Contracts And Sales Mbe

Front 1

General Definition

Back 1

A contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law, in some way, recognizes as a duty.

Front 2

Common Law vs. Article 2 Sale of Goods

Back 2

Generally, the common law governs contracts.

However, for contracts involving the sale of GOODS, Article 2 of the Uniform Commercial Code ("U.C.C.") applies.

Article 2 has adopted much of the common law of contracts, but when the common law and Article 2 differ, Article 2 prevails in a contract for the sale of goods.

Front 3

"Goods" Defined

Back 3

"Goods" are all THINGS MOVABLE at the time they are identified as the goods to be sold under the contract.

Thus, Article 2 applies to sales of most tangible things (e.g., cars, horses, hamburgers), but does not apply to the sale of real estate, services (e.g., a health club membership), or intangibles (e.g., a patent), or to construction contracts.

Front 4

Merchants vs. Nonmerchants

Back 4

A number of the rules in Article 2 depend on whether the seller and/or buyer are merchants.

Article 2 generally defines "merchant" as one who regularly deals in goods of the kind sold or who otherwise by his profession holds himself out as having special knowledge or skills as to the practices or goods involved.

For Article 2 provisions dealing with GENERAL BUSINESS PRACTICES (e.g., Statute of Frauds, confirmatory memos, firm offers, modification), almost anyone in business can be deemed a merchant.

But remember that some Article 2 provisions are narrower and require a person to be a merchant WITH RESPECT TO GOODS OF THE KIND INVOLVED IN THE SUBJECT TRANSACTION (e.g., the implied warranty of merchantability)

Front 5

Types of Contracts: As to Formation: Express Contracts

Back 5

Express contracts are formed BY LANGUAGE, oral or written.

Front 6

Types of Contracts: As to Formation: Implied in Fact Contracts

Back 6

Implied contracts are formed by manifestations of assent other than oral or written language, i.e., BY CONDUCT.

Front 7

Types of Contracts: As to Formation: Quasi-Contract or Implied in Law Contract

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Quasi-contracts are NOT CONTRACTS at all.

They are constructed by courts to AVOID UNJUST ENRICHMENT by permitting the plaintiff to bring an action in restitution to recover the amount of the benefit conferred on the defendant.

Front 8

Types of Contracts: As to Acceptance: Bilateral Contracts--Exchange of Mutual Promises

Back 8

The traditional bilateral contract is one consisting of the exchange of mutual promises, i.e., a promise for a promise, in which each party is both a promisor and a promisee.

Front 9

Types of Contracts: As to Acceptance: Unilateral Contracts--Acceptance by Performance

Back 9

The traditional unilateral contract is one in which the offeror requests performance rather than a promise.

Here, the offeror-promisor promises to pay upon the COMPLETION OF THE REQUESTED ACT by the promisee.

Once the act is COMPLETED, a contract is formed.

In such contracts, there is one promisor and one promisee.

Front 10

Types of Contracts: As to Acceptance: Modern View--Most Contracts are Bilateral

Back 10

Under Article 2 and the Second Restatement, a traditional unilateral (i.e., a contract that can be formed only by full performance) occurs in only two situations:

1. When the offeror clearly (unambiguously) indicates that COMPLETION OF PERFORMANCE IS THE ONLY MANNER OF ACCEPTANCE; and

2. Where there is an OFFER TO THE PUBLIC, such as a reward offer.

Front 11

Types of Contracts: As to Validity: Void Contract

Back 11

A void contract is one that is totally WITHOUT ANY LEGAL EFFECT from the beginning (e.g., an agreement to commit a crime).

IT CANNOT BE ENFORCED BY EITHER PARTY.

Front 12

Types of Contracts: As to Validity: Voidable Contract

Back 12

A voidable contract is one that one or both parties may ELECT TO AVOID (e.g., by raising a defense that makes it voidable, such as infancy or mental illness).

Front 13

Types of Contracts: As to Validity: Unenforceable Contract

Back 13

An unenforceable contract is an agreement that is otherwise valid but which may not be enforceable due to a defense extraneous to contract formation, such a the statute of limitations or Statute of Frauds.

Front 14

Creation of a Contract

Back 14

When a suit is brought in which one party seeks to enforce a contract or to obtain damages for breach of contract, a court must first decide whether there was in fact a contract.

In making this determination, a court will ask the following three basic questions:

1. Was there MUTUAL ASSENT?

2. Was there CONSIDERATION or some substitute for consideration?

3. Are there any DEFENSES to creation of the contract?

Front 15

Exam Tip on Contract Formation

Back 15

Contract formation is a major topic on the exam.

For any contract question, be sure that there really is an enforceable contract; i.e., ALL THREE of the elements must be present.

Fact patterns sometimes greatly emphasize some elements (e.g., offer and acceptance) to try to fool you into thinking that a contract has been formed, but on closer examination, you might find that another element (e.g., consideration) is missing.

Remember to check carefully or all three elements.

Front 16

Mutual Assent--Offer and Acceptance: In General

Back 16

For an agreement to be enforced as a contract, there must be mutual assent.

In other words, one party must accept the other's offer.

Whether mutual assent is present will be determined by an objective standard; i.e., did words or conduct manifest a present intention to enter into a contract?

Front 17

The Offer

Back 17

An offer creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror.

For a communication to be an offer, it must create a REASONABLE EXPECTATION in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms.

In deciding whether a communication creates this reasonable expectation, ask:

1. Was there an expression of a PROMISE, UNDERTAKING, OR COMMITMENT to enter into a contract?

2. Were there CERTAINTY AND DEFINITENESS in the essential terms?

3. Was there COMMUNICATION of the above to the offeree?

Front 18

The Offer: Promise, Undertaking, or Commitment

Back 18

For a communication to be an offer, it must contain a promise, undertaking, or commitment to enter into a contract, rather than a mere invitation to begin preliminary negotiations; i.e. there must be an INTENT to enter into a contract.

Front 19

The Offer: Promise, Undertaking, or Commitment: Language

Back 19

The language used may show that an offer was or was not intended.

Technical language such as "I offer" or "I promise" is useful, but it is not necessary.

Phrases such as "I quote," "I am asking 30 for," and "I would consider selling for" tend to be construed merely as invitations to deal rather than offers.

Front 20

The Offer: Promise, Undertaking, or Commitment: Surrounding Circumstances

Back 20

The circumstances surrounding the language will be considered by courts in determining whether an offer exists.

For example, if a statement is made in jest, anger, or by way of bragging, and it is reasonably understood in this context, it will have no legal effect.

Front 21

The Offer: Promise, Undertaking, or Commitment: Prior Practice and Relationship of the Parties

Back 21

In determining whether certain remarks constitute an offer rather than preliminary negotiations, a court will look to the prior relationship and practice of the parties involved.

Front 22

The Offer: Promise, Undertaking, or Commitment: Method of Communication: Use of Broad Communications Media

Back 22

The broader the communicating media (e.g., publications), the more likely it is that the courts will view the communication as merely the SOLICITATION OF AN OFFER.

Front 23

The Offer: Promise, Undertaking, or Commitment: Method of Communication: Advertisements, etc.

Back 23

Advertisements, catalogs, circular letters, and the like containing price quotations are USUALLY construed as mere INVITATIONS FOR OFFERS.

Front 24

Exam Tip

Back 24

Most offers are fairly easy to spot, but watch out for language that sounds like an offer but really is an invitation to deal.

For example, advertisements often sound like offers but usually are just invitations for people to come in and deal.

The more definite the language (e.g., "I'll sell for..." or "I'll pay you 10 for..."), the more likely the statement is an offer.

However, you need to examine the other factors (surrounding circumstances, prior relationship of parties, etc.)

Front 25

Exam Tip

Back 25

If there has been a series of communications between the parties, pay attention to the legal significance, if any, of each statement.

For example, if you determine that A's first statement to B is not an offer but rather merely an invitation to deal, then B's response cannot be an acceptance (nothing to accept).

Front 26

The Offer: Definite and Certain Terms

Back 26

An offer must be definite and certain in its terms.

The basic inquiry is whether enough of the essential terms have been provided so that a contract including them would be CAPABLE OF BEING ENFORCED.

Front 27

The Offer: Definite and Certain Terms: Identification of the Offeree

Back 27

To be considered an offer, a statement must sufficiently identify the offeree or a class to which she belongs to justify the inference that the offeror intended to create a power of acceptance.

Front 28

The Offer: Definite and Certain Terms: Definiteness of Subject Matter

Back 28

The subject matter of the deal must be certain, because a court can enforce a promise only if it can tell with reasonable accuracy what the promise is.

Front 29

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Requirements for Specific Types of Contracts: Real Estate Transactions--Land and Price Terms

Back 29

An offer involving realty must identify the LAND and the PRICE terms.

The land must be identified with some particularity but a deed description is not required (e.g., "my house in Erewhon" is sufficient if a seller has only one house in Erewhon).

Most courts will NOT supply a missing price term for realty.

Front 30

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Requirements for Specific Types of Contracts: Sale of Goods--Quantity Term

Back 30

In a contract for the sale of goods, the QUANTITY being offered must be certain or capable of being made certain.

Front 31

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Sale of Goods--Quantity Term: "Requirements" and "Output" Contracts

Back 31

In a requirements contract, a buyer promises to buy from a certain seller all of the goods the buyer requires, and the seller agrees to sell that amount to the buyer.

In an output contract, a seller promises to sell to a certain buyer all of the goods that the seller produces, and the buyer agrees to buy that amount from the seller.

It is assumed that the parties will act in good faith; hence, there may not be a tender of or a demand for a quantity UNREASONABLY DISPROPORTIONATE to:

1. Any stated estimate, or

2. (In the absence of a stated estimate) any normal or otherwise comparable prior output or requirements.

Front 32

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Requirements for Specific Types of Contracts: Services--Nature of Work

Back 32

The nature of the work to be performed is required in an offer for services.

Front 33

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Missing Terms

Back 33

The fact that one or more terms are left open does NOT PREVENT THE FORMATION of a contract if it appears that the parties INTENDED TO MAKE A CONTRACT and there is a REASONABLY CERTAIN BASIS for giving a remedy.

In such a case, the majority of jurisdictions and Article 2 hold that the COURT CAN SUPPLY REASONABLE TERMS for those that are missing.

Front 34

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Missing Terms: Price

Back 34

Except in contracts for real property, the failure to state the price does not prevent the formation of a contract if the parties intended to form a contract without the price being settled.

Note that if a contract for the sale of goods is missing a price term, Article 2 provides that the price will be a REASONABLE PRICE AT THE TIME OF DELIVERY.

Front 35

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Vague Terms

Back 35

The presumption that the parties' intent was to include a reasonable term goes to supplying MISSING terms.

The presumption CANNOT be made if the parties have INCLUDED a term that makes the contract too vague to be enforced (e.g., an agreement to split profits on a "liberal basis").

However, uncertainty can be cured by part performance that clarifies the vague term or by acceptance of full performance.

Front 36

The Offer: Definite and Certain Terms: Definiteness of Subject Matter: Terms to Be Agreed on Later

Back 36

Often, an offer will state that some term is to be agreed on at a future date.

If the term is a MATERIAL term, the offer is TOO UNCERTAIN.

Front 37

The Offer: Communication to Offeree

Back 37

To have the power to accept, the offeree must have KNOWLEDGE of the offer.

Therefore, the proposal must be communicated to her.

Front 38

Termination of the Offer

Back 38

An offer cannot be accepted after it has been terminated.

An offer may be terminated by an act of either party or by operation of law.

Front 39

Termination of the Offer: By Offeror--Revocation

Back 39

A revocation is the retraction of an offer by the offeror.

An offeror may revoke by directly communicating the revocation to the offeree (e.g., "I revoke my offer of May 25").

An offer made by publication can be directly revoked only by publication through comparable means (e.g., an offer placed in the Wall Street Journal cannot be revoked by publishing in Better Homes and Gardens).

An offer may also be revoked INDIRECTLY if the offeree receives:

1. Correct information,

2. From a reliable source,

3. Of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer (e.g., after offeror offers to sell his car to offeree, offeree is told by a reliable third party that offeror just sold his car to someone else).

Front 40

Termination of Offer by Offeror (Revocation) is Effective When Received

Back 40

A revocation is generally effective when RECEIVED by the offeree.

Where revocation is by publication, it is effective when PUBLISHED

Front 41

Exam Tip on Revocation

Back 41

Remember that generally a written communication is "received" when it is delivered to a place of business through which the contract was made or another location authorized to receive this type of communication.

It does NOT matter whether the recipient ACTUALLY READS the communication.

Front 42

Limitations on Offeror's Power to Revoke

Back 42

Offers can be revoked at will by the offeror, even if he has promised not to revoke for a certain period, except in the following circumstances:

1. Options

2. Merchant's Firm Offer Under Article 2

3. Detrimental Reliance

4. Part Performance in a True Unilateral Contract Offer

5. Part Performance When Offer is Indifferent as to Manner of Acceptance

Front 43

Limitations on Offeror's Power to Revoke: Options

Back 43

An option is a distinct contract in which the OFFEREE GIVES CONSIDERATION for a promise by the offeror not to revoke an outstanding offer (e.g., an offeror offers to sell her farm to an offeree for 1 million and promises to keep the offer open for 90 days if the offeree pays the offeror 1,000 to keep the offer open).

Front 44

Limitations on Offeror's Power to Revoke: Merchant's Firm Offer Under Article 2

Back 44

Under Article 2:

1. If a MERCHANT;

2. Offers to sell goods in a SIGNED WRITING; and

3. The writing GIVES ASSURANCES THAT IT WILL BE HELD OPEN (e.g., "this offer will be held open for 10 days," "this offer is firm for 10 days," "I shall not revoke this offer for 10 days"),

The offer IS NOT REVOCABLE for lack of consideration during the time stated, or if no time is stated, for a reasonable time (but in no event may such period exceed THREE MONTHS).

Front 45

Exam Tip on Firm Offers

Back 45

If a merchant-offeror states that an offer will stay open for a period beyond the U.C.C.'s three-month limit on irrevocability, he will be bound ONLY FOR THREE MONTHS.

Remember that the three-month limitation applies only to offers NOT SUPPORTED BY CONSIDERATION.

Watch for an offer that looks like a merchant's firm offer but includes some consideration. This is an option contract, and the offer can be held open for as long as the parties specify.

Front 46

Limitations on Offeror's Power to Revoke: Detrimental Reliance

Back 46

When the offeror could reasonably expect that the offeree would rely to her detriment on the offer, and the offeree does so rely, the offer will be held IRREVOCABLE AS AN OPTION CONTRACT FOR A REASONABLE LENGTH OF TIME.

At the very least, the offeree would be entitled to relief measured by the extent of any detrimental reliance.

Front 47

Limitations on Offeror's Power to Revoke: Part Performance in True Unilateral Contract Offer: Implied Contract for Reasonable Time

Back 47

An offer for a true unilateral contract becomes IRREVOCABLE ONCE PERFORMANCE HAS BEGUN.

The offeror must give the offeree a REASONABLE TIME TO COMPLETE PERFORMANCE.

Note that the offeree is NOT BOUND to complete performance--she may withdraw at any time prior to completion of performance, and there is no acceptance until performance is complete.

Front 48

Limitations on Offeror's Power to Revoke: Part Performance--True Unilateral Contract Offers: Preparations to Perform

Back 48

Substantial preparations to perform (as opposed to the beginning of performance) do not make the offer irrevocable but MAY CONSTITUTE DETRIMENTAL RELIANCE sufficient to make the offeror's promise binding to the extent of the detrimental reliance.

Front 49

Limitations on Offeror's Power to Revoke: Part Performance--Offer Indifferent as to Manner of Acceptance

Back 49

As noted above, most offers are indifferent as to the manner of acceptance, and thus, a bilateral contract may be formed UPON THE START OF PERFORMANCE by the offeree.

Therefore, once the offeree BEGINS PERFORMANCE, the contract is complete and REVOCATION becomes IMPOSSIBLE.

But note: Notification of the start of performance may be necessary.

Front 50

Termination by Offeree: Express Rejection

Back 50

An express rejection is a statement by the offeree that she does not intend to accept the offer.

Such a rejection will terminate the offer.

Front 51

Termination by Offeree: Counteroffer as Rejection

Back 51

A counteroffer is an offer made by the OFFEREE to the offeror that contains the same subject matter as the original offer, but differs in its terms (e.g., "I'll take the house at that price, but only if you paint it first").

Front 52

Exam Tip on Counteroffer as Rejection

Back 52

Remember that a counteroffer is BOTH a rejection and a new offer.

It terminates the original offer and reverses the roles of the parties: The offeree giving a counteroffer becomes the offeror of a new offer, which the other party may accept or reject.

Thus, if A offers to sell his property, Blackacre, to B for 100,000, and B says, "I'll buy it for 90,000," what has happened?

A's offer has been rejected and B has made an offer for 90,000, which A may accept or reject.

B cannot later say to A, "All right, I'll take Blackacre for 100,000," and accept A's offer. It no longer exists because it was rejected. (Of course, A could accept B's new offer to buy it for 100,000).

Front 53

Distinguish Counteroffer from Mere Inquiry

Back 53

Distinguish between a counteroffer (which constitutes a rejection) and a mere inquiry.

An inquiry will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration (e.g., "Would you consider lowering your price by 5,000?").

The test is whether a REASONABLE PERSON would believe that the original offer had been rejected.

Front 54

Termination by Offeree: Rejection: Effective When Received

Back 54

A rejection is effective when RECEIVED by the offeror.

Front 55

Termination by Offeree: Rejection of Option

Back 55

Because an option is a contract to keep an offer open, a rejection of or a counteroffer to an option does NOT constitute a termination of the offer.

The offeree is still free to accept the original offer within the option period unless the offeror has DETRIMENTALLY RELIED on the offeree's rejection.

Front 56

Termination by Offeree: Laspe of Time

Back 56

An offer may be terminated by the offeree's failure to accept within the time specified by the offer or, if no deadline was specified, within a reasonable period.

Front 57

Termination by Operation of Law

Back 57

The following events will terminate an offer by operation of law:

1. DEATH OR INSANITY OF EITHER PARTY (unless the offer is of a kind the offeror could not terminate, e.g., an option supported by consideration). Death or insanity need NOT be communicated to the other party;

2. DESTRUCTION of the proposed contract's SUBJECT MATTER; or

3. SUPERVENING ILLEGALITY

Front 58

Acceptance

Back 58

An acceptance is a manifestation of assent to the terms of an offer.

Front 59

Acceptance: Who May Accept

Back 59

Generally, only the person to whom an offer is addressed has the power of acceptance.

One may also have the power of acceptance if she is a member of a class to which an offer has been directed.

Generally, an offeree's power of acceptance CANNOT BE ASSIGNED.

However, if the offeree has paid consideration to keep the offer open (i.e., an option contract was created), the right to accept IS transferable.

Front 60

Acceptance: Offeree Must Know of Offer

Back 60

The offeree must know of the offer in order to accept it, and this is true whether the offer is for a bilateral or unilateral contract.

