words of the parties for the limited purpose of determining whether there is a defense to the enforcement of the agreement, such as misrepresentation, fraud, or duress.

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Parol Evidence Rule: Ambiguity

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Parol evidence rule does not prevent a court from considering evidence of earlier agreements to resolve ambiguities in the written contract.

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Parol Evidence Rule: Adding to the written deal

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Parol evidence rule prevents a court from considering evidence of earlier agreements as a source of consistent, additional terms unless the court finds (i) that the written agreement was only a partial integration or (ii) that the additional terms would ordinarily be in a separate agreement.

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Delivery Obligations of a Seller under the UCC

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1. Shipment Contracts - Seller completes its delivery obligation when it (i) gets the goods to a common carrier, and (ii) makes reasonable arrangements for delivery, and (iii) notifies the buyer.

2. Destination Contracts - Seller does not complete its delivery obligation until the goods arrive at the destination.

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Risk of Loss Rules under the UCC (four)

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1. Agreement of the parties controls.

2. Breaching party is liable for any uninsured loss even though breach is unrelated to problem.

3. Risk of loss shifts from seller to buyer at the time the seller completes its delivery obligations.

4. Risk of loss shifts from merchant-SELLER to buyer on the buyer's "receipt" of the goods; risk of loss shifts from a nonmerchant seller when he or she tenders the goods.

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Limitations on warranty liability

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1. Statute of Limitations - 4 years, usually starts when tender is made.

2. Privity -

3. Buyer's examination of the goods - there are no implied warranties as to defects which would be obvious on examination (or refusal to examine after seller's demand.

4. Disclaimer - Express warranties generally cannot be disclaimed. Implied warranties of merchatability and fitness can be by (i) conspicuous language, or (ii) "as is" or "with all faults."

5. Limitation of remedies - does not eliminate warranties, simply limits or sets recovery for any breach of warranty.

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Performance of Article 2 Contracts: Perfect Tender

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Perfect tender rule only applies to sales of goods. Must completely comply with contract terms.

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Performance of Article 2 Contracts: Rejection of the Goods

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(1) A less than perfect tender generally gives the buyer the option to reject the goods so long as the buyer acts in good faith,

(2) the buyer must take reasonable care of the goods and cannot continue to use, and

(3) the option of rejection because of less than perfect tender is limited by the concepts of cure, installment contracts, and acceptance.

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Performance of Article 2 Contracts: Cure

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(a) Time for performance has not expired.

(b) Seller has reasonable ground to believe tender would be acceptable, perhaps with a money allowance.

*In very limited situations, a seller has the option of curing after contract delivery date. "Reasonable grounds" is the statutory test.

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Performance of Article 2 Contracts: Installment Contracts

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Buyer has the right to reject an installment only where there is a substantial impairment in that installment that can't be cured.

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Performance of Article 2 Contracts: Acceptance of the Goods

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(i) If buyer accepts the goods, cannot later reject.

(ii) Payment without opportunity for inspection is not acceptance.

(iii) Rejection must be timely.

(iv) Effect of buyer's keeping goods is implied acceptance.

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Performance of Article 2 Contracts: Revocation of Acceptance of the Goods

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Requirements:

1. nonconformity substantially impairs the value of the goods, and

2. excusable ignorance of grounds for revocation or reasonable reliance on seller's assurance of satisfaction, and

3. revocation within a reasonable time after discovery of nonconformity.

Front 42

When there is third party beneficiary, who can sue whom?

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1. Beneficiary can recover from promisor, or

2. Promisee can recover from promisor.

3. General rule: Beneficiary cannot recover from promisee.

*Limited exception: Creditor beneficiary can recover from promisee but only on pre-existing debt.

Front 43

Limitations on assignment: language of prohibition

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Takes away the right to assign but not the power to assign, meaning that the assignor is liable for breach of contract, but assignee who does not know of the prohibition can still enforce the assignment.

Front 44

Limitations on assignment: Language of invalidation

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Takes away both the right to assign and the power to assign so that there is a breach by the assignor and no rights in the assignee.

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Limitations on Assignment: When no language regarding assignment

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Even if a contract does not in any way limit the right to assign, common law bars an assignment that substantially changes the duties of the obligor.

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Requirements for assignment

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General rule is that consideration is not required, but gratuitous assignments (and only gratuitous assignments) can be revoked.

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When assignment occurs, who can sue whom?

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1. Assignee can recover from the obligor.

2. Assignor for consideration cannot recover from obligor.

3. Obligor has same defenses against assignee as it would have against assignor.

4. Payment by obligor to assignor is effective until obligor knows of assignment. Similarly, modification agreements between obligor and assignor are effective if the obligor did not know of the assignment.

5. In an assignment for consideration, the assignor warrants (1) the right assigned actually exists, and (2) the right assigned is not subject to any then existing defenses by the obligor, and (3) the assignor will do nothing after the assignment to impair the value of the assignment. Assignor, however, does not warrant what the obligor will do after the assignment.

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When multiple assignments:

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1. All gratuitous assignments: last assignee generally wins.

2. Multiple assignments for consideration: generally, first assignment for consideration wins. Limited exception when a subsequent assignee takes priority over earlier assignee for value only if he both (i) does not know of the earlier assignment and (ii) is the first to obtain (1) payment, (2) a judgment, (3) a novation, OR (4) indicia of ownership.

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Duties that are delegable

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Generally, contract duties are delegable. The limitations on delegation are very limited. Delegations are permitted unless either (1) contract prohibits delegations or prohibits assignments or (2) "personal services contract" that calls for very special skills.

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Nonmonetary remedy: seller's reclamation from an insolvent buyer of goods.

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(i) buyer must have been insolvent at the time that it received the goods, and (ii) the seller demands return of goods within 10 days of receipt (this 10 day rule becomes a "reasonable time rule" if, before delivery, there had been an express representation of solvency by the buyer), and (iii) the buyer still has goods at time of demand.

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Breach of Contract - Measure of Damages

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Expectation damages.

(1) look to facts for dollar value of performance without breach.

(2) look to facts for dollar value of performance with breach.

(3) compare the two to determine amount of damages.

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Damage rules for sales of goods: Seller's breach

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1. Seller breaches, buyer keeps goods: Fair market value if perfect - fair market value as delivered, or, cost of repair.

2. Seller breaches, seller has goods: market price at time of discovery of the breach - contract price, or, reasonable replacement price - contract price, whichever is greater.

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Damage rules for sales of goods: Buyer's breach

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1. Buyer breaches, buyer keeps the goods: contract price.

2. Buyer breaches, seller has the goods: Contract price - resale unless seller cannot resell in which case the seller can recover the contract price and in some situations provable lost profits.

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Incidental Damages

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Costs incurred in dealing with the breach such as costs of storing rejected goods in a sale of goods or finding a replacement in a services contract - always recoverable.

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Foreseeable consequential damages

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Limited to damages arising from P's special circumstances and recovery is limited to situations in which D had reason to know of these special circumstances at the time of contract.

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Avoidable Damages

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No recovery for damages that could have been avoided without undue burden on plaintiff. Burdens of pleading and proof on defendant.

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Liquidated damages

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Needs to be a reasonable forecast.

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Novation

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An agreement between both parties to an existing contract to the substitution of a new party.

Novation excuses the contracted for performance of the party who is substituted for or replaced.