Thus, if A sends B an offer and B sends A an offer unaware of A's offer (i.e. a crossing offer situation), no contract is formed, even if the offers contain the same terms.

Front 61

Acceptance of Offer for Unilateral Contract: Completion of Performance

Back 61

Most courts hold that an offer to form a unilateral contract is not accepted until performance is completed.

The beginning of performance may create an option so that the offer is irrevocable.

However, the offeree is not obligated to complete performance merely because he has begun performance, as only complete performance constitutes an acceptance of the offer.

Front 62

Exam Tip on Completion of Performance

Back 62

Keep in mind that like all offerees, the offeree of a unilateral contract MUST KNOW OF THE OFFER to accept it.

If the "offeree" acts without knowledge and learns of the offer later, his acts were not an acceptance.

Thus, if A finds O's watch and returns it to O without knowledge of O's reward offer, A has no contractual right to the reward.

Front 63

Acceptance of Offer for Unilateral Contract: Notice

Back 63

Generally, the offeree is NOT required to give the offeror notice that he has begun the requested performance, but is required to notify the offeror within a reasonable time after performance has been completed.

However, no notice is required if:

1. The offeror WAIVED NOTICE; or

2. The offeree's PERFORMANCE WOULD NORMALLY COME TO THE OFFEROR'S ATTENTION within a reasonable time.

Front 64

Acceptance of Offer for Bilateral Contract

Back 64

Recall that unless an offer specifically provides that it may be accepted only through performance, it will be construed as an offer to enter into a bilateral contract and may be accepted either by a promise to perform or by the BEGINNING OF PERFORMANCE (compare offers for true unilateral contracts, which may be accepted only by full performance).

Front 65

Acceptance of Offer for Bilateral Contract: Generally, Acceptance Must be Communicated

Back 65

Generally, acceptance of an offer to enter into a bilateral contract must be communicated to the offeror, unless the offer provides that acceptance need not be communicated.

Front 66

Acceptance of Offer for Bilateral Contract: Method of Acceptance

Back 66

Unless otherwise provided, an offer is construed as inviting acceptance in ANY REASONABLE MANNER and by any medium reasonable under the circumstances.

Any objective manifestation of the offeree's counterpromise is usually sufficient.

Front 67

Acceptance of Offer for Bilateral Contract: Offers to Buy Goods for Current or Prompt Shipment

Back 67

Under Article 2, an offer to buy goods for current or prompt shipment is construed as inviting acceptance either by a PROMISE TO SHIP or by CURRENT OR PROMPT SHIPMENT of conforming or nonconforming goods.

Front 68

Acceptance of Offer for Bilateral Contract: Offers to Buy Goods for Current or Prompt Shipment: Shipment of Nonconforming Goods

Back 68

The shipment of nonconforming goods is an ACCEPTANCE creating a bilateral contract AS WELL AS A BREACH of the contract unless the seller reasonably notifies the buyer that a shipment of nonconforming goods is offered only as an ACCOMODATION.

The buyer is not required to accept accommodation goods and may reject them.

If he does, the shipper is not in breach and may reclaim the accommodation goods, because her tender does not constitute an acceptance of the buyer's original offer.

Front 69

Exam Tip on Shipment of Nonconforming Goods

Back 69

Remember that the accommodation shipment rules applies ONLY when a shipment is used as a form of acceptance.

Watch out for a fact pattern in which a party accepts an order by promising to ship. He then discovers he lacks the specified goods and ships nonconforming goods as an "accommodation."

This is a breach, not an accommodation. There was a contract at the promise to ship. The shipment was not the acceptance, thus, ACCOMMODATION IS NOT POSSIBLE.

Front 70

Acceptance of Offer for Bilateral Contract: Acceptance Must be Unequivocal

Back 70

Traditional contract law insists on an absolute and unequivocal acceptance of each and every term of the offer (the "mirror image rule").

Front 71

Acceptance of Offer for Bilateral Contract: Common Law Rule

Back 71

At common law, any different or additional terms in the acceptance make the response a REJECTION AND COUNTEROFFER.

Front 72

Acceptance of Offer for Bilateral Contract: Article 2 Rule--Battle of the Forms Provision

Back 72

Article 2 has abandoned the mirror image rule, providing instead that the proposal of additional or different terms by the offeree in a definite and timely acceptance does NOT constitute a rejection and counteroffer, but rather is EFFECTIVE AS AN ACCEPTANCE, unless the acceptance is EXPRESSLY made conditional on assent to the additional or different terms.

Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants.

Front 73

Exam Tip on Battle of the Forms

Back 73

Recall that Article 2 changes the common law rule.

Thus, for an offer for the purchase or sale of GOODS, an acceptance with additional terms is still an acceptance and a contract is formed (with or without the new terms).

If the offer is for something OTHER THAN THE SALE OF GOODS (e.g., land) an acceptance proposing additional or different terms is a rejection and a counteroffer, no contract is formed.

Front 74

Acceptance of Offer for Bilateral Contract: Conditional Acceptance

Back 74

When an acceptance is made expressly conditional on the acceptance of new terms, it is a REJECTION of the offer.

It can be considered a counteroffer only to the extent that the original offeror may expressly assent to the new terms and thus form a contract.

It is not considered a counteroffer that may be accepted by performance.

If the parties ship or accept goods after a conditional acceptance, a contract is formed BY THEIR CONDUCT, and the new terms are not included.

Front 75

Acceptance of Offer for Bilateral Contract: Bilateral Contracts Formed by Performance

Back 75

If a contract is not formed by the parties' communications, but they begin to perform as if they formed a contract, a contract is formed.

Front 76

Acceptance of Offer for Bilateral Contract: When Effective--The Mailbox Rule

Back 76

Acceptance by mail or similar means create a contract at the MOMENT OF DISPATCH, provided that the mail is properly addressed and stamped, UNLESS:

1. The OFFER STIPULATES that acceptance is not effective until received; or

2. An OPTION CONTRACT is involved (an acceptance under an option contract is effective only upon RECEIPT).

3. If the offeree sends a REJECTION AND THEN SENDS AN ACCEPTANCE, whichever arrives first is effective.

4. If the offeree sends an acceptance and then a rejection, the acceptance is effective (i.e., the mailbox rule applies) UNLESS THE REJECTION ARRIVES FIRST AND the offeror DETRIMENTALLY RELIES on it.

Front 77

Acceptance of Offer for Bilateral Contract: Acceptance by Unauthorized Means

Back 77

An acceptance transmitted by unauthorized means or improperly transmitted by authorized means may still be EFFECTIVE IF IT IS ACTUALLY RECEIVED by the offeror while the offer is still in existence.

Front 78

Auction Contracts

Back 78

The U.C.C. contains some special rules regulating auction sales.

A sale by auction is complete when the auctioneer so announces by the FALL OF THE HAMMER or in another customary manner.

An auction sale is with reserve unless the goods are explicitly put up without reserve.

"WITH RESERVE" means the AUCTIONEER MAY WITHDRAW THE GOODS at any time until he announces completion of the sale.

Front 79

Consideration: Introduction

Back 79

Courts will enforce a promise as a contract only if it is supported by consideration or a substitute for consideration.

Front 80

Consideration: Elements

Back 80

Basically, two elements are necessary to constitute consideration:

1. There must be a BARGAINED-FOR EXCHANGE between the parties; and

2. That which is bargained for must be considered of LEGAL VALUE or, as it is traditionally stated, it must constitute a benefit to the promisor OR a detriment to the promisee.

Front 81

Bargained-For Exchange

Back 81

This element of consideration requires that the promise induce the detriment AND the detriment induce the promise.

There is no bargain involved (i.e., no consideration) when one party gives a GIFT to another.

Front 82

Bargained-For Exchange: Act or Forbearance by Promisee Must be of Benefit to Promisor

Back 82

An act or forbearance by the promisee (or a promise to act or forbear) is sufficient consideration to form a contract if it benefits the promisor.

The benefit, however, need not be economic (e.g., the gratification of influencing the mind of another is sufficient).

Front 83

Bargained-For Exchange: "Past" or "Moral" Consideration

Back 83

A promise given in exchange for something already done does not satisfy the bargain requirement.

Front 84

Exam Tip on Consideration

Back 84

Beware of questions that use the word "consideration" to refer to something already done, as in "In consideration of your having done X, I promise you 1,000 dollars."

Under the general rule, this promise is NOT ENFORCEABLE because the promise is given in exchange for past acts.

Front 85

Exceptions to "Past" or "Moral" Consideration

Back 85

Where a past obligation is unenforceable because of a technical defense (e.g., statute of limitations), that obligation will be enforceable IF A NEW PROMISE is made IN WRITING or is PARTIALLY PERFORMED.

Also, under the modern trend, if a past act benefited the promisor and was performed by the promisee at the promisor's REQUEST or in response to an EMERGENCY, a SUBSEQUENT PROMISE to pay for that act will be enforceable.

Front 86

Bargained-For Exchange: Legal Value Element: Adequacy of Consideration

Back 86

In general, courts do NOT inquire into the adequacy or fairness of consideration.

However, if something is entirely devoid of value (token consideration) it is insufficient.

Sham consideration (insignificant sum recited in the contract) is also insufficient if not paid.

But note that if there is a possibility of value in the thing bargained for, consideration will be found even if the value never comes into existence.

Front 87

Bargained-For Exchange: Legal Value Element: Legal Benefit and Legal Detriment Theories

Back 87

The majority of courts require that a party incur DETRIMENT (by doing something he is not legally obligated to do or by refraining from doing something he has a legal right to do) to satisfy the legal value element.

Under the minority rule, conferring a benefit on the other party is also sufficient.

Front 88

Bargained-For Exchange: Legal Value Element: Preexisting Legal Duty Not Consideration

Back 88

Traditionally, performing or promising to perform an existing legal duty is INSUFFICIENT consideration.

Exceptions:

The preexisting legal duty rule is riddled with exceptions; there is consideration if:

1. NEW OR DIFFERENT consideration is promised;

2. The promise is to RATIFY A VOIDABLE OBLIGATION (e.g., a promise to ratify a minor's contract after reaching majority, a promise to go through with a contract despite the other party's fraud);

3. The preexistin duty is OWED TO A THIRD PERSON rather than to the promisor;

4. There is an HONEST DISPUTE as to the duty; or

5. There are UNFORESEEN CIRCUMSTANCES sufficient to discharge a part.

Also, a GOOD FAITH agreement modifying a contract subject to the UCC needs NO CONSIDERATION to be binding.

Front 89

Exam Tip

Back 89

Although payment of a smaller sum than due on an existing debt is generally NOT sufficient consideration or a promise by the creditor to discharge the debt, courts will attempt to avoid this result by applying the above exceptions.

Thus, see if there is new or different consideration given in the facts (e.g., payment EARLIER than required or payment in STOCK instead of cash); this change in performance could make the payment of a smaller amount sufficient consideration.

Front 90

Bargained-For Exchange: Legal Value Element: Forbearance to Sue

Back 90

A promise to refrain from suing on a claim may constitute consideration if the claim is valid or the claimant IN GOOD FAITH believed the claim was valid.

Front 91

Mutual and Illusory Promises--Requirement of Mutuality

Back 91

Consideration must exist on both sides of a contract (although the benefit of the consideration generally need not flow to all parties).

If only one party is bound to perform, the promise is illusory and will not be enforced.

Courts often supply implied promises (e.g., a party must use her best efforts) to infer mutuality

Examples: The following contracts satisfy the mutuality requirement

1. Requirements and output contracts

2. Conditional promises, unless the condition is entirely within the promisor's control

3. Contracts where a party has the right to cancel, if that right is somehow restricted (e.g., a party must give 60 days' notice);

4. Exclusivity agreements because the court will find an implied promise to use best efforts

5. Voidable promises (one made by an infant)

6. Unilateral and option contracts; and

7. Gratuitous suretyship promises made before or at the same time that consideration flows to the principal debtor

Front 92

Exam Tip

Back 92

Closely analyze the wording of contract terms; language can make a big difference here.

For example, a valid requirements or output contract will say, "all the widgets I REQUIRE" or "all that you PRODUCE," but a term such as "all the widgets I WANT" or "all you WANT TO SELL me" is illusory.

Front 93

Requirement of Mutuality: Right to Choose Alternative Courses

Back 93

A promise to choose one of several alternative means of performance is illusory UNLESS EVERY ALTERNATIVE involves legal detriment to the promisor.

The promise will not be found illusory if:

1. At least one alternative involves legal detriment and the power to choose rests with the promisee or a third party, or

2. A valuable alternative (i.e., one involving legal detriment) is actually selected.

Front 94

Promissory Estoppel or Detrimental Reliance

Back 94

CONSIDERATION IS NOT NECESSARY if the facts indicate that the promisor should be estopped from not performing.

Under section 90 of the First Restatement, a promise is enforceable if necessary to prevent injustice if:

1. The promisor should reasonably EXPECT TO INDUCE ACTION OR FORBEARANCE;

2. OF A DEFINITE AND SUBSTANTIAL CHARACTER;

3. And SUCH ACTION OR FORBEARANCE IS IN FACT INDUCED.

In the Second Restatement, section 90 no longer requires that the action or forbearance be "of a definite and substantial character."

It also provides that the remedy "MAY BE LIMITED AS JUSTICE REQUIRES."

Typically, if the elements of promissory estoppel are present, a jurisdiction following the First Restatement approach will award expectation damages (i.e., what was promised under the contract), while a jurisdiction following the Second Restatement might award reliance damages (i.e., whatever the promisee spent in reliance on the promise), which usually is something less than expectation damages, but t

Front 95

Exam Tip on Promissory Estoppel

Back 95

A valid contract is better than an agreement that can be enforced only by promissory estoppel because some states limit recovery under promissory estoppel to that which "justice requires."

Thus, in a question asking whether a party can prevail based on an agreement, always check first to see if there is a VALID CONTRACT.

Only if there is not should you consider promissory estoppel as a proper choice.

Front 96

Requirement that No Defenses Exist: Introduction

Back 96

Even if an agreement is supported by valuable consideration or a recognized substitute, contract rights may still be unenforceable because there is a defense to formation of the contract, because there is a defect in capacity (making the obligations voidable by one of the parties), or because a defense to enforcement of certain terms exists.

Front 97

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Mutual Mistake as to Existing Facts

Back 97

If both parties entering into a contract are mistaken ABOUT EXISTING FACTS (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party if:

1. The mistake concerns a BASIC ASSUMPTION on which the contract is made (e.g., the parties think they are contracting for the sale of a diamond but in reality the stone is a cubic zirconia);

2. The mistake has a MATERIAL EFFECT on the agreed-upon exchange (e.g., the cubic zirconia is worth only a hundredth of what a diamond is worth; and

3. The party seeking avoidance DID NOT ASSUME THE RISK of the mistake.

Front 98

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Mutual Mistake as to Existing Facts: Assumption of Risk

Back 98

Mutual mistake is not a defense if the adversely affected party bore the risk that the assumption was mistaken.

This commonly occurs when one party is in a position to better know the risks that the other party (e.g., contractor vs. homeowner) or where the parties knew that their assumption was doubtful (i.e., when the parties were consciously aware of their ignorance).

Front 99

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Assumption of Risk: Mistake in Value Generally Not a Defense

Back 99

If the parties to a contract make assumptions as to the value of the subject matter, mistakes in those assumptions will generally not be remedied--even though the value of the subject matter is generally a basic assumption and the mistake creates a material imbalance--because both parties usually assume the risk that their assumption as to value is wrong.

Front 100

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Compare--Unilateral Mistake

Back 100

If only one of the parties is mistaken about facts relating to the agreement, the mistake will NOT prevent formation of a contract.

However, if the nonmistaken party KNEW OR HAD REASON TO KNOW OF THE MISTAKE made by the other party, the contract is voidable by the mistaken party.

Front 101

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Mistake by the Intermediary (Transmission)

Back 101

When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message AS TRANSMITTED is operative unless the other party knew or should have known of the mistake.

Front 102

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Ambiguous Contract Language

Back 102

If the contract includes a term with at least two possible meanings, the result depends on the parties' awareness of the ambiguity:

1. Neither party aware--no contract unless both parties intended the same meaning;

2. Both parties aware--no contract unless both parties intended the same meaning

3. One party aware--binding contract based on what the ignorant party reasonably believed to be the meaning of ambiguous words.

Ambiguity is one area where subjective intent is taken into account.

Front 103

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Misrepresentation: Fraudulent Misrepresentation (Fraud in the Inducement)--Contract Voidable

Back 103

If a party induces another to enter into a contract by using FRAUDULENT MISREPRESENTATION (i.e., by asserting information she knows is untrue), the contract is VOIDABLE by the innocent party if she JUSTIFIABLY RELIED on the fraudulent misrepresentation.

This is FRAUD IN THE INDUCEMENT

Front 104

Exam Tip

Back 104

Keep in mind that a fraudulent misrepresentation need not be spoken or written; it can be INFERRED FROM CONDUCT.

Concealing a fact, frustrating investigation of a fact, or falsely denying knowledge of a fact is the same as asserting the fact does not exist.

Nondisclosure of a fact is NOT misrepresentation unless it is MATERIAL and FRAUDULENT (e.g., false denial of knowledge of a material fact).

Front 105

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Misrepresentation: Nonfraudulent Misrepresentation--Contract Voidable if Material

Back 105

Even if a misrepresentation is NOT fraudulent, the contract is VOIDABLE by the innocent party if the innocent party JUSTIFIABLY RELIED on the misrepresentation and the misrepresentation was MATERIAL.

A misrepresentation is material if either:

1. The information asserted would induce a reasonable person to agree; or

2. The maker of the misrepresentation knew the information asserted would cause a particular person to agree.

Front 106

Exam Tip

Back 106

Remember that just because a misrepresentation could have been revealed by the exercise of reasonable care does NOT mean that reliance was unjustified.

Failure to read a contract or use care in reading it does not necessarily preclude a party from avoiding a contract for misrepresentation.

Front 107

Requirement that No Defenses Exist: Defenses to Formation: Absence of Mutual Assent: Misrepresentation: Innocent Party May Rescind Agreement and Recover Damages

Back 107

Note that the innocent party need not wait until she is sued on the contract but may take affirmative action in equity to RESCIND the agreement.

In addition, she may pursue all remedies available for breach of contract.

Front 108

Requirement that No Defenses Exist: Defenses to Formation: Absence of Consideration

Back 108

If the promises exchanged at the formation stage lack the elements of bargain or legal detriment, NO CONTRACT exists.

In this situation, one of the promises is always illusory.

Front 109

Requirement that No Defenses Exist: Defenses to Formation: Public Policy Defenses to Contract Formation--Illegality

Back 109

If the CONSIDERATION OR SUBJECT MATTER of a contract is illegal (e.g., a contract to commit murder), the contract is void.

Exceptions:

1. The plaintiff is unaware of the illegality while the defendant knows of the illegality;

2. The parties are not in pari delicto (i.e., one party is not as culpable as the other); or

3. The illegality is the failure to obtain a license when the license is for revenue-raising purposes rather than for protection of the public.

If only the PURPOSE behind the contract is illegal, the contract is VOIDABLE by a party who was:

1. Unaware of the purpose; or

2. Aware but did not facilitate the purpose AND the purpose does not involve serious moral turpitude.

Front 110

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Legal Incapacity to Contract: Contracts of Infants (Minors)

Back 110

Infants (in most jurisdictions, persons under the age of 18) generally lack capacity to enter into a contract binding on themselves.

However, contractual promises of an adult made to an infant are binding on the adult.

Front 111

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Contracts of Infants: Disaffirmance

Back 111

An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority.

If an infant chooses to disaffirm, she must return anything that she received under the contract THAT STILL REMAINS at the time of disaffirmance.

However, there is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed.

Front 112

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Contracts of Infants: Affirmance upon Attaining Majority

Back 112

An infant may affirm, i.e., choose to be bound by his contract, upon reaching majority.

He affirms either expressly or by conduct (e.g., by FAILING TO DISAFFIRM the contract WITHIN A REASONABLE TIME AFTER REACHING MAJORITY).

Front 113

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Mental Incapacity

Back 113

One whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative.

He may likewise affirm during a lucid interval or upon complete recovery, even without formal restoration by judicial action.

In other words, the contract is VOIDABLE.

As in the case of infants, mentally incompetent persons are liable in quasi-contract for necessities furnished to them.

Front 114

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Intoxicated Persons

Back 114

One who is so intoxicated that he does not understand the nature and significance of his promise may be held to have made only a VOIDABLE promise if the other party had reason to know of the intoxication.

The intoxicated person may affirm the contract upon recovery.

Once again, there may be quasi-contractual recovery for necessities furnished during the period of incapacity.

Front 115

Requirement that No Defenses Exist: Defenses Based on Lack of Capacity: Duress and Undue Influence

Back 115

Contracts induced by duress or undue influence are VOIDABLE and may be rescinded as long as not affirmed.

The common type of duress occurs when a party's assent is procured by an improper threat (e.g., "sign the contract or I'll break your legs").

Generally, taking advantage of another person's economic needs is not duress.

However, withholding something someone wants or needs will constitute economic duress if:

1. The party threatens to commit a wrongful act that would seriously threaten the other contracting party's property or finances; and

2. There are no adequate means available to prevent the threatened loss.

Elements of undue influence are:

1. Undue susceptibility to pressure by one party, and

2. Excessive pressure by the other party.

Undue influence concerns often arise when the dominant party is in a confidential or caregiver relationship with the influenced party.

Front 116

Requirement that No Defenses Exist: Defenses to Enforcement: Statute of Frauds

Back 116

In most instance, an oral contract is valid.

However, certain agreements, by statute, must be evidenced by a WRITING SIGNED BY THE PARTIES SOUGHT TO BE BOUND.

Front 117

Statute of Frauds: Writing Requirement

Back 117

The Statute of Frauds does not require that the contract be in writing; it requires only that there be one or more writings signed by the person sought to be held liable on the contract that reflect the MATERIAL TERMS of the contract.

Thus, a letter (even to a nonparty) or receipt, or even a check indicating a quantity of goods on the memo line could be sufficient.

An electronic record (e-mail) satisfies the writing requirement.

Front 118

Exam Tip on Writing Requirement

Back 118

Remember, to be sufficient under the Statute of Frauds, the writing need not be a full-fledged contract, nor need it even be one piece of paper.

Thus, several pieces of correspondence (including electronic correspondence) between the parties could be sufficient memoranda of the agreement; a fax or a memo written on a napkin also could suffice.

The key is that there be SOMETHING IN WRITING evidencing the MATERIAL TERMS.

Front 119

Statute of Frauds: Signature Requirement

Back 119

The signature requirement is liberally construed by most courts.

It need not be handwritten; it can be printed or typed.

A party's initials or letterhead may also be sufficient.

An electronic signature is also sufficient.

Front 120

Exam Tip

Back 120

Note that the memorandum does NOT need to be signed by both parties to the contract.

Only the PARTY TO BE CHARGED (i.e., the person to be sued) must sign.

Thus, if a fact situation has an otherwise sufficient writing that is signed by the seller but not the buyer, if the buyer is suing the seller, the writing satisfies the Statute of Frauds.

However, if the seller is suing the buyer, the writing would not be sufficient.

(Although there is an exception in contracts for the sale of goods in the case of a merchant's confirmatory memo).

Front 121

Statute of Frauds: Agreements Covered: Executor or Administrator Promises Personally to Pay Estate Debts

Back 121

A promise by an executor or administrator to pay the estate's debts out of his own funds must be evidenced by a writing.

Front 122

Statute of Frauds: Agreements Covered: Promises to Pay Debt of Another (Suretyship Promises)

Back 122

A promise to answer for the debt or default of another must be evidenced by a writing.

The promise may arise as a result of a tort or contract, but it must be collateral to another person's promise to pay, and not a primary purpose to pay.

However, if the main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is NOT WITHIN THE STATUTE OF FRAUDS even though the effect is still to pay the debt of another (e.g., homeowner promises to pay contractor's debt to building supplier if contractor does not pay, so contractor can obtain supplies to work on homeowner's house).

Front 123

Statute of Frauds: Agreements Covered: Promises in Consideration of Marriage

Back 123

A promise the consideration for which is marriage must be evidenced by a writing.

This applies to promises that induce marriage by offering something of value (other than a return promise to marry--e.g., "if you marry my son, I will give the two of you a house")

Front 124

Statute of Frauds: Agreements Covered: Interest in Land

Back 124

A promise creating an interest in land must be evidenced by a writing.

This includes not only agreements for the sale of real property, but also:

1. Leases for more than one year;

2. Easements of more than one year;

3. Fixtures;

4. Minerals (or the like) or structures if they are to be severed by the BUYER; and

5. Mortgages and most other security liens.

Front 125

Statute of Frauds: Agreements Covered: Interest in Land: Items Not Within the Statute

Back 125

Contracts to build a building or to find a buyer for a seller (e.g., a broker's contract) do not come within the Statute.

Front 126

Statute of Frauds: Agreements Covered: Interest in Land: Effect of Performance on Contracts

Back 126

If the seller conveys to the purchaser (i.e., fully performs), the seller can enforce the buyer's oral promise to pay.

Similarly, the purchaser may be able to specifically enforce a land contract if the "PART PERFORMANCE DOCTRINE" is applicable.

Under the doctrine, conduct (i.e., part performance) that UNEQUIVOCALLY INDICATES that the parties have contracted for the sale of the land will take the contract out of the Statute of Frauds.

What constitutes sufficient part performance varies among the jurisdictions.

Most require AT LEAST TWO of the following: payment (in whole or in part), possession, and/or valuable improvements

Front 127

Exam Tip

Back 127

Watch for a fact pattern where the parties orally agree to an installment land contract.

In the absence of other facts, such as a large down payment, possession plus payment does not UNEQUIVOCALLY indicate a contract for the sale of land.

Those facts are also consistent with a lease; thus, the purchaser cannot enforce the contract.

Front 128

Statute of Frauds: Agreements Covered: Performance Not Within One Year

Back 128

A promise that BY ITS TERMS CANNOT BE PERFORMED WITHIN ONE YEAR is subject to the Statute of Frauds.

Part performance does not satisfy the Statute of Frauds in the case.

Front 129

Statute of Frauds: Agreements Covered: Performance Not Within One Year: Effective Date

Back 129

The date runs from the DATE OF THE AGREEMENT and not from the date of performance.

Front 130

Statute of Frauds: Agreements Covered: Performance Not Within One Year: Lifetime Contracts

Back 130

A contract measured by a lifetime (e.g., a promise to "employ until I die" or "work until I die") is not within the Statute because it is capable of performance within a year since a person can die at any time.

Front 131

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More

Back 131

A contract for the sale of goods for a price of 500 dollars or more is within the Statute of Frauds and generally must be evidenced by a signed writing to be enforceable.

Note that a writing is sufficient even though it omits or incorrectly states a term, but the contract is NOT ENFORCEABLE BEYOND THE QUANTITY OF GOODS SHOWN IN THE WRITING.

Front 132

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More: When Writing Not Required

Back 132

There are three situations in which contracts are enforceable without the writing described above:

1. Specially Manufactured Goods

2. Admissions in Pleadings or Court

3. Payment or Delivery of Goods

Front 133

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More: When Writing Not Required: Specially Manufactured Goods

Back 133

If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course of his business, the contract is enforceable if the seller has, under circumstances that reasonably indicate that the goods are for the buyer, made SUBSTANTIAL BEGINNING in their manufacture or COMMITMENTS for their purchase before notice of repudiation is received.

Front 134

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More: When Writing Not Required: Admissions in Pleadings or Court

Back 134

If the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in court that the contract for sale was made, the contract is enforceable without a writing (but in such a case the contract is not enforced beyond the quantity of goods admitted).

Front 135

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More: When Writing Not Required: Payment or Delivery of Goods

Back 135

If goods are either received and accepted or paid for, the contract is enforceable.

However, the contract is not enforceable beyond the quantity of goods accepted or paid for.

Thus, if only some of the goods called for in the oral contract are accepted or paid for, the contract is only partially enforceable.

If an indivisible item is partially paid for, most courts hold that the Statute of Frauds is satisfied for the whole term.

Front 136

Statute of Frauds: Agreements Covered: Goods Priced at 500 Dollars or More: Merchants--Confirmatory Memo Rule

Back 136

In contracts between merchants, if one party, within a reasonable time after an oral agreement has been made, sends to the other party a WRITTEN confirmation of the understanding that is sufficient under the Statute of Frauds to bind the sender, it will also bind the recipient if:

1. He has reason to know of the confirmation's contents; and

2. He does not object to it in writing within 10 days of receipt

Front 137

Exam Tip

Back 137

To determine whether the Statute of Frauds is satisfied (and the contract is enforceable), look carefully for a writing signed BY THE PARTY TO BE CHARGED (i.e., sued).

If only one party signed the writing, first check to see if the signature is of the party being sued.

If not, consider whether the merchants' confirmatory memo rule applies.

Be sure that the contract is between MERCHANTS; if not, that rule does not apply, and the signature of one party cannot bind the other.

Front 138

Exam Tip

Back 138

An acronym for remembering when a writing signed the party to be charged is NOT REQUIRED for a sale of goods, even if for 500 dollars or more, is SWAP:

Specially made goods
Written confirmation by a merchant
Admission in court
Performance.

These facts take the contract out of the Statute of Frauds.

Front 139

Statute of Frauds: Effect of Noncompliance with the Statute

Back 139

Noncompliance with the Statute of Frauds renders the contract UNENFORCEABLE AT THE OPTION OF THE PARTY TO BE CHARGED (i.e., the party being charged may raise the lack of a sufficient writing as an affirmative defense).

If the Statute is not raised as a defense, it is waived.

Front 140

Statute of Frauds: Remedies if Contract is Within the Statute

Back 140

If a contract violates the Statute of Frauds, in almost all cases a party can sue for the REASONABLE VALUE of the services or part performance rendered, OR the RESTITUTION of any other benefit that has been conferred.

Front 141

Statute of Frauds: Remedies if Contract is Within Statute: Part Performance

Back 141

If the part performance rendered takes the contract out of the Statute of Frauds, the performing party has the option of suing ON THE CONTRACT for expectation damages, rather than merely in restitution for the value of the benefit conferred.

Front 142

Exam Tip

Back 142

Statute of Frauds issues are often raised in MBE questions.

Remember that the Statute does not apply to all contracts.

You must check the facts to see whether the contract falls within any of the covered areas.

An easy way to remember agreements covered by the Statute of Frauds is by using the acronym MY LEGS:

Marriage
Year (within one)

Land
Executor (or Administrator)
Goods (for 500 or more)
Surety

Front 143

Defenses to Enforcement: Unconscionability

Back 143

The concept of unconscionability allows a court to REFUSE TO ENFORCE A PROVISION OR AN ENTIRE CONTRACT (or to modify the contract) to avoid "unfair" terms, usually due to some unfairness in the bargaining process (i.e., procedural unconscionability).

Unfair price alone is not a ground for unconscionability.

Front 144

Common Instances of Procedural Unconscionability: Inconspicuous Risk-Shifting Provisions

Back 144

Standardized printed form contracts often contain a material provision that seeks to shift a risk normally borne by one party to the other.

Typically, such clauses are found in the fine print ("boilerplate") in printed form contracts.

Courts have invalidated these provisions because they are INCONSPICUOUS or INCOMPREHENSIBLE to the average person, even if brought to his actual attention.

Front 145

Common Instances of Procedural Unconscionability: Contracts of Adhesion--"Tale It or Leave It"

Back 145

Courts will deem a clause unconscionable and unenforceable if the signer is unable to procure necessary goods, such as an automobile, from any seller without agreeing to a similar provision.

Front 146

Common Instances of Procedural Unconscionability: Exculpatory Clauses

Back 146

An exculpatory clause releasing a contracting party from liability for his own INTENTIONAL wrongful acts is usually found to be unconscionable because such a clause is against public policy in most states.

Exculpatory clauses for NEGLIGENT acts may be found to be unconscionable if they are inconspicuous, but commonly are upheld if they are in contracts for activities that are known to be hazardous (e.g., a contract releasing a ski hill operator for liability for negligence often will be upheld)

Front 147

Common Instances of Procedural Unconscionability: Limitations on Remedies

Back 147

A contractual clause limiting liability for damages to property generally will NOT be found to be unconscionable unless it is inconspicuous.

However, if a contract limits a party to a certain remedy and that remedy FAILS OF ITS ESSENTIAL PURPOSE (e.g., the contract limits remedies to repair and the item cannot be repaired), a court may find the limitation unconscionable and ignore it.

Front 148

Unconscionability: Timing

Back 148

Unconscionability is determined by the circumstances as they existed AT THE TIME THE CONTRACT WAS FORMED.

Front 149

Unconscionability: Effect if Court Finds Unconscionable Clause

Back 149

If a court finds as a matter of law that a contract or any clause of the contract was unconscionable WHEN MADE, the court may:

1. Refuse to enforce the contract;

2. Enforce the remainder of the contract WITHOUT the unconscionable clause; or

3. LIMIT THE APPLICATION OF ANY CLAUSE so as to avoid an unconscionable result.

Front 150

Exam Tip

Back 150

Unconscionability is seldom a good defense on the MBE.

That a contract turned out badly for one party is insufficient in itself to give rise to unconscionability.

Look for great differences in bargaining power (e.g., big company vs. average consumer) before finding a contract or clause is unconscionable.

Front 151

Determining the Terms of the Contract: Introduction

Back 151

Once you have determined that a contract exists, the next thing you must do is determine what are its terms.

Front 152

General Rules of Contract Construction

Back 152

1. Contracts will be construed as a "whole"; specific clauses will be subordinated to the contract's general intent;

2. The courts will construe words according to their "ordinary" meaning unless it is clearly shown that they were meant to be used in a technical sense;

3. If provisions appear to be inconsistent, written or typed provisions will prevail over printed provisions;

4. The courts will generally look to see what custom and usage is in the particular business and in the particular locale where the contract is either made or to be performed;

5. It is important to note that the courts generally will try to reach a determination that a contract is valid and enforceable;

6. Ambiguities in a contract are construed against the party preparing the contract, absent evidence of the intention of the parties.

Front 153

Parol Evidence Rule: Supplementing, Explaining, or Contradicting Terms

Back 153

When the parties to a contract express their agreement in a WRITING with the INTENT that it embody the final expression of their bargain (i.e., the writing is an "INTEGRATION"), any other expressions--written or oral--made PRIOR TO the writing, as well as any oral expressions CONTEMPORANEOUS WITH the writing, are INADMISSIBLE TO VARY the terms of the writing under the parol evidence rule.

Front 154

Parol Evidence Rule: Is the Writing an "Integration"?

Back 154

The question of whether a writing is an "integration" of all agreements between the parties can be broken down into two further subquestions:

1. Is the writing intended as a FINAL expression? (The MORE COMPLETE the agreement appears to be on its face, the more likely it is that it was intended as an INTEGRATION.)

2. Is the writing a COMPLETE or PARTIAL integration? (If the agreement contains a MERGER CLAUSE reciting that the agreement is complete on its face, this clause strengthens the PRESUMPTION that all negotiations were merged into the written document.

Front 155

Who decides whether writing is an integration?

Back 155

The MAJORITY VIEW is that the question as to whether an agreement is an integration is one of fact to be decided by the JUDGE, not the jury.

Front 156

Is Writing an Integration?: How Determination is Made

Back 156

There are two competing tests for determining whether the parties intended the writing to be a complete and final integration: the Corbin test and the Williston test.

The Corbin test is followed by most courts. It takes into account the SPECIFIC CIRCUMSTANCES OF THE TRANSACTION INVOLVED (e.g., are the parties related or strangers, was it a large transaction, etc.) and asks whether parties like these, situated as they are, would naturally and normally include in their writing the extrinsic matter that is sought to be introduced.

If people like these under circumstances like this would normally include the extrinsic matter in their writing, it will be excluded under the parol evidence rule. Otherwise the evidence is admissible.

Front 157

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule

Back 157

Because the rule prohibits admissibility only of extrinsic evidence that seeks to vary, contradict, or add to an "integration," other forms of extrinsic evidence may be admitted if they will not bring about this result, i.e., they will fall outside the scope of the parol evidence rule.

Front 158

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Attacking Validity

Back 158

A party to a written contract can attack the agreement's validity.

The party acknowledges (concedes) that the writing reflects the agreement but asserts, most frequently, that the AGREEMENT NEVER CAME INTO BEING because of any of the following:

1. Formation Defects

2. Conditions Precedent

Front 159

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Attacking Validity: Formation Defects

Back 159

Formation defects (e.g., fraud, duress, mistake, and illegality) may be shown by extrinsic evidence

Front 160

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Attacking Validity: Conditions Precedent

Back 160

If a party asserts that there was an oral agreement that the written contract would not become EFFECTIVE until a condition occurred, all evidence of the understanding may be offered and received.

This would be a condition precedent to effectiveness.

Front 161

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Interpretation

Back 161

If there is uncertainty or ambiguity in the written agreement's terms or a dispute as to the MEANING of those terms, parol evidence can be received to aid the fact finder in reaching a correct interpretation of the agreement.

However, if the meaning of the agreement is plain, parol evidence is inadmissible.

Front 162

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Showing of "True Consideration"

Back 162

The parol evidence rule will not bar extrinsic evidence showing the "true consideration" paid (e.g., evidence that the consideration stated in the contract was never paid).

Front 163

Parol Evidence Rule: Extrinsic Evidence Outside Scope of Rule: Reformation

Back 163

If a party to a written agreement alleges facts (e.g., mistake) entitling him to reformation of the agreement, the parol evidence is inapplicable.

Front 164

Parol Evidence Rule: Collateral Agreements and Naturally Omitted Terms

Back 164

Parol evidence is often said to be admissible if the alleged parol agreement is collateral to the written obligation (i.e., related to the subject matter but not part of the primary promise) and does not conflict with it.

The Restatement of Contracts include a similar concept with a more definitive approach: the naturally omitted terms doctrine.

The doctrine allows evidence of terms that would naturally be omitted from the written agreement.

A term would naturally be omitted if:

1. It DOES NOT CONFLICT with the written integration; and

2. It concerns a subject that similarly situated parties WOULD NOT ORDINARILY BE EXPECTED TO INCLUDE in the written instrument.

Front 165

Parol Evidence Rule: Not Applicable to Subsequent Modifications

Back 165

Parol evidence can be offered to show subsequent modifications of a written contract.

Front 166

Parol Evidence Rule: Article 2 Rule

Back 166

Article 2 generally follows the rules discussed (including the Corbin test), providing that a party cannot contradict a written contract but he may add CONSISTENT ADDITIONAL TERMS unless:

1. There was a merger clause, or

2. The courts find from all of the circumstances that the writing was intended as a complete and exclusive statement of the terms of the agreement.

Article 2 also provides that a written contract's terms may be EXPLAINED or SUPPLEMENTED by the following, whether or not the writing appears to be ambiguous:

1. The parties' COURSE OF DEALING (i.e., the sequence of conduct concerning PREVIOUS TRANSACTIONS between the parties to a particular transaction that may be regarded as establishing a common basis of their understanding);

2. A USAGE OF TRADE (i.e., a PRACTICE OR METHOD OF DEALING, regularly observed in a particular business setting so as to justify an expectation that it will be followed in the transaction in question);

3. The parties' COURSE OF PERFORMANCE (i.e., if a co

Front 167

Other Article 2 Provisions on Interpreting Contracts: Battle of the Forms:

Back 167

Recall that under Article 2, a contract can be formed even though the terms of the acceptance do not match the terms of the offer.

Article 2 also has specific rules for determining what terms are included in the contract in such a case, and these rules are dependent on whether both parties to the transaction are merchants.

Front 168

Other Article 2 Provisions on Interpreting Contracts: Battle of the Forms: Contracts Involving a Nonmerchant--Terms of the Offer Govern

Back 168

If any party to the contract is not a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do NOT become part of the contract unless the offeror expressly agrees.

Front 169

Other Article 2 Provisions on Interpreting Contracts: Battle of the Forms: Contracts Between Merchants--Additional Terms in Acceptance Usually Included

Back 169

If BOTH parties to the contract are merchants, ADDITIONAL terms in the acceptance will be included in the contract unless:

1. They MATERIALLY ALTER the original terms of the offer (e.g., they change a party's risk or the remedies available);

2. The offer EXPRESSLY LIMITS ACCEPTANCE to the terms of the offer; or

3. The OFFEROR HAS ALREADY OBJECTED to the particular terms, or OBJECTS WITHIN A REASONABLE TIME after notice of them is received.

Front 170

Other Article 2 Provisions on Interpreting Contracts: Battle of the Forms: Contracts Between Merchants--Different Terms in Acceptance May or May Not Be Included

Back 170

There is a split of authority over whether terms in the acceptance that are DIFFERENT from (as opposed to in addition to) the terms in the offer will become part of the contract.

Some courts treat different terms like additional terms, and follow the test set out above in determining whether the terms should be part of the contract.

Other courts follow the "KNOCKOUT RULE," which states that conflicting terms in the offer and acceptance are knocked out of the contract, because each party is assumed to object to the inclusion of such terms in the contract.

Under the knockout rule, gaps left by knocked out terms are filled by the UCC

Front 171

Other Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: Price

Back 171

If:

1. Nothing has been said as to price;

2. The price is left open to be agreed upon by the parties and they fail to agree; or

3. The price is to be fixed in terms of some standard that is set by a third person or agency and it is not set, then the price is a REASONABLE PRICE AT THE TIME OF DELIVERY

Front 172

Other Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: Place of Delivery

Back 172

If the place of delivery is not specified, the place usually is the SELLER'S PLACE OF BUSINESS, if he has one; otherwise, it is the seller's home.

Front 173

Other Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: Time for Shipment or Delivery

Back 173

If the time for shipment or delivery is not specified, shipment/delivery is due in a REASONABLE TIME.

Front 174

Other Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: time for Payment

Back 174

If the time for payment is not specified, payment is due at the TIME AND PLACE AT WHICH THE BUYER IS TO RECEIVE THE GOODS.

Front 175

Other Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: Assortment

Back 175

If a contract provides that an assortment of goods is to be delivered (e.g., blouses in various colors and sizes) and does not specify which party is to choose, the assortment is AT THE BUYER'S OPTION.

If the party who has the right to specify the assortment does not do so seasonably, the other party is excused from any resulting delay and may either proceed in any reasonable manner (e.g., choose a reasonable assortment) or treat the failure as a breach.

Front 176

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Noncarrier Case

Back 176

A noncarrier case is a sale in which it appears that the parties did not intend that the goods would be moved by a common carrier (e.g., when you buy groceries).

In such a case, if the SELLER IS A MERCHANT, risk of loss passes to the buyer only when she TAKES PHYSICAL POSSESSION of the goods.

If the SELLER IS NOT MERCHANT, risk of loss passes to the buyer upon TENDER OF DELIVERY.

Front 177

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case

Back 177

A carrier case is a sale in which it appear that the parties intended the goods to be moved by a carrier (e.g., when you order a book from an Internet website).

There are two types of carrier cases: shipment contracts and destination contracts.

Front 178

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case: Shipment Contract

Back 178

If the contract authorizes or requires the seller to ship the goods by carrier but does not require him to deliver them at a particular destination, it is a shipment contract and risk of loss passes to the buyer when the goods are DELIVERED TO THE CARRIER.

In the absence of a contrary agreement, Article 2 presumes a contract is a shipment contract.

Front 179

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case: Destination Contracts

Back 179

If the contract requires the seller to deliver the goods at a particular destination, the risk of loss passes to the buyer when the goods are TENDERED TO THE BUYER AT THE DESTINATION.

Front 180

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case: Common Delivery Terms: C.I.F. and C. & F.

Back 180

C.I.F. stands for "cost, insurance, and freight;" and C. & F. stands for "cost and freight."

These terms mean that the price in the contract includes the price of the goods, the cost of shipping them to the buyer, and (in C.I.F. contracts) the cost of purchasing insurance for the benefit of the buyer in case the goods are destroyed in transit.

These contracts are ALWAYS SHIPMENT CONTRACTS (i.e., the risk of loss passes to the buyer as soon as the goods are turned over to the carrier).

Front 181

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case: Common Delivery Terms: F.A.S.

Back 181

F.A.S. stands for "free alongside."

The term is generally used only when goods are to be shipped by boat.

Risk of loss passes to the buyer once the goods are delivered to the dock.

Front 182

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Case: Common Delivery Terms: F.O.B.

Back 182

F.O.B. stands for "free on board."

The letters F.O.B. are always followed by a location, and the risk of loss passes to the buyer at the named location.

The seller bears the risk and expense of getting the goods to the named location.

These contracts can be either shipment contracts or destination contracts, depending on the location named.

Front 183

Exam Tip

Back 183

All contracts for goods require an address for delivery.

Merely indicating an address for shipment does not make a contract a destination contract.

A contract that does not contain an F.O.B. term or any other term explicitly allocating the risk of loss is a SHIPMENT contract.

Front 184

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Effect of Breach on Risk of Loss: Defective Goods

Back 184

If goods are so defective that the buyer has a right to reject them, the risk of loss does not pass to the buyer until the defects are CURED or she ACCEPTS the goods in spite of their defects.

Note that a buyer generally has the right to reject for any defect.

Front 185

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Effect of Breach of Risk of Loss: Revocation of Acceptance

Back 185

If the buyer rightfully revokes acceptance, the RISK OF LOSS is treated as having rested ON THE SELLER FROM THE BEGINNING to the extent of any deficiency in the buyer's insurance coverage.

Front 186

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Risk in Sale or Return and Sale on Approval Contracts: Sale or Return

Back 186

For the purpose of determining the risk of loss, a sale or return contract (e.g., the buyer takes goods for resale but may return them if she is unable to resell them) is treated as an ordinary sale and the above rules apply.

If the goods are returned to the seller, the RISK REMAINS ON THE BUYER while the goods are in transit.

Front 187

Other Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Risk in Sale or Return and Sale on Approval Contracts: Sale on Approval

Back 187

In a sale on approval (i.e., the buyer takes goods for use but may return them even if they conform to the contract), the risk of loss does not pass to the buyer until she ACCEPTS.

Front 188

Other Article 2 Provisions on Interpreting Contracts: Insurable Interest and Identification

Back 188

As noted above, a buyer often bears the risk of loss before receiving the goods purchased.

In order to aid buyers in this situation (and a few others), Article 2 gives buyers a special property interest in goods as soon as they are identified as the ones that will be used to satisfy the contract (e.g., as soon as the seller sets them aside for the buyer).

This special property interest is insurable.

Front 189

Other Article 2 Provisions on Interpreting Contracts: Bilateral Contracts Formed by Performance

Back 189

Recall that a contract may be formed by the parties' performance where the mirror image rule is not satisfied and under certain circumstances under Article 2's "battle of the forms" provision.

In such a case, under Article 2, the contract includes all of the terms on which the writings of both parties agree.

Any necessary missing terms are filled in by the supplemental terms provided for in article 2.

Compare this with the Common Law Last Shot Rule

--At common law, the contract will include the terms of the last communication sent to the party who performed.

Front 190

Other Article 2 Provisions on Interpreting Contracts: Warranties

Back 190

Contracts for the sale of goods automatically include a warranty of title (in most cases).

They also may include certain implied warranties and express warranties.

Front 191

Other Article 2 Provisions on Interpreting Contracts: Warranty of Title

Back 191

ANY SELLER of goods warrants that the title transferred is good, that the transfer is rightful, and that there are no liens or encumbrance against the title of which the buyer is unaware at the time of contracting.

This warranty arises automatically and need not be mentioned in the contract.

Front 192

Other Article 2 Provisions on Interpreting Contracts: Warranty Against Infringement

Back 192

A MERCHANT SELLER regularly dealing in goods of the kind sold also automatically warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims.

But a BUYER WHO FURNISHES SPECIFICATIONS for the goods to the seller must hold the seller harmless against such claims.

Front 193

Other Article 2 Provisions on Interpreting Contracts: Implied Warranty of Merchantability: When Given

Back 193

Implied in every contract for SALE BY A MERCHANT who deals in goods of the kind sold, there is a warranty that the goods are merchantable.

Note that the serving of food or drink for consumption on the premises is a sale of goods subject to the warranty of merchantability.

Front 194

Other Article 2 Provisions on Interpreting Contracts: Warranty of Merchantability: Elements

Back 194

To be merchantable, goods must at least be "FIT FOR THE ORDINARY PURPOSES FOR WHICH SUCH GOODS ARE USED."

Front 195

Other Article 2 Provisions on Interpreting Contracts: Seller's Knowledge of Defect Not Relevant

Back 195

As in all implied warranty cases, it makes no difference that the seller himself did not know of the defect or that he could not have discovered it.

Implied warranties are not based on negligence but rather on ABSOLUTE LIABILITY that is imposed on certain sellers.

Front 196

Other Article 2 Provisions on Interpreting Contracts: Implied Warranty of Fitness for a Particular Purpose

Back 196

A warranty will also be implied in a contract for the sale of goods whenever:

1. ANY SELLER, merchant or not, HAS REASON TO KNOW THE PARTICULAR PURPOSE for which the goods are to be used and that the BUYER IS RELYING on the seller's skill and judgment to select suitable goods; and

2. The BUYER IN FACT RELIES on the seller's skill or judgment.

Front 197

Other Article 2 Provisions on Interpreting Contracts: Express Warranties

Back 197

Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model is part of the BASIS OF THE BARGAIN.

For the statement, description, sample, or model to be a part of the basis of the bargain, it need only come at such a time that the BUYER COULD HAVE RELIED on it when she entered into the contract.

The buyer does not need to provide that she actually did rely, although the seller may negate the warranty by proving that the buyer as a matter of fact did not rely.

It is not necessary that the seller intended the affirmation of fact, description, model or sample to create a warranty.

Front 198

Distinguish Express Warranties from Statements of Value or Opinion

Back 198

A statement relating merely to the value of the goods, or a statement purporting to be only the seller's opinion or commendation of the goods, does not create an express warranty.

Front 199

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Warranty of Title

Back 199

The title warranty can be disclaimed or modified only be specific language or by circumstances that give the buyer notice that seller does not claim title or that he is selling only such rights as he or a third party may have (e.g., a sheriff's sale).

Front 200

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Implied Warranties

Back 200

The implied warranties of merchantability and fitness for a particular purpose can be disclaimed by either specific disclaimers or general methods of disclaimer.

Front 201

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Specific Disclaimer of Warranty of Merchantability

Back 201

The warranty of merchantability can be specifically disclaimed or modified only by MENTIONING MERCHANTABILITY.

If the sales contract is in writing, the disclaimer must be CONSPICUOUS.

Front 202

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Disclaimer of Warranty of Fitness for a Particular Purpose

Back 202

The warranty of fitness for a particular purpose can be specifically disclaimed only by a CONSPICUOUS WRITING.

A written disclaimer, according to the statute, is sufficient if it says, for example, "there are no warranties which extend beyond the description on the face hereof."

Front 203

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: "Conspicuous" Defined

Back 203

A term is consicuous when it is "so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it."

Language in the body of a writing is conspicuous if:

1. It is in larger type than surrounding text,

2. It is in a contrasting type, font, or color; or

3. It is set off from the text by marks that call attention to it.

The court, not the jury, decides any fact question as to conspicuousness.

Front 204

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Implied Warranties: General Disclaimer Methods: By General Disclaimer Language

Back 204

Unless the circumstances indicate otherwise, the implied warranties of merchantability and fitness can be disclaimed by expressions such as "AS IS," "with all faults," or other expressions that in common understanding call the buyer's attention to the fact that there are no implied warranties.

Front 205

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Implied Warranties: General Disclaimer Methods: By Examination or Refusal to Examine

Back 205

If the buyer, before entering into the contract, has examined the goods or a sample or model as fully as she desires or has refused to examine, there is no warranty as to defects that a reasonable examination would have revealed to her.

Front 206

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Implied Warranties: General Disclaimer Methods: By Course of Dealing, Etc.

Back 206

Implied warranties may also be disclaimed by the course of dealing, course of performance, or usage of trade.

Front 207

Exam Tip

Back 207

It may seem odd that there are specific disclaimer methods, with detailed requirements, and general disclaimer methods, requiring little formality.

In actual practice, it is better to use the specific disclaimers because general disclaimers may be limited by the circumstances.

However, on the MBE, an "as is" or "with all faults" disclaimer will generally be as effective as a specific disclaimer.

Front 208

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Express Warranties

Back 208

The UCC provides that words or conduct relevant to the creation of express warranties and words or conduct tending to negate such warranties shall wherever possible be construed as consistent with each other, but "NEGATION OR LIMITATIONS IS INOPERATIVE TO THE EXTENT THAT SUCH CONSTRUCTION IS UNREASONABLE."

In other words, once an express warranty is made, it is very difficult to disclaim.

Front 209

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Limitations on Damages

Back 209

Parties may include in their contract a clause limiting the damages available in the case of breach of warranty (e.g., "remedy for breach of warranty is limited to repair or replacement of the defective goods").

Such a limitation generally will be upheld unless the limitation is unconscionable (e.g., causes the remedy to fail of its essential purpose).

Front 210

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Timing--Disclaimers and Limitations in the Box

Back 210

To be effective, a disclaimer of warranty or limitation on remedies must be agreed to during the bargaining process.

Thus, although a few courts hold otherwise, most hold that a warranty disclaimer or limitation on remedy included inside the packaging of goods is not effective against the buyer.

Front 211

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Compare--"Clickwrap"

Back 211

Computer software often comes with terms that appear on the user's computer screen during the installation process, and the purchaser must click to agree to the terms before installing.

Such limitations and disclaimers typically are upheld on the rationale that the purchaser can return the software if he disagrees with the conditions.

Front 212

Other Article 2 Provisions on Interpreting Contracts: Disclaimer of Warranties: Unconscionability and Warranty Disclaimers

Back 212

Some courts will, in addition to determining whether disclaimers have met the formal requirements, test warranty disclaimers by the unconscionability standards.

Moreover, warranty disclaimers that limit damages for personal injury caused by a breach of warranty on consumer goods are prima facie unconscionable.

Front 213

Other Article 2 Provisions on Interpreting Contracts: Damages for Breach of Warranty: In General--Difference Between Goods Tendered and as Warranted

Back 213

Generally, the measure of damages for breach of any warranty is the difference between the value of the goods accepted and the value of the goods as warranted, measured at the time and place of acceptance.

If there are special circumstances, damages may be measured differently to account for those circumstances.

Front 214

Other Article 2 Provisions on Interpreting Contracts: Damages for Breach of Warranty: Breach of Warranty of Title

Back 214

If the warranty of title is breached, the goods are reclaimed by the true owner or lien holder, thus dispossessing the buyer.

The buyer may then rescind the contract, revoke acceptance of the goods, or sue for damages.

The value of the goods accepted is deemed to be nothing; so the damages are the value of the goods as warranted.

Often, but not always, that is the same as the purchase price.

Front 215

Other Article 2 Provisions on Interpreting Contracts: Damages for Breach of Warranty: Breach of Warranty of Title: Special Circumstances--Appreciation and Depreciation

Back 215

If there are special circumstances, the value of the goods is measured at the time of the dispossession rather than at the time of acceptance.

A great appreciation (e.g., art) or depreciation (e.g., car) in the value of the goods from the time of delivery until dispossession is usually considered a special circumstance.

Front 216

Other Article 2 Provisions on Interpreting Contracts: To Whom Do Warranties Extend?

Back 216

UCC section 2-318 provides alternative provisions for determining to whom warranty liability extends.

Most states have adopted the narrowest provision, ALTERNATIVE A, which provides that the seller's warranty liability extends to any natural person who is in the FAMILY or HOUSEHOLD of the buyer or who is a GUEST in the buyer's home if it is reasonable to expect that the person may use, consume, or be affected by the goods and that person suffers PERSONAL INJURY because of a breach of warranty.

Front 217

Modification of Contract Terms: Consideration

Back 217

Under general contract law, a contract cannot be modified unless the modification is supported by new consideration, but under the UCC promises of new and different terms by the parties to a sales contract are valid without consideration.

Front 218

Modification of Contract Terms: Writing

Back 218

A written contract can be modified orally.

For sales of goods contracts, however, the modification must be in writing if the contract AS MODIFIED falls within the Statute of Frauds.

Front 219

Modification of Contract Terms: Common Law--Provisions Prohibiting Oral Modifications Not Effective

Back 219

The common law rule is that even if a written contract expressly provides that it may be modified only by a writing, the parties can orally modify the contract.

Front 220

Modification of Contract Terms: UCC--No-Modification Clauses Effective

Back 220

Under the UCC, if a contract explicitly provides that it may not be modified or rescinded except by a signed writing, that provision is given effect.

If the contract is between a merchant and a nonmerchant, however, this provision requires the nonmerchant's separate signature.

Front 221

Modification of Contract Terms: Writing: Waiver

Back 221

If the parties attempt to orally modify a contract that requires written modification (either because of a contract clause or the Statute of Frauds), it is technically ineffective as a modification, but it can operate as a waiver.

Such a waiver will be bound whenever the other party has changed position in reliance on the oral modification.

However, a party who makes a waiver affecting an executory (not yet performed) portion of the contract may retract the waiver if she notifies the other party that strict performance of the waived terms is required.

The waive may not be retracted if the other party detrimentally relied on it.

Front 222

Modification of Contract Terms: Parol Evidence Rule Does not Apply

Back 222

Parol evidence is admissible to show subsequent oral modifications of a written contract.

Front 223

Performance and Excuse of Performance: Introduction

Back 223

Having established that there is a contract and having determined what are the terms of the contract, the next issue to consider is what performance is due and whether any nonperformance is excused.

Front 224

Performance and Excuse of Performance: Performance at Common Law

Back 224

A party's basic duty at common law is to substantially perform all that is called for in the contract.

Front 225

Performance and Excuse of Performance: Performance under Article 2

Back 225

Article 2 generally requires a PERFECT TENDER--the delivery and condition of the goods must be exactly as promised in the contract.

Front 226

Performance and Excuse of Performance: Performance under Article 2: Obligation of Good Faith

Back 226

Article 2 requires all parties to act in good faith, which is defined as "honesty in fact and the observance of reasonable commercial standards of fair dealing."

Front 227

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Noncarrier Cases

Back 227

Recall that a noncarrier case is a sale in which it appears that the parties did not intend that the goods be moved by a carrier.

Front 228

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Noncarrier Cases: Tender of Delivery

Back 228

In a proper tender of delivery, the seller must put and hold conforming goods at the buyer's disposition for a time sufficient for the buyer to take possession.

The seller must GIVE THE BUYER NOTICE reasonably necessary to enable her to take possession of the good.

The TENDER MUST BE AT A REASONABLE HOUR.

Front 229

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Noncarrier Cases: Place of Delivery

Back 229

In the absence of an agreement otherwise, the place of delivery generally is the SELLER'S PLACE OF BUSINESS, or if he has none, his residence.

Front 230

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Carrier Cases

Back 230

Recall that a carrier case is a sale in which, due either to the circumstances or to the express terms of the agreement, it appears that the parties intended that a carrier be used to move the goods.

Front 231

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Carrier Cases: Shipment Contracts--Where Seller Has Not Agreed to Tender at Particular Destination

Back 231

In the absence of an agreement otherwise, the seller need not see that the goods reach the buyer, but need only:

1. Put the goods in the hands of a reasonable carrier and make a reasonable contract for their transportation to buyer;

2. Obtain and promptly tender any documents required by the contract or usage of trade or otherwise necessary to enable the buyer to take possession; and

3. Promptly notify the buyer of the shipment.

Front 232

Performance and Excuse of Performance: Performance under Article 2: Seller's Obligation of Tender and Delivery: Carrier Cases: Destination Contracts--where Seller has agreed to Tender at Particular Destination

Back 232

If the contract requires the seller to tender delivery of the goods at a particular destination (e.g., F.O.B. buyer's warehouse), the seller must, at the destination, put and hold conforming goods at the buyer's destination.

Front 233

Performance and Excuse of Performance: Performance under Article 2: Buyer's Obligation to Pay--Right to Inspect: Delivery and Payment Concurrent Conditions

Back 233

In NONCARRIER cases, unless the contract provides otherwise, a sale is for cash and the price is due concurrently with tender of delivery.

However, unless otherwise agreed, when goods are shipped BY CARRIER, the price is due only at the time and place at which the buyer receives the goods.

Therefore, in a shipment case the price is due when the goods are put in the hands of the carrier, and in a destination contract the price is due when the goods reach the named destination.

Front 234

Performance and Excuse of Performance: Performance under Article 2: Buyer's Obligation to Pay--Right to Inspect: Payment by Check

Back 234

Tender of payment by check is sufficient unless the seller demands cash and gives the buyer time to get it.

If a check is given, the buyer's duty to pay is suspended until the check is either paid or dishonored.

If the check is paid, the buyer's duty to pay is discharged.

If the check is dishonored, the seller may sue for the price or recover the goods.

Front 235

Performance and Excuse of Performance: Performance under Article 2: Buyer's Obligation to Pay--Right to Inspect: Installment Contracts

Back 235

In an installment contract (i.e., one that requires or authorizes delivery in separate installments), the seller may demand payment for each installment if the price can be so apportioned, unless a contrary intent appears.

Front 236

Performance and Excuse of Performance: Performance under Article 2: Buyer's Obligation to Pay--Right to Inspect: Buyer's Right of Inspection

Back 236

The buyer has a right to inspect the goods before she pays unless the contract provides for payment C.O.D. or otherwise indicates that the buyer has promised to pay without inspecting the goods.

Front 237

Conditions--Has the Duty to Perform Become Absolute?

Back 237

A contract may provide that a party does not have a duty to perform unless some condition is fulfilled.

In that case, the party's failure to perform is JUSTIFIED if the condition was not fulfilled.

Front 238

Conditions--Has the Duty to Perform Become Absolute?: Distinction Between Promise and Condition

Back 238

It is important to understand that there is a difference between whether a party is bound under a contract and whether a party who is bound has come under a duty to perform.

A person is bound if there has been an offer, an acceptance, and an exchange of consideration.

However, the contract may provide (impliedly or explicitly) that a party who is bound does not come under a duty to perform unless or until some specified condition occurs.

In looking at the terms of a contract, a distinction has to be drawn between an absolute promise on the one hand and a condition on the other.

Front 239

Conditions--Has the Duty to Perform Become Absolute?: Distinction Between Promise and Condition: Promise

Back 239

A promise is a commitment to do or refrain from doing something.

If a promise is unconditional, the failure to perform according to its terms is a breach of contract.

Front 240

Conditions--Has the Duty to Perform Become Absolute?: Distinction Between Promise and Condition: Condition

Back 240

"Condition" normally means EITHER:

1. An event or state of the world that must occur or fail to occur BEFORE a party has a duty to perform; or

2. An event or state of the world the occurrence or nonoccurrence of which RELEASES a party from his duty to perform.

A condition is a "PROMISE MODIFIER."

There can be no breach of promise until the promisor is under an immediate duty to perform.

Front 241

Conditions--Has the Duty to Perform Become Absolute?: Distinction Between Promise and Condition: Failure of Condition vs. Breach of Contract

Back 241

The failure of a contractual provision that is only a condition is NOT A BREACH OF CONTRACT, but it discharges the liability of the promisor whose obligations on the contractual promise never mature.

Front 242

Exam Tip

Back 242

The distinction between a promise and a condition is important, because the failure of a PROMISE is a BREACH and gives rise to liability, whereas the failure of a CONDITION RELIEVES a party of the obligation to perform.

Front 243

Conditions--Has the Duty to Perform Become Absolute?: Distinction Between Promise and Condition: Interpretation of Provision as Promise or Condition

Back 243

What determines whether a contract provision is a promise or a condition is the "INTENT OF THE PARTIES."

Courts will look at the words and phrases used by the parties, their prior practices, the custom in the business community with respect to the provision, and whether performance is needed from a third party (if performance is to be rendered by a third party, it is more likely to be a condition than an absolute promise).

In doubtful situations, most courts will hold that the provision in question is a PROMISE.

Front 244

Exam Tip

Back 244

Words such as "provided," "if," and "when" usually indicate a CONDITION, whereas "promise" and "agree" usually indicate a PROMISE.

"When" can be tricky.

If the event following "when" is not within the obligee's control, courts prefer to interpret it as indicating a time for performance, not a condition of performance.

In a common situation the contract states that a subcontractor will get paid "when" the general contractor is paid by the landowner.

This is not considered a condition, and the general contractor must pay the subcontractor within a reasonable time.

Front 245

Conditions--Has the Duty to Perform Become Absolute?: Classification of Conditions: Condition Precedent

Back 245

A condition precedent is one that must occur BEFORE an absolute duty of immediate performance arises in the other party.

Front 246

Conditions--Has the Duty to Perform Become Absolute?: Classification of Conditions: Conditions Concurrent

Back 246

Conditions concurrent are those that are capable of occurring TOGETHER, and that the parties are bound to perform at the same time (e.g., tender of deed for cash).

Thus, in effect, each is a condition "precedent" to other.

Front 247

Conditions--Has the Duty to Perform Become Absolute?: Classification of Conditions: Condition Subsequent

Back 247

A condition subsequent is one the occurrence of which CUTS OFF an already existing absolute duty of performance.

Front 248

Conditions--Has the Duty to Perform Become Absolute?: Express Conditions

Back 248

"Express condition" normally refers to an EXPLICIT CONTRACTUAL PROVISION.

It is an express statement in the contract providing that either:

1. A party does not have a duty to perform unless some event occurs or fails to occur; or

2. If some event occurs or fails to occur, the obligation of a party to perform one or more of his duties under the contract is suspended or terminated.

Conditions of satisfaction are common express conditions.

Front 249

Conditions--Has the Duty to Perform Become Absolute?: Express Conditions: Promisor's Satisfaction as Condition Precdent

Back 249

Many contracts include an express condition that a party will pay only if "satisfied" with the other party's performance.

Because it is a condition, the promisor is under no duty to pay unless she is satisfied.

Front 250

Conditions--Has the Duty to Perform Become Absolute?: Express Conditions: Mechanical Fitness, Utility, or Marketability

Back 250

In contracts involving mechanical fitness, utility, or marketability (e.g., construction or manufacturing contracts), a condition of satisfaction is fulfilled by a performance that would satisfy a REASONABLE PERSON.

It is therefore immaterial that the promisor was not personally satisfied if a reasonable person would have accepted and approved the performance tendered.

Front 251

Conditions--Has the Duty to Perform Become Absolute?: Express Conditions: Personal Taste or Judgment

Back 251

If the contract involves personal taste or personal judgment (e.g., portraits, dental work), a condition of satisfaction is fulfilled only if the promisor is PERSONALLY SATISFIED.

But note: Even if a condition requires personal satisfaction, a promisor's lack of satsifaction must be honest and in good faith.

Thus, if the promisor refuses to examine the promisee's performance, or otherwise rejects the performance in bad faith, the condition of satisfaction will be EXCUSED.

Front 252

Conditions--Has the Duty to Perform Become Absolute?: Express Conditions: Satisfaction of Third Person as Condition

Back 252

Construction contracts often include a condition requiring the satisfaction of the owner's architect or engineer.

When the satsifaction of a third person is a condition, most courts require the ACTUAL PERSONAL SATSIFACTION of that person.

However, the condition will be excused if the third person's dissatisfaction is not HONEST AND IN GOOD FAITH.

Front 253

Conditions--Has the Duty to Perform Become Absolute?: Constructive (Implied) Conditions: Constructive Conditions of Performance

Back 253

The most important and common implied condition is that the duty of each party to render performance is conditioned on the OTHER PARTY either rendering HIS performance or making a tender of his performance.

Front 254

Conditions--Has the Duty to Perform Become Absolute?: Constructive (Implied) Conditions: Constructive Conditions of Cooperation and Notice

Back 254

Constructive conditions of cooperation and notice are common.

Under a constructive condition of cooperation, the obligation of one party to render performance is impliedly conditioned on the other party's cooperaton in that performance.

Also, it is often a condition to one party's performance that the other party give him NOTICE that the performance is due.

A condition of notice is most commonly applied where a party could not reasonably be expected to know a fact (e.g., need for repair) that triggered the duty to perform unless such notice was given.

Front 255

Conditions--Has the Duty to Perform Become Absolute?: Constructive (Implied) Conditions: Order of Performance:

Back 255

The courts will sometimes imply constructive conditions relating to the time for performing under the contract.

Front 256

Conditions--Has the Duty to Perform Become Absolute?: Constructive (Implied) Conditions: Order of Performance: Simultaneous Performance Possible--Conditions Concurrent

Back 256

If both performances can be rendered at the same time, they are constructively concurrent; thus, each is a condition "precedent" to the other.

Hence, absent excuse, each party must first tender his own performance if he wishes to put the other under a duty of immediate performance resulting in breach if he fails to perform.

Front 257

Conditions--Has the Duty to Perform Become Absolute?: Constructive (Implied) Conditions: Order of Performance: One Performance Takes Time--Conditions Precedent

Back 257

If one performance will take a period of time to complete while the other can be rendered in an instant, completion of the longer performance is a constructive condition precedent to execution of the shorter performance.

Front 258

Conditions--Has the Duty to Perform Become Absolute?: Effect of Condition--Equitable Remedy

Back 258

If a contract is not enforceable due to the failure or occurrence of a condition, and one of the parties has fully or partially performed, he can usually recover under unjust enrichment theories, although the measure of damages in that case may be less advantageous than the contract price.

Front 259

Conditions--Has the Duty to Perform Become Absolute?: Have the Conditions Been Excused?

Back 259

A duty of immediate performance with respect to a conditional promise does not become ABSOLUTE until the conditions:

1. Have been PERFORMED, or

2. Have been LEGALLY EXCUSED.

Thus, in analyzing a question, if the facts do not reveal performance of the applicable condition precedent or concurrent, look to see whether the condition has been excused.

Excuse of condition can arise in a variety of ways.

Front 260

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Hindrance or Failure to Cooperate

Back 260

If a party having a duty of performance that is subject to a condition (i.e., she is the party protected by the condition) prevents the condition from occurring, the condition will be excused if the prevention is WRONGFUL (i.e., the other party would not have reasonably contemplated or assumed the risk of this type of conduct).

Front 261

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Actual Breach

Back 261

An actual breach of the contract when performance is due will excuse the duty of counterperformance.

Note, however, that counterperformance will be excused at common law ONLY if the BREACH WAS MATERIAL.

A minor breach may suspend this duty, but it will not excuse it.

Front 262

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Anticipatory Repudiation

Back 262

Anticipatory repudiation occurs if a promisor, prior to the time set for performance of his promise, indicates that he will not perform when the time comes.

If the requirements set forth below are met, the anticipatory repudiation will serve to excuse conditions.

Front 263

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Ancticipatory Repudiation: Executory Bilateral Contract Requirement

Back 263

Anticipatory repudiation applies only if there is a bilateral contract with EXECUTORY (UNPERFORMED) DUTIES ON BOTH SIDES

Front 264

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Ancticipatory Repudiation: Requirement that Anticipatory Repudiation be Unequivocal

Back 264

An anticipatory repudiation stems from the words or conduct of the promisor UNEQUIVOCALLY indicating that he cannot or will not perform when the time comes.

Front 265

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Ancticipatory Repudiation: Effect

Back 265

In the case of an anticipatory repudiation, the nonrepudiating party has four alternatives:

1. Treat the anticipatory repudiation as a total repudiation and SUE IMMEDIATELY

2. Suspend his own performance and WAIT TO SUE until the performance date;

3. Treat the repudiation as an offer to rescind and TREAT THE CONTRACT AS DISCHARGED; or

4. Ignore the repudiation and URGE THE PROMISOR TO PEFORM (but note that by urging the promisor to perform, the nonrepudiating party is not waiving the repudiation--she can still sue for breach and is excused from performing unless the promisor retracts the repudiation)

Front 266

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Ancticipatory Repudiation: Retraction of Repudiation

Back 266

A repudiating party may at any time before his next performance is due withdraw his repudiation unless the other party has CANCELED, MATERIALLY CHANGED HER POSITION in reliance on the repudiation, or otherwise indicated that she considers the REPUDIATION FINAL.

Withdrawal of the repudiation may be in any manner that clearly indicates the intention to perform, but must include any assurances justifiably demanded.

Front 267

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Prospective Inability or Unwillingness to Perform

Back 267

Prospective failure of condition occurs when a party has reasonable grounds to believe that the other party will be unable or unwilling to perform when performance is diue.

Front 268

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Prospective Inability or Unwillingness to Perform: Distinguish From Actual and Anticipatory Repudiation

Back 268

Prospective inability or unwillingness to perform is not an anticipatory repudiation because such a repudiation must be UNEQUIVOCAL, whereas prospective failure to perform involves conduct or words that merely raise doubt that the party will perform.

Front 269

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Prospective Inability or Unwillingness to Perform: Effect of Prospective Failure

Back 269

The effect of prospective failure is to allow the innocent party to suspend further performance on her side until she receives ADEQUATE ASSURANCES that performance will be forthcoming.

If the other party fails to provide adequate assurances, the innocent party may be excused from her own performance and may treat the failure to provide assurances as a repudiation.

Front 270

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Prospective Inability or Unwillingness to Perform: Retraction of Repudiation

Back 270

As with anticipatory repudiation, retraction is possible if the defaulting party regains his ability or willingness to perform.

However, this fact must be communicated to the innocent party in order to be effective.

Front 271

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Substantial Performance:

Back 271

Generally, the condition of complete performance may be excused if the party has rendered substantial performance.

In this case, the other party's duty of counterperformance becomes absolute.

It should be noted, however, that courts generally apply this doctrine only if a CONSTRUCTIVE (implied in law) condition is involved.

They will not apply it when there is an EXPRESS condition for fear this would defeat the express intent of the parties.

Front 272

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Substantial Performance: Substantial Performance Arises if Breach is Minor

Back 272

The rules for determining substantiality of performance are the same as those for determining materiality of breach.

Front 273

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Substantial Performance: Inapplicable Where Breach "Willful"

Back 273

Most courts will not apply the substantial performance doctrine if the breach was "willful."

Front 274

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Substantial Performance: Damages Offset

Back 274

Even though the party who has substantially performed is able to enforce the contract, the other party will be able to mitigate by deducting damages suffered due to the first party's incomplete performance.

Front 275

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Substantial Performance: Generally Inapplicable to Contracts for the Sale of Goods

Back 275

The doctrine of substantial performance generally is not applicable in contracts for the sale of goods.

Front 276

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by "Divisibility" of Contract

Back 276

If a contract is divisible and a party performs one of the units of the contract, he is entitled to the agreed-on equivalent for that unit even if he fails to perform the other units.

It is not a condition precedent to the other party's liability that the whole contract be performed.

However, the other party has a cause of action for failure to perform the other units and may withhold his counterperformance for those units.

Front 277

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by "Divisibility" of Contract: What is a Divisible Contract

Back 277

THREE TESTS must be CONCURRENTLY satisfied to make a contract divisible:

1. The PERFORMANCE OF EACH PARTY IS DIVIDED INTO TWO OR MORE PARTS under the contract;

2. The NUMBER OF PARTS DUE FROM EACH PARTY IS THE SAME; and

3. The PERFORMANCE OF EACH PARTY BY ONE PARTY IS AGREED ON AS THE EQUIVALENT OF THE CORRESPONDING PART from the other party, i.e., each performance is the quid pro quo of the other.

Front 278

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by "Divisibility" of Contract: Sales of Goods--Installment Contracts

Back 278

Like the common law, Article 2 assumes that a contract is not divisible unless it authorizes deliveries in several lots, in which case the contract is called an installment contract.

In installment contracts, the price, if it can be apportioned, may be demanded for EACH LOT unless a contrary intent appears.

Front 279

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel:

Back 279

One having the benefit of a condition under a contract may indicate by WORDS OR CONDUCT that she will not insist on that condition's being met.

Consideration is NOT required for a valid waiver of condition.

Front 280

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel: Estoppel Waiver

Back 280

Whenever a party indicates that she is "waiving" a condition before it is to happen, or she is "waiving" some performance before it is to be rendered, and the person addressed DETRIMENTALLY RELIES on the waiver, the courts will hold this to be a binding (estoppel) waiver.

Note, however, that the promise to waive a condition may be retracted at any time BEFORE the other party has changed his position to his detriment.

Front 281

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel: Election Waiver

Back 281

When a condition or a duty of performance is broken, the beneficiary of the condition or duty must make an election; she may:

1. Terminate her liability, OR

2. Continue under the contract.

If she chooses to continue, she will be deemed to have waived the condition or duty.

This election waiver requires neither consideration nor estoppel (although estoppel elements are often present).

Front 282

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel: Conditions that May be Waived

Back 282

If NO CONSIDERATION is given for the waiver, the condition must be ANCILLARY OR COLLATERAL to the main subject and purpose of the contract for the waiver to be effective.

In other words, one cannot "waive" entitlement to the entire or substantially entire return performance.

Front 283

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel: Waiver in Installment Contracts

Back 283

In an INSTALLMENT CONTRACT, if a waiver is not supported by consideration, the beneficiary of the waived condition can insist on strict compliance with the terms of the contract for future installments (so long as there has been no detrimental reliance on the waiver) by giving notice that he is revoking the waiver.

Front 284

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Waiver or Estoppel: Right to Damages for Failure of Condition

Back 284

It is important to note that a waiver severs only the right to treat the failure of the condition as a total breach excusing counterperformance.

However, the waiving party does NOT thereby waiver her right to damages.

Front 285

Conditions--Has the Duty to Perform Become Absolute?: Excuse of Condition by Impossibility, Impracticability, or Frustration

Back 285

Conditions may be excused by impossibility, impracticability, or frustration of purpose.

Front 286

Has the Absolute Duty to Perform been Discharged?:

Back 286

Once it is determined that a party is under an immediate duty to perform, the duty to perform must be discharged.

Front 287

Has the Absolute Duty to Perform been Discharged?: Discharge by Performance or Tender of Performance

Back 287

The most obvious way to discharge a contractual duty is, of course, by full and complete performance.

Good faith tender of performance made in accordance with contractual terms will also discharge contractual duties.

Front 288

Has the Absolute Duty to Perform been Discharged?: Discharge by Occurrence of Condition Subsequent

Back 288

The occurrence of a condition subsequent will serve to discharge contractual duties.

Front 289

Has the Absolute Duty to Perform been Discharged?: Discharge by Illegality

Back 289

If the subject matter of the contract has become illegal due to a subsequently enacted law or other governmental act, performance will be discharged.

This is often referred to as "supervening illegality"

Note: If the illegality existed at the time the agreement was made, no contract was formed because of the illegality.

Front 290

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility, Impracticability, or Frustration:

Back 290

The occurrence of an unanticipated or extraordinary event may make contractual duties impossible or impracticable to perform or may frustrate the purpose of the contract.

Where the nonoccurrence of the event was a BASIC ASSUMPTION of the parties in making the contract and NEITHER party has expressly or impliedly ASSUMED THE RISK of the event occurring, contractual duties may be discharged.

Front 291

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Impossibility must be "Objective"

Back 291

For this rule to operate, the impossibility must be "objective", i.e., the duties could not be performed by anyone.

"Subjective" impossibility will not suffice, i.e., where the duties could be performed by someone but not the promisor.

Front 292

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Timing of Impossibility

Back 292

The impossibility must arise AFTER the contract has been entered into.

If the facts giving rise to impossibility already existed when the contract was formed, the question is not really one of "discharge of contractual duties."

Rather, it is a "contract formation" problem, namely, whether the contract is voidable because of mistake.

Front 293

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Effect of Impossibility

Back 293

If a contract is discharged because of impossibility, each party is excused from duties arising under the contract that are yet to be fulfilled.

Either party may sue for rescission and receive restitution of any goods delivered, payments made, etc.

Front 294

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Partial Impossibility

Back 294

If the performance to be rendered under the contract becomes only partially impossible, the duty may be discharged ONLY TO THAT EXTENT.

The remainder of the performance may be required according to the contractual terms.

This is so even though this remaining performance might involve added expense or difficulty.

Front 295

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Temporary Impossibility

Back 295

Temporary impossibility SUSPENDS contractual duties; it does not discharge them.

When performance once more becomes possible, the duty "springs back" into existence unless the burden on either party to the contract would be substantially increased or different from that originally contemplated.

Front 296

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Part Performance Prior to Impossibility--Quasi-Contractual Recovery

Back 296

If a party partially performed before the impossibility arose, that party will have a right to recover in quasi-contract at the contract rate or for the reasonable value of his performance if that is a more convenient mode of valuation.

Front 297

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Death of Physical Incapacity

Back 297

Death or the physical incapacity of a person NECESSARY to effectuate the contract serves to discharge it.

Front 298

Exam Tip

Back 298

A contract is NOT discharge by the death or incapacity of the person who was to perform the services if the services are of a kind that can be delegated.

Thus, if the contract was for personal services of a UNIQUE kind (e.g., the painting of a portrait by a famous artist), the death or incapacity of that person could make performance impossible, but if the services are not unique (e.g., the painting of a farmer's barn), the death or incapacity of that person would NOT make performance impossible.

Front 299

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Supervening Illegality

Back 299

Supervening illegality may serve to discharge a contract.

Many courts treat such supervening illegality as a form of impossibility.

Front 300

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Subsequent Destruction of a Contract's Subject Matter or Means of Performance

Back 300

If the contract's subject matter is destroyed or the designated means for performing the contract are destroyed, contractual duties will be discharged.

Front 301

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Compare Destruction of Subject Matter with Contracts to Build

Back 301

A contractor's duty to CONSTRUCT a building is NOT discharged by destruction of the work in progress.

Rationale: Construction is not rendered impossible; the contractor can still rebuild.

However, if the destruction was not caused by the contractor, most courts will excuse the contractor from meeting the original deadline.

Front 302

Exam Tip

Back 302

Remember when a building under construction is destroyed, the contractor is still obligated to build and is NOT entitled to anything other than the CONTRACT PRICE.

By contrast, a contract for REPAIR OR REMODEL of a building that is destroyed after work has begun is discharged (there is nothing left to repair), and to the extent the contractor has already performed, the contractor is entitled to recover in RESTITUTION for the value of the work done prior to the building's destruction.

Front 303

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Subsequent Destruction of Contract's Subject Matter or Means of Performance: Specificity of Subject Matter

Back 303

Note that destruction of the subject matter will render a contract impossible only if the very thing destroyed is necessary to fulfill the contract.

If the thing destroyed is not actually necessary, impossibility is not a defense.

Front 304

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Subsequent Destruction of Contract's Subject Matter or Means of Performance: Specificity of Source

Back 304

As with the destruction of the subject matter, destruction of a source for fulfilling the contract will render the contract impossible only if the source is the one source specified by the parties.

Front 305

Has the Absolute Duty to Perform been Discharged?: Discharge by Impossibility: Subsequent Destruction of Contract's Subject Matter or Means of Performance: If Risk of Loss Has Already Passed to Buyer

Back 305

The rules relating to discharge because of destruction of the subject matter WILL NOT APPLY if the risk of loss has already passed to the buyer

Front 306

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability:

Back 306

Modern courts will also discharge contractual duties where performance has become impracticable.

Front 307

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability: Test for Impracticability

Back 307

The test for finding of impracticability is that the party to perform has encountered:

1. EXTREME AND UNREASONABLE difficulty and/or expense; and

2. Its nonoccurrence was a BASIC ASSUMPTION of the parties.

Front 308

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability: Contracts for the Sale of Goods:

Back 308

Article 2 generally follows the above rules for impossibility and impracticability.

If performance has become impossible or commercially impracticable, the seller will be DISCHARGED TO THE EXTENT OF THE IMPOSSIBILITY OR IMPRACTICABILITY.

Front 309

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability: Contracts for the Sale of Goods: Allocation of Risk

Back 309

Generally, the seller assumes the risk of the occurrence of such unforeseen events and must continue to perform.

However, if it is fair to say that the parties would not have placed on the seller the risk of the extraordinary occurrence, the seller will be discharged.

Front 310

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability: Contracts for the Sale of Goods: Events Sufficient for Discharge

Back 310

Events sufficient to excuse performance include a SHORTAGE OF RAW MATERIALS or the inability to convert them into the seller's product because of contingencies such as war, strike, embargo, or unforeseen shutdown of a major supplier.

Catastrophic local crop failure (as opposed to mere shortage) also is sufficient for discharge.

However, mere increases in costs are rarely sufficient for discharge unless they change the nature of the contract.

Note: There is no bright line test for determining when a rise in price changes the nature of the contract, but an increase in costs of more than 50% has been held to be INSUFFICIENT.

Front 311

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability: Contracts for the Sale of Goods: Seller's Partial Inability to Perform

Back 311

If the seller's inability to perform as a result of the unforeseen circumstance is only partial, he MUST ALLOCATE DELIVERIES among his customers and, at his option, may include in the allocation regular customers not then under contract.

Front 312

Has the Absolute Duty to Perform been Discharged?: Discharge by Frustration:

Back 312

Frustration will exist if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge.

If the purpose has been frustrated, a number of courts will discharge contractual duties even though performance of these duties is still possible.

The elements necessary to establish frustration are as follows:

1. There is some SUPERVENING ACT or event leading to the frustration;

2. At the time of entering into the contract, the parties DID NOT REASONABLY FORESEE the act or event occurring;

3. The PURPOSE of the contract has been completely or almost completely DESTROYED by this act or event; and

4. The purpose of the contract was realized by BOTH PARTIES at the time of making the contract.

Front 313

Exam Tip

Back 313

You will likely encounter the doctrine of frustration on your exam.

Watch for facts showing that a person has rented a venue FOR A SPECIFIC PURPOSE KNOWN TO THE OWNER and a subsequent event (e.g., a storm/death) that was not reasonably foreseeable renders the purpose for renting the place moot.

Front 314

Has the Absolute Duty to Perform been Discharged?: Discharge by Impracticability, Impossibility, Frustration: Distinguish Uses of Defenses of Impossibility/Impracticability and Frustration

Back 314

A seller of land, goods, or services will raise impossibility or impracticability as a defense that discharges performance.

By contrast,the party who is supposed to pay (usually the buyer) will raise frustration of purpose as a defense discharging performance.

Paying money is never impracticable.

Front 315

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission:

Back 315

Rescission will serve to discharge contractual duties.

Rescission may be either mutual or unilateral.

Front 316

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission

Back 316

The contract may be discharged by an EXPRESS AGREEMENT between the parties to rescind.

The agreement to rescind is itself a binding contract supported by consideration, namely, the giving up by each party of her right to counterperformance from the other.

Front 317

Exam Tip

Back 317

Although mutual rescission generally discharges the parties to a contract, watch out for a third-party beneficiary case.

If the rights of a third-party beneficiary have ALREADY VESTED, the contract CANNOT be discharged by mutual rescission by the promisor and promisee.

Front 318

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission: Contract Must be Executory

Back 318

For a contract to be effectively discharged by rescission, the duties must be executory on BOTH sides.

Front 319

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission: Unilateral Contracts

Back 319

If the contract is unilateral (i.e., only one party owes an absolute duty), a contract to mutually rescind where one party still has a duty to perform will be ineffective.

For an effective rescission in a unilateral contract situation where the offeree has already performed, the rescission promise must be supported by one of the following:

1. An offer of NEW CONSIDERATION by the nonperforming party;

2. Elements of PROMISORRY ESTOPPEL, i.e., detrimental reliance; or

3. Manifestation of an INTENT by the original offeree to make a GIFT of the obligation owed her.

Front 320

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission: Partially Performed Bilateral Contracts

Back 320

A mutual agreement to rescind will usually be enforced when a bilateral contract has been partially performed.

Whether the party who has partialy performed will be entitled to compensation depends on the terms of the rescission agreement.

Front 321

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission: Formalities

Back 321

Mutual rescission may be made ORALLY.

This is so even though the contract to be rescinded expressly states that it can be rescinded only by a written document, unless the subject matter of the contract to be rescinded falls within the Statute of Frauds (e.g., transfer of land) or the contract is for the sale of goods (Article 2 requires a written rescission or modification if the original contract to be rescinded or modified expressly requires a written rescission).

Front 322

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Mutual Rescission: Contracts Involving Third-Party Beneficiary Rights

Back 322

If the rights of third-party beneficiaries have already VESTED, the contract may NOT be discharged by mutual rescission.

Front 323

Has the Absolute Duty to Perform been Discharged?: Discharge by Rescission: Unilateral Rescission:

Back 323

Unilateral rescission results when one of the parties to the contract desires to rescind it but the other party desires that the contract be performed according to its terms.

For unilateral rescission to be granted, the party desiring rescission must have adequate legal grounds.

Most common among these are mistake, misrepresentation, duress, and failure of consideration.

If the nonassenting party refuses to voluntarily grant rescission, the other party may file an action in equity to obtain it.

Front 324

Has the Absolute Duty to Perform Been Discharged?: Partial Discharge by Modification of Contract:

Back 324

If a contract is subsequently modified by the parties, this will serve to discharge those terms of the original contract that are the subject of the modification.

It will NOT serve to discharge the ENTIRE CONTRACT.

To have such a partial discharge, the following requirements must usually be met:

1. Mutual assent; and

2. Consideration

Front 325

Has the Absolute Duty to Perform Been Discharged?: Partial Discharge by Modification of Contract: Mutual Assent

Back 325

The modifying agreement must have been mutually assented to.

Note, however, that under the doctrine of REFORMATION, either of the parties to the contract may bring an equity action to have a contract's terms modified if the writing, through mistake or misrepresentation, does not incorporate the terms orally agreed on.

Front 326

Has the Absolute Duty to Perform Been Discharged?: Partial Discharge by Modification of Contract: Consideration

Back 326

Generally, consideration is necessary to modify a contract.

However, the courts usually find consideration to be present because each party has limited his right to enforce the original contract as is.

No consideration is necessary if the effect of the modification is merely to correct an error in the original contract.

Front 327

Has the Absolute Duty to Perform Been Discharged?: Partial Discharge by Modification of Contract: Consideration Not Required for Contracts for the Sale of Goods

Back 327

No consideration is needed for the modification of a contract for the sale of goods under Article 2, as long as the modification is sought in good faith

Front 328

Has the Absolute Duty to Perform Been Discharged?: Discharge by Novation

Back 328

A novation occurs when a new contract substitutes a new party to receive benefits and assume duties that had originally belonged to one of the original parties under the terms of the old contract.

A novation will serve to discharge the old contract.

The elements for a valid novation are:
1. A PREVIOUS valid contract;
2. An AGREEMENT among all parties, including the new party (or parties) to the new contract;
3. The IMMEDIATE EXTINGUISHMENT of contractual duties as between the original contracting parties; and
4. A valid and enforceable NEW contract

Front 329

Has the Absolute Duty to Perform Been Discharged?: Discharge by Cancellation

Back 329

The destruction or surrender of a written contract will not usually, by itself, discharge the contract.

If, however, the parties manifest their INTENT to have these acts serve as a discharge it will usually have this effect if consideration or one of its alternatives is present.

Front 330

Has the Absolute Duty to Perform Been Discharged?: Discharge by Release

Back 330

A release and/or contract not to sue will serve to discharge contractual duties.

The release or contract not to sue usually must be in WRITING and supported by NEW CONSIDERATION or PROMISSORY ESTOPPEL elements.

Front 331

Has the Absolute Duty to Perform Been Discharged?: Discharge by Substituted Contract

Back 331

A contract may be discharged by a substituted contract.

This occurs when the parties to a contract enter into a second contract that IMMEDIATELY REOVKES the first contract expressly or impliedly.

Front 332

Has the Absolute Duty to Perform Been Discharged?: Discharge by Substituted Contract: Intent Governs

Back 332

Whether a second contract will constitute a substituted contract depends on whether the parties intend an immediate discharge or a discharge only after performance of the second contract.

If an immediate discharge is intended, there is a substituted contract.

If the parties intend the first contract to be discharged only after performance of the second contract, there is an executory accord rather than a substituted contract.

Front 333

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction

Back 333

A contract may be discharged by an accord and satisfaction

Front 334

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Accord

Back 334

An accord is an agreement in which one party to an existing contract agrees to accept, in lieu of the performance that she is supposed to receive from the other party to the existing contract, some other, different performance.

Front 335

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Requirement of Consideration

Back 335

In general, an accord must be supported by consideration.

When the consideration is of lesser value than the originally bargained-for consideration in the prior contract, it will be sufficient if the new consideration is of a DIFFERENT TYPE or if the claim is to be paid to a THIRD PARTY.

Front 336

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Partial Payment of Original Debt

Back 336

One often-encountered problem involves the offer of a smaller amount than the amount due under an existing obligation in satisfaction of the claim, i.e., partial payment of an original debt.

The MAJORITY VIEW is that this will suffice for an ACCORD AND SATISFACTION if there is a “BONA FIDE DISPUTE” as to the claim or there is otherwise some alteration, even if slight, in the debtor’s consideration.

Front 337

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Effect of Accord

Back 337

The accord, taken alone, will not discharge the prior contract.

It merely SUSPENDS the right to enforce it in accordance with the terms of the accord contract.

Front 338

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Satisfaction

Back 338

Satisfaction is the performance of the accord agreement.

Its effect is to discharge not only the original contract, but also the accord contract as well.

Front 339

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Effect of Breach of Accord Agreement Before Satisfaction

Back 339

Breach by Debtor: If the debtor breaches an accord agreement, the creditor may sue either on the original undischarged contract OR for breach of the accord agreement.

Breach by Creditor: If a creditor breaches an accord agreement (i.e., he sues on the ORIGINAL contract), the debtor has two courses of action available:

1. Raise the accord agreement as an equitable defense and ask that the contract action be dismissed; or
2. WAIT UNTIL SHE IS DAMAGED (i.e., the creditor is successful in his action on the original contract) and then bring an action at law for damages for breach of the accord contract

Front 340

Has the Absolute Duty to Perform Been Discharged?: Discharge by Accord and Satisfaction: Checks Tendered as “Payment in Full”

Back 340

If a monetary claim is UNCERTAIN or is subject to a BONA FIDE DISPUTE, an accord and satisfaction may be accomplished by a GOOD FAITH tender and acceptance of a check when that check (or an accompanying document) CONSPICUOUSLY STATES that the check is tendered in FULL SATISFACTION of the debt.

Front 341

Has the Absolute Duty to Perform Been Discharged?: Discharge by Account Stated

Back 341

An account stated is a contract between parties whereby they agree to an amount as a FINAL BALANCE DUE from one to the other.

This final balance encompasses a number of transactions between the parties and serves to merge all of these transactions by discharging all claims owed.

Front 342

Has the Absolute Duty to Perform Been Discharged?: Discharge by Lapse

Back 342

If the duty of each party is a condition concurrent to the other’s duty, it is possible that on the day set for performance, neither party is in breach and their contractual obligations lapse.

If the contract states that time is “of the essence,” this lapse will occur immediately; otherwise the contract will lapse after a reasonable time.

Front 343

Has the Absolute Duty to Perform Been Discharged?: Effect of Running of Statute of Limitations

Back 343

If the statute of limitations on an action has run, it is generally held that an action for breach of contract may be barred.

Note, however, that only JUDICIAL REMEDIES are barred; the running of the statute DOES NOT DISCHARGE THE DUTIES. (Hence, if the party who has the advantage of the statute of limitations subsequently agrees to perform, new consideration will not be required.)

Front 344

Exam Tip

Back 344

Note the difference between a discharge by lapse and the effect of a statute of limitations.

Although both have to do with time and the end result may be similar, technically, lapse DISCHARGES a contract while the statute of limitations merely MAKES IT UNENFORCEABLE in court.

Front 345

Breach: When Does a Breach Occur?

Back 345

If it is found that:

1. The promisor is under an absolute duty to perform, and
2. This absolute duty of performance has not been discharged, then this failure to perform in accordance with contractual terms will amount to a breach of the contract.

The nonbreaching party who sues for breach of contract must show that she is WILLING AND ABLE to perform but for the breaching party’s failure to perform.

Front 346

Breach: Material or Minor Breach—Common Law Contracts

Back 346

Once you have determined that there is a breach of contract, the next determination to be made in a common law contract situation is whether that breach is material or minor

Front 347

Effect of Breaches: Minor Breach

Back 347

A breach of contract is minor if the oblige gains the SUBSTANTIAL BENEFIT OF HER BARGAIN despite the obligor’s defective performance.

A minor breach does NOT RELIEVE the aggrieved party of her duty of performance under the contract; it merely gives her a right to damages (setoff) for the minor breach.

Front 348

Effect of Breaches: Material Breach

Back 348

If the oblige does not receive the SUBSTANTIAL BEENFIT OF HER BARGAIN, the breach is considered material.

If the breach is material, the nonbreaching party:

1. May treat the contract as at an end, i.e., any duty of counterperformance owed by her will be discharged, and
2. Will have an IMMEDIATE RIGHT to all remedies for breach of the entire contract, including total damages

Front 349

Effect of Breaches: Minor Breach Coupled with Anticipatory Repudiation

Back 349

If a minor breach is coupled with an anticipatory repudiation, the nonbreaching party may treat it as a material breach; i.e., she may sue immediately for total damages and is permanently discharged from any duty of further performance.

Indeed, the courts hold that the aggrieved party must not continue on, because to do so would be a failure to mitigate damages. The UCC modifies this to permit a party to complete the manufacture of goods to avoid having to sell unfinished goods at the lower salvage value.

Front 350

Effect of Breaches: Material Breach of Divisible Contract

Back 350

In a divisible contract, recovery is available for substantial performance of a divisible part even though there has been a material breach of the entire contract.

Front 351

Exam Tip

Back 351

The distinction between a material and a minor breach is important.

A minor breach may allow the aggrieved party to recover damages, BUT SHE STILL MUST PERFORM under the contract.

If the breach is a material one, the aggrieved party need not perform

Front 352

Determining Materiality of Breach

Back 352

In determining whether a breach is material or minor, courts look at:

1. THE AMOUNT OF BENEFIT RECEIVED by the nonbreaching party;
2. THE ADEQUACY OF COMPENSATION for damages to the injured party;
3. THE EXTENT OF PART PERFORMANCE by the breaching party;
4. HARDSHIP to the breaching party;
5. NEGLIGENT OR WILLFUL BEHAVIOR of the breaching party; and
6. THE LIKELIHOOD THAT THE BREACHING PARTY WILL PERFORM the remainder of the contract.
The nonbreaching party must show that he was both willing and able to perform.

Front 353

Exam Tip

Back 353

On the MBE, you will not be asked to make a fact determination about whether a breach is material. If you find yourself going down that road, reconsider what the question is asking. Note that it is still worthwhile to know the factors above should you need to discuss them in an ESSAY ANSWER

Front 354

Breach: Timeliness of Performance

Back 354

Failure to perform by the time stated in the contract is generally not a material breach if performance is rendered within a reasonable time.

However, if the nature of the contract makes timely performance essential, or if the contract expressly provides that time is of the essence, then failure to perform on time is a material breach.

Front 355

Perfect Tender Rule—Sale of Goods

Back 355

Article 2 generally does not follow the common law substantial performance doctrine.

Instead, it follows the perfect tender rule—if GOODS OR THEIR DELIVERY FAIL TO CONFORM TO THE CONTRACT IN ANY WAY, the buyer generally may reject all, accept all, or accept any commercial units and reject the rest.

Front 356

Perfect Tender Rule—Sale of Goods: Right to Reject Cut off by Acceptance

Back 356

A buyer’s right to reject under the perfect tender doctrine generally is cut off by acceptance.

Under Article 2, a buyer accepts when:

1. After reasonable opportunity to inspect the goods, she INDICATES TO THE SELLER THAT THEY CONFORM to requirements or that she will keep them even though they fail to conform;
2. She FAILS TO REJECT within a reasonable time after tender or delivery of the goods or fails to seasonably notify the seller of her rejection; or
3. She does any ACT INCONSISTENT WITH THE SELLER’S OWNERSHIP.

Front 357

Perfect Tender Rule—Sale of Goods: Buyer’s Responsibility for Goods After Rejection

Back 357

After rejecting goods in her physical possession, the buyer has an obligation to hold them with reasonable care at the seller’s disposition and to obey any reasonable instructions as to the rejected goods (e.g., arrange to reship the goods).

If the seller gives no instructions within a reasonable time, the buyer may RESHIP the goods to the seller, STORE the for the seller’s account, or RESELL them for the seller’s account.

If the buyer resells, she is entitled to recover her expenses and a reasonable commission

Front 358

Perfect Tender Rule—Sale of Goods: Buyer’s Right to Revoke Acceptance

Back 358

Once goods are accepted, the buyer’s power to reject the goods generally is terminated and the buyer is obligated to pay the price less any damages resulting from the seller’s breach.

However, under limited situations, a buyer may revoke an acceptance already made.

A proper revocation of acceptance has the effect of a rejection

Front 359

Perfect Tender Rule—Sale of Goods: When Acceptance May be Revoked

Back 359

The buyer may revoke her acceptance if the goods have a defect that SUBSTANTIALLY IMPAIRS their VALUE to her AND:
1. She accepted them on the REASONABLE BELIEF THAT THE DEFECT WOULD BE CURED and it has not been; or
2. She accepted them because of the DIFFICULTY OF DISCOVERING DEFECTS or because of the SELLER’S ASSURANCES THAT THE GOODS CONFORMED to the contract.

Revocation of acceptance must occur:
1. WITHIN A REASONABLE TIME after the buyer discovers or should have discovered the defects; and
2. BEFORE ANY SUBSTANTIAL CHANGE IN THE GOODS OCCURS that is not caused by a defect present at the time the seller relinquished possession.

Front 360

Exceptions to the Perfect Tender Rule: Installment Contracts

Back 360

The right to reject when a contract is an installment contract (i.e., when there is to be more than one delivery) is much more limited than in a single delivery contract situation.

Installment contracts follow a rule akin to the common law substantial performance doctrine. In an installment contract situation, an installment can be rejected only if the nonconformity SUBSTANTIALLY IMPAIRS the value of that installment AND CANNOT BE CURED. In addition, the whole contract is breached only if the nonconformity SUBSTANTIALLY IMPAIRS the value of the ENTIRE CONTRACT.

Front 361

Exceptions to the Perfect Tender Rule: Seller’s Right to Cure: Single Delivery Contracts: Seller Can Cure by Notice and New Tender Within Time for Performance

Back 361

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 that the buyer must then accept

Front 362

Exceptions to the Perfect Tender Rule: Seller’s Right to Cure: Single Delivery Contracts: Seller’s Right to Cure Beyond Original Contract Time

Back 362

Ordinarily, the seller has no right to cure beyond the original contract time.

However, if the buyer rejects a tender of nonconforming goods that the seller REASONABLY believed would be acceptable “without or without money allowance,” the seller, upon reasonable notification to the buyer, has a FURTHER REASONABLE TIME beyond the original contract time within which to make a conforming tender.

A seller will probably be found to have had reasonable cause to believe that the tender would be acceptable if the seller can show that:
1. Trade practices or prior dealings with the buyer led the seller to believe that the goods would be acceptable, or
2. The seller could not have known of the defect despite proper business conduct (e.g., packaged goods purchased from a supplier).

Front 363

Exceptions to the Perfect Tender Rule: Seller’s Right to Cure: Installment Contracts

Back 363

Article 2 provides that a defective shipment in an installment contract cannot be rejected IF THE DEFECT CAN BE CURED.

Front 364

Breach: Anticipatory Repudiation

Back 364

Recall that an anticipatory repudiation can be treated as an immediate breach of contract

Front 365

Breach: Breach of Warranty

Back 365

Sellers gives warranties as to the condition of the goods that apply even after acceptance.

Failure to live up to these warranties constitutes a breach of warranty, for which a remedy is available.

Front 366

Remedies: Nonmonetary Remedies

Back 366

There are two broad branches of remedies available in breach of contract situations: nonmonetary and monetary.

The primary nonmonetary remedy for exam purposes is specific performance, but Article 2 has a number of other specific nonmonetary remedies for certain situations involving contracts for the sale of goods.

Front 367

Remedies: Nonmonetary Remedies: Specific Performance

Back 367

If the LEGAL REMEDY IS INADEQUATE, the nonbreaching party may seek specific performance, which is an order from the court to the breaching party to perform or face contempt of court charges.

Front 368

Remedies: Nonmonetary Remedies: Specific Performance: Available for Land and Rare or Unique Goods

Back 368

Specific performance is always available for land sale contracts. It is also available for goods that are rare or unique at the time performance is due (e.g., rare paintings, gasoline in short supply because of oil embargoes, etc.).

It is NOT available for breach of contract to provide SERVICES, even if the services are rare or unique. This is because of problems of enforcement (it would be difficult for the court to supervise the performance) and because the courts feel it is tantamount to involuntary servitude, which is prohibited by the Constitution.

Front 369

Remedies: Nonmonetary Remedies: Specific Performance: Injunction as Alternate Remedy

Back 369

In contrast, a court may ENJOIN a breaching employee from working for a competitor throughout the duration of the contract if the services contracted for are rare or unique.

Front 370

Remedies: Nonmonetary Remedies: Specific Performance: Covenant Not to Compete

Back 370

Most courts will grant an order of specific performance to enforce a contract not to compete if:
1. The services to be performed are UNIQUE (thus rendering money damages inadequate); and
2. The covenant is REASONABLE.

To be reasonable:
1. The covenant must be reasonably necessary to protect a LEGITIMATE INTEREST of the person benefited by the covenant (i.e., an employer or the purchaser of the covenantor’s business);
2. The covenant must be reasonable as to its GEOGRAPHIC SCOPE AND DURATION (i.e., it cannot be broader than the benefited person’s customer base and typically cannot be longer than one or two years); and
3. The covenant MUST NOT HARM THE PUBLIC.

Front 371

Remedies: Nonmonetary Remedies: Specific Performance: Equitable Defenses Available

Back 371

In addition to standard contract defenses, an action for specific performance is subject to the equitable defenses of:

1. LACHES—a claim that the plaintiff has delayed bringing the action and that THE DELAY HAS PREJUDICED THE DEFENDANT;
2. UNCLEAN HANDS—a claim that the party seeking specific performance is guilty of WRONGDOING IN THE TRANSACTION BEING SUED UPON; and
3. SALE TO A BONA FIDE PURCHASER—a claim that the subject matter has been SOLD TO A PERSON WHO PURCHASED FOR VALUE AND IN GOOD FAITH.

Front 372

Remedies: Nonmonetary Remedies under Article 2: Buyer’s: Cancellation

Back 372

If a buyer rightfully rejects goods because they do not conform to the contract, one of her options is simply to cancel the contract

Front 373

Remedies: Nonmonetary Remedies under Article 2: Buyer’s Right to Replevy Identified Goods: On Buyer’s Prepayment

Back 373

If a buyer has made at least PART PAYMENT of the purchase price of goods that have been identified under a contract and the seller HAS NOT DELIVERED the goods, the buyer may REPLEVY the goods from the seller in two circumstances:
1. The seller becomes INSOLVENT within 10 days after receiving the buyer’s first payment; or
2. The goods were purchased for PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES

In either case, the buyer must TENDER any unpaid portion of the purchase price to the seller.

Front 374

Remedies: Nonmonetary Remedies under Article 2: Buyer’s Right to Replevy Identified Goods: On Buyer’s Inability to Cover

Back 374

In addition, the buyer may replevy undelivered, identified goods from the seller if the buyer, after reasonable effort, is UNABLE TO SECURE ADEQUATE SUBSTITUTE GOODS (i.e., cover).

Front 375

Remedies: Nonmonetary Remedies under Article 2: Seller’s Right to Withhold Goods

Back 375

If the buyer fails to make a payment due on or before delivery, the seller may withhold delivery of the goods.

The seller may also withhold goods when the goods are sold on credit and, before the goods are delivered, the seller discovers that the buyer is insolvent.

However, in such a case, the seller must deliver the goods if the buyer tenders cash for their payment

Front 376

Remedies: Nonmonetary Remedies under Article 2: Seller’s Right to Recover Goods from Buyer on Buyer’s Insolvency

Back 376

If a seller learns that a buyer has received delivery of goods on credit while insolvent, the seller may reclaim the goods upon demand made within 10 days after the buyer’s receipt of the goods.

However, the 10-day limitation does not apply if a misrepresentation of solvency has been MADE IN WRITING to the particular seller WITHIN THREE MONTHS before delivery.

Front 377

Remedies: Nonmonetary Remedies under Article 2: Seller’s Right to Recover Shipped or Stored Goods from Bailee on Buyer’s Insolvency

Back 377

The seller may stop delivery of goods in the possession of a carrier or other bailee if he discovers that the buyer is insolvent.

Of course, the seller must deliver the goods if the buyer tenders cash for their payment

Front 378

Remedies: Nonmonetary Remedies under Article 2: Seller’s Right to Recover Shipped or Stored Goods from Bailee on Buyer’s Breach

Back 378

The seller may stop delivery of carload, truckload, planeload, or larger shipments of goods if the buyer breaches the contract or the seller has a right to withhold performance pending receipt of assurances.

Front 379

Remedies: Nonmonetary Remedies under Article 2: Seller’s Ability to Force Goods on Buyer Limited

Back 379

The seller’s ability to force goods on a buyer is limited to an action for price when the seller is unable to resell the goods to others at a reasonable price.

Front 380

Remedies: Nonmonetary Remedies under Article 2: Right to Demand Assurances

Back 380

Under Article 2, actions or circumstances that increase the risk of nonperformance by the other party to the contract, but that do not clearly indicate that performance will not be forthcoming, may NOT be treated immediately as an anticipatory repudiation.

Instead, if the party REASONABLY fears that the other party will not perform, he may demand assurances that the performance will be forthcoming at the proper time.

Until he receives adequate assurances, he may suspend his own performance.

If the proper assurances are not given within a reasonable time (i.e., within 30 days after a justified demand for assurances), he may then treat the contract as repudiated.

What constitutes an adequate assurance depends on the facts of the case

Front 381

Exam Tip

Back 381

Be sure that you understand the difference between circumstances giving rise to a right to demand assurances and those constituting anticipatory repudiation.

The right to demand assurances arises when there are REASONABLE GROUNDS FOR INSECURITY—something makes a party nervous that the other will not perform.

Anticipatory repudiation requires much more than nervousness; there must be a CLEAR INDICATION that the other party is unwilling or unable to perform. Thus, for example, “I’m not going to perform” is an anticipatory repudiation, but “I’m not sure if I can perform” most likely is only a reason to demand assurances.

Front 382

Monetary Remedy—Damages: Compensatory Damages

Back 382

The usual goal of damages for breach of contract is to PUT THE NONBREACHING PARTY WHERE SHE WOULD HAVE BEEN HAD THE PROMISE BEEN PERFORMED, so far as money can do this.

Front 383

Monetary Remedy—Damages: Compensatory Damages: “Standard Measure” of Damages—Expectation Damages

Back 383

In most cases, the plaintiff’s standard measure of damages will be based on an “expectation” measure, i.e., sufficient damages for her to buy a SUBSTITUTE PERFORMANCE.

This is known as “BENEFIT OF THE BARGAIN” damages

Front 384

Monetary Remedy—Damages: Compensatory Damages: Reliance Damage Measure

Back 384

If the plaintiff’s expectation damages are too speculative to measure (e.g., the plaintiff cannot show with sufficient certainty the profits she would have made if the defendant had performed the contract), the plaintiff may elect to recover damages based on a “reliance” measure, rather than an expectation measure.

Reliance damages award the plaintiff the cost of her performance; i.e., they are designed to PUT THE PLAINTIFF IN THE POSITION SHE WOULD HAVE BEEN IN HAD THE CONTRACT NEVER BEEN FORMED.

Front 385

Monetary Remedy—Damages: Compensatory Damages: Consequential Damages

Back 385

Consequential damages consist of losses resulting from the breach that any REASONABLE PERSON would have FORESEEN would occur from a breach at the time of entry into the contract.

Note that in contracts for the sale of goods, ONLY A BUYER may recover consequential damages.

Front 386

Monetary Remedy—Damages: Compensatory Damages: Incidental Damages—Contracts for the Sale of Goods

Back 386

In contracts for the sale of goods, compensatory damages may also include incidental damages.

Incidental damages include expenses reasonably incurred by the buyer in inspection, receipt, transportation, care, and custody of goods rightfully rejected and other expenses reasonably incident to the seller’s breach, and by the seller in storing, shipping, returning, and reselling the goods as a result of the buyer’s breach

Front 387

Monetary Remedy—Damages: Compensatory Damages: Certainty Rule

Back 387

The plaintiff must prove that the losses suffered were certain in their nature and NOT SPECULATIVE.

Traditionally, if the breaching party prevented the nonbreaching party from setting up a new business, courts would not award lost profits from the prospective business as damages, because they were too speculative.

However, modern courts may allow lost profits as damages if they can be made more certain by observing similar businesses in the area or other businesses previously owned by the same party.

Front 388

Monetary Remedy—Damages: Punitive Damages

Back 388

Punitive damages are generally NOT awarded in contract cases.

Front 389

Monetary Remedy—Damages: Nominal Damages

Back 389

Nominal (token) damages (e.g., 1 dollar) may be awarded when a breach is shown but no actual loss is proven

Front 390

Monetary Remedy—Damages: Liquidated Damages

Back 390

The parties to a contract may stipulate what damages are to be paid in the event of a breach. These liquidated damages must be in an amount that is reasonable in view of the actual or anticipated harm caused by the breach.

Front 391

Requirement for Enforcement of Liquidated Damages Clause

Back 391

Liquidated damage clauses will be enforceable if the following two requirements are met:

1. Damages for contractual breach must have been DIFFICULT TO ESTIMATE OR ASCERTAIN AT THE TIME THE CONTRACT WAS FORMED; and
2. The amount agreed on must have been a REASONABLE FORECAST or compensatory damages in the case of breach. The test for reasonableness is a comparison between the amount of damages prospectively probable at the time of contract formation and the liquidated damages figure. If the liquidated damages amount is unreasonable, the courts will construe this as a PENALTY and will not enforce the provision.

Front 392

Liquidated Damages are Recoverable Even if No Actual Damages

Back 392

If the above requirements are met, the plaintiff will receive the liquidated damages amount.

Most courts hold this is so even if no actual money or pecuniary damages have been suffered.

Front 393

Contracts for Sale of Goods: Buyer’s Damages: Seller Does not Deliver or Buyer Rejects Goods or Revokes Acceptance

Back 393

The buyer’s basic damages where the seller does not deliver, or the buyer properly rejects or revokes acceptance of tendered goods, consist of the difference between the contract price and either:
1. The market price (i.e., BENEFIT OF THE BARGAIN damages) or
2. The cost of buying replacement goods (i.e., COVER), PLUS incidental and consequential damages, if any, LESS expenses saved as a result of the seller’s breach.

Front 394

Contracts for Sale of Goods: Buyer’s Damages: Seller Does not Deliver or Buyer Rejects Goods or Revokes Acceptance: Difference Between Contract Price and Market Price

Back 394

If the buyer measures damages by the difference between contract price and market price, market price usually is determined as of the time the buyer learns of the breach and at the place of tender

Front 395

Exam Tip

Back 395

Note that the BUYER’S DAMAGES are measured as of the TIME SHE LEARNS OF THE BREACH while the SELLER’S DAMAGES are measured as of the TIME FOR DELIVERY

Front 396

Contracts for Sale of Goods: Buyer’s Damages: Seller Does not Deliver or Buyer Rejects Goods or Revokes Acceptance: Difference Between Contract Price and Cost of Replacement Goods (“Cover”)

Back 396

If the buyer chooses the cover measure (i.e., difference between contract price and cost of buying replacement goods), the buyer must make a REASONABLE CONTRACT for substitute goods IN GOOD FAITH and WITHOUT UNREASONABLE DELAY

Front 397

Contracts for Sale of Goods: Buyer’s Damages: Seller Delivers Nonconforming Goods that Buyer Accepts: Warranty Damages

Back 397

If the buyer accepts goods that breach one of the seller’s warranties, the buyer may recover as damages “loss resulting in the normal course of events from the breach.”

The basic measure of damages in such a case is the difference between the VALUE OF THE GOODS AS DELIVERED and the VALUE THEY WOULD HAVE HAD IF THEY HAD BEEN ACCORDING TO THE CONTRACT, plus incidental and consequential damages.

Front 398

Contracts for Sale of Goods: Buyer’s Damages: Seller Delivers Nonconforming Goods that Buyer Accepts: Notice Requirement

Back 398

To recover damages for any defect as to accepted goods, the buyer must, WITHIN A REASONABLE TIME AFTER SHE DISCOVERS OR SHOULD HAVE DISCOVERED THE DEFECT, notify the seller of the defect.

If she does not notify the seller within a reasonable time, she loses her right to sue.

“Reasonable time” is, of course, a flexible standard.

Front 399

Contracts for Sale of Goods: Buyer’s Damages: Seller Anticipatorily Breaches Contract

Back 399

The measure of damages when the seller anticipatorily breaches the contract is the difference between the MARKET PRICE AT THE TIME THE BUYER LEARNED OF THE BREACH and the CONTRACT PRICE.

Front 400

Contracts for Sale of Goods: Buyer’s Damages: Consequential Damages

Back 400

As noted above, a seller is liable for consequential damages arising from his breach if:

1. He had reason to know of the buyer’s general or particular requirements, and
2. The subsequent loss resulting from those needs could not reasonably be prevented by cover.

Particular needs must be made known to the seller, but general requirements usually need not be.

Front 401

Contracts for Sale of Goods: Buyer’s Damages: Consequential Damages: Goods for Resale

Back 401

If the buyer is in the business of reselling the goods, the seller is deemed to have knowledge of the resale

Front 402

Contracts for Sale of Goods: Buyer’s Damages: Consequential Damages: Goods Necessary for Manufacturing

Back 402

If a seller knows that the goods he provides are to be used in the manufacturing process, he should know that his breach would cause a disruption in production leading to a loss of profits.

Front 403

Contracts for Sale of Goods: Seller’s Damages: Where Buyer Repudiates or Refuses to Accept Conforming Goods

Back 403

The Code provides three measures of damages for when the buyer wrongfully repudiates or refuses to accept conforming goods. The seller can:

1. Recover the difference between the MARKET PRICE (measured as of the time and at the place of delivery) AND THE CONTRACT PRICE;
2. Resell the goods and recover the difference between the CONTRACT PRICE AND THE RESALE PRICE; or
3. If applicable, recover under a “LOST PROFITS” measure the difference between the contract price and the cost to the seller. (Note that if the seller is a dealer, his costs would be the costs incurred in obtaining the goods from the manufacturer or another dealer, whereas if the seller is a manufacturer, his costs would be the costs of manufacturing the goods.)

The seller may also recover incidental damages, such as costs of storing, shipping, and reselling the goods as a result of the buyer’s breach.

Note: The Code provides that the lost profits measure may be used only when the other measures will not put the seller in as good a po

Front 404

Exam Tip

Back 404

Other damages measures will never be adequate if the seller is a LOST VOLUME SELLER.

To determine whether the lost profits measure is appropriate, look at the seller’s SUPPLY.

If the seller’s supply of goods is UNLIMITED (i.e., he can obtain all the goods he can sell), then he is a lost volume seller, and the lost profits measure can be used.

If the seller’s supply is limited (i.e., he cannot obtain all the goods he can sell, as with the sale of a unique item), the lost profits measure cannot be used, and one of the other two measures must be used instead.

Front 405

Contracts for Sale of Goods: Seller’s Damages: Where Buyer Accepted Goods—Action for Goods

Back 405

If the buyer has accepted the goods and has not paid, or has not accepted the goods and the seller is UNABLE TO RESELL them at any reasonable price, or if the goods have been lost or damaged at a time the risk of loss was on the buyer, the seller may maintain an action against the buyer for the full contract price.

Front 406

Contracts for Sale of Land

Back 406

The standard measure of damages for breach of land sale contracts is the difference between the CONTRACT PRICE AND THE FAIR MARKET VALUE of the land

Front 407

Employment Contracts

Back 407

In employment contracts, check to see whether the breach was by the employer or the employee.

Front 408

Employment Contracts: Breach by Employer

Back 408

Irrespective of when the breach occurs—i.e., before performance, after part performance, or after full performance, the standard measure of the employee’s damages is the FULL CONTRACT PRICE (although such damages may be reduced if the employee fails to mitigate)

Front 409

Employment Contracts: Breach by Employee

Back 409

If the employee is the breaching party, the employer is entitled to a standard measure of damages computed according to what it COSTS TO REPLACE the employee, i.e., the difference between the cost incurred to get a second employee to do the work and the cost to the employer had the first breaching employee done the work.

If he breach was unintentional (e.g., due to the employee’s illness), the employee may have the right to quasi-contractual recovery for the work done to date.

The modern view allows employees to offset such amount whether the breach was intentional or unintentional

Front 410

Construction Contracts

Back 410

If a construction contract is breached by the OWNER, the builder will be entitled to profits that would have resulted from the contract plus any costs expended. (If the contract is breached after construction is completed, the measure if the full contract price plus interest.) If the contract is breached by the BUILDER, the owner is entitled to the cost of completion plus reasonable compensation for the delay.

Most courts allow the builder to offset or recover for work performed to date to avoid unjust enrichment of the owner. (If the breach is only late performance, the owner is entitled to damages incurred because of late performance.)

Front 411

Avoidable Damages (Mitigation)

Back 411

The nonbreaching party cannot recover avoidable damages. Thus, she must refrain from piling up losses after she receives notice of the breach; she must not incur further expenditures or costs, and she must make reasonable efforts to cut down her losses by procuring a substitute performance at a fair price. Should she not do so, she will not be allowed to recover those damages that might have been avoided by such mitigation after the breach.

Generally, a party may RECOVER THE EXPENSES OF MITIGATION.

Front 412

Avoidable Damages (Mitigation): Employment Contracts

Back 412

If the employer breaches, the employee is under a duty to use REASONABLE CARE in finding a position of the same kind, rank, and grade in the same locale (although it does not necessarily have to be at the same exact pay level). However, not that the burden is on the employer to show that such jobs were available.

Front 413

Avoidable Damages (Mitigation): Contracts for Sale of Goods

Back 413

If the buyer is in breach, recall that the seller generally cannot bring an action against the buyer for the full contract price unless the goods cannot be resold at a reasonable price or were damages or lost when the risk of loss was on the buyer.

Front 414

Avoidable Damages (Mitigation): Manufacturing Contracts

Back 414

Generally, in a contract to manufacture goods, if the person for whom the goods are being manufactured breaches, the manufacturer is under a duty to mitigate by NOT CONTINUING WORK after the breach. However, if the facts are such that completion of the manufacturing project will decrease rather than increase damages, the manufacturer has a right to continue.

Front 415

Avoidable Damages (Mitigation): Construction Contracts

Back 415

A builder does not owe a duty to avoid the consequences of an owner’s breach, e.g., by securing other work, but does not have a duty to mitigate by NOT CONTINUING WORK after the breach. Again, however, if completion will decrease damages, it will be allowed.

Front 416

Exam Tip

Back 416

Keep in mind that the duty to mitigate only REDUCES a recovery; it does not prohibit recovery. Thus, if a fact pattern shows a clear breach and the plaintiff does not attempt to mitigate damages, she can recover for the breach, but the recovery will be reduced by the damages that would have been avoided by mitigation

Front 417

Restitution

Back 417

As an alternative to the contract damages discussed above, restitution may be available in a contract-type situation. Restitution is not really part of contract law, but rather is a distinct concept. Restitution is based on preventing UNJUST ENRICHMENT when one has conferred a benefit on another without gratuitous intent.

Restitution can provide a remedy not only when a contract exists and has been breached, but also when a contract is unenforceable, and in some cases when no contractual relationship exists at all between the parties.

Front 418

Restitution: Terminology

Back 418

When a contract is unenforceable or no contract between the parties exists, an action to recover restitutionary damages often is referred to as an action for an IMPLIED IN LAW contract or an action in QUASI-CONTRACT.

Front 419

Restitution: Measure of Damages

Back 419

Generally, the measure of restitution is the VALUE OF THE BENEFIT CONFERRED. Although this is usually based on the benefit received by the defendant (e.g., the increase in value of the defendant’s property or the value of the goods received), recovery may also be measured by the “detriment” suffered by the plaintiff (e.g., the reasonable value of the work performed or the services rendered) if the benefits are difficult to measure or the “benefit” measure would achieve an unfair result.

Front 420

Restitution: When a Contract Breached

Back 420

When a contract has been breached and the nonbreaching party has not fully performed, he may choose to rescind the contract and sue for restitution to prevent unjust enrichment. Note that if the plaintiff has fully performed, he is LIMITED TO HIS DAMAGES UNDER THE CONTRACT. This may be less than he would have received in a restitutionary action, because a restitutionary remedy is not limited to the contract price.

Front 421

Restitution: When a Contract Breached: “Losing” Contracts

Back 421

A restitutionary remedy often is desirable in the case of a “losing” contract (i.e., a contract in which the actual value of the services or goods to be provided under the contract is higher than the contract price), because normal contract expectation damages or reliance damages would be for a lesser amount.

Front 422

Restitution: Breach by Plaintiff

Back 422

Under some circumstances, a plaintiff may seek restitution even though the plaintiff is the party who breached. If the breach was intentional, some courts will not grant the breaching party restitution; modern courts, however, will permit restitutionary recovery but limit it to the contract price less damages incurred as a result of the breach.

Front 423

Restitution: Breach by Plaintiff: Restitution of Advance Payments or Deposit If Buyer of Goods Breaches

Back 423

If the buyer has paid part of the purchase price in advance and then breaches the contract, he can usually recover some of the payments. Unless the seller can prove greater damages, he may keep advance payments totaling 20% of the purchase price or 500 dollars, whichever is less. The balance must be returned to the buyer. If there is a valid liquidated damages clause, the seller need refund only the excess of the buyer’s payments over the amount of liquidated damages.

Front 424

Restitution: When Contract Unenforceable—Quasi-Contract Remedy

Back 424

Restitution may be available in a QUASI-CONTRACT action when a contract was made but is unenforceable and unjust enrichment would otherwise would result (e.g., celebrity is hired to sign autographs and is paid, but dies before he performs; the other party has a restitutionary action to recover the payment).

Front 425

Restitution: When No Contract Involved—Quasi-Contract Remedy

Back 425

Restitution may also be available in a QUASI-CONTRACT action when there is no contractual relationship between the parties if:

1. The plaintiff has CONFERRED A BENEFIT on the defendant by rendering services or expending properties;
2. The plaintiff conferred the benefit with the REASONABLE EXPECTATION OF BEING COMPENSATED for its value;
3. The defendant KNEW OR HAD REASON TO KNOW of the plaintiff’s expectation; and
4. The defendant would be UNJUSTLY ENRICHED if he were allowed to retain the benefit without compensating the plaintiff.

Front 426

Exam Tip

Back 426

Always keep the quasi-contract remedy in the back of your mind. LOOK FIRST FOR A VALID CONTRACT allowing the plaintiff relief. But if there is no valid contract, quasi-contract may provide a remedy if the plaintiff has suffered a loss or rendered services.

Front 427

Rescission

Back 427

Rescission is a remedy whereby the original contract is considered voidable and rescinded. The parties are left as though a contract had never been made. The grounds for rescission must have occurred either BEFORE OR AT THE TIME the contract was entered into. The grounds are:

1. MUTUAL MISTAKE of a material fact;
2. UNILATERAL MISTAKE IF THE OTHER PARTY KNEW or should have known of the mistake;
3. UNILATERAL MISTAKE IF HARDSHIP BY THE MISTAKEN PARTY IS SO EXTREME it outweighs the other party’s expectations under the contract;
4. MISREPRESENTATION OF FACT OR LAW by either party as to a material factor in the negotiations that was relied upon; and
5. OTHER GROUNDS, such as duress, undue influence, illegality, lack of capacity, and failure of consideration.

Front 428

Rescission: Defenses

Back 428

Generally all equitable defenses (e.g., laches, unclean hands) are available in a rescission action. Note that the plaintiff’s negligence is not a defense.

Front 429

Rescission: Additional Relief

Back 429

If the plaintiff has paid money to the defendant, she is entitled to restitution in addition to rescission

Front 430

Reformation

Back 430

Reformation is the remedy whereby the writing setting forth the agreement between the parties is changed so that it conforms to the original intent of the parties. A reformation action is usually based on mutual mistake; i.e., the parties agree to a set of terms and the written contract fails to reflect those terms. Reformation is also possible if there is a unilateral mistake and the party who knows of the mistake does not disclose it and when the writing is incorrect because of misrepresentation.

Front 431

Reformation: Clear and Convincing Evidence Standard

Back 431

The variance between the antecedent agreement and the writing must be established by clear and convincing evidence

Front 432

Reformation: Parol Evidence Rule and Statute of Frauds Do Not Apply

Back 432

The parol evidence rule is not applied in reformation actions. Likewise, the majority rule is that the Statute of Frauds does not apply—but may courts will deny reformation if it would add land to the contract with complying with the Statute of Frauds.

Front 433

Reformation: Defenses

Back 433

In addition to the general equitable defenses, the existence of a bona fide purchaser for value is also a defense to reformation. Similarly, reformation is not permitted if the rights of third parties will be unfairly affected.

Front 434

Statute of Limitations under UCC

Back 434

For sales contracts, the UCC provides for FOUR-YEAR STATUTE of limitations. The parties may shorten the period by agreement to NO LESS THAN ONE YEAR, but they may not lengthen the period.

Front 435

Statute of Limitations under UCC: Accrual of Action

Back 435

The statutory period begins to run when a party can bring suit—i.e., when breach occurs. The period begins to run regardless of whether the aggrieved party knows about the breach.

Front 436

Statute of Limitations under UCC: Breach of Warranty Actions

Back 436

For a breach of warranty action, the breach occurs and the limitations period begins to run upon DELIVERY of the goods. This is true even if the buyer does not discover the breach until much later.

Front 437

Statute of Limitations under UCC: Warranty Extends to Future Performance

Back 437

If there is an EXPRESS warranty that explicitly extends to future performance of the goods, the four-year period does not begin to run until the buyer should have discovered the breach

Front 438

Statute of Limitations under UCC: Implied Warranties Breached on Delivery

Back 438

Because implied warranties cannot “explicitly” extend to future performance, they are breached, if at all, upon delivery.

Front 439

Rights and Duties of Third Parties to the Contract: Introduction

Back 439

Nonparties to a contract may have rights or duties in connection with the contract.

Front 440

Rights and Duties of Third Parties to the Contract: Third-Party Beneficiaries

Back 440

In the typical third-party beneficiary situation, A (the promise) contracts with B (the promisor) that B will render some performance to C (the third-party beneficiary).

Front 441

Rights and Duties of Third Parties to the Contract: Intended vs. Incidental Beneficiaries

Back 441

Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining if a beneficiary is intended, consider whether the beneficiary:
1. Is IDENTIFIED in the contract;
2. RECEIVES PERFORMANCE DIRECTLY from the promisor, or
3. Has some RELATIONSHIP WITH THE PROMISEE to indicate intent to benefit

Front 442

Rights and Duties of Third Parties to the Contract: Creditor vs. Donee Beneficiary

Back 442

There are two types of intended beneficiaries:
1. A creditor beneficiary—a person to whom a debt is owed by the promise, and
2. A donee beneficiary—a person whom the promise intends to benefit gratuitously.

Front 443

Rights and Duties of Third Parties to the Contract: Significance of Vesting

Back 443

Before the intended third-party beneficiary’s rights vest, the promisor and the promise are free to modify their contract—including removing the third-party beneficiary altogether—without consulting the third party. Once the third party’s rights vest, the promisor and promise cannot vary his rights without his consent.

Front 444

Exam Tip

Back 444

One the exam, look at the call of the question to see who is bringing the suit. If the THIRD-PARTY BENEFICIARY is bringing suit to enforce the contract, the act of bringing the suit vests his rights. No other act is required. Accordingly, if the third-party beneficiary is suing, any answer choice that states the third-party beneficiary’s rights have not vested is INCORRECT.

Front 445

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Third-Party Beneficiary vs. Promisor

Back 445

A beneficiary may sue the promisor on the contract. The promisor may raise against the third-party beneficiary any defense that the promisor has against the promise. Whether the promisor may use the defenses the promise would have against the third-party beneficiary depends on whether the promisor made an absolute promise to pay or only a promise to pay what the promise owes the beneficiary. If the promise is absolute, the promisor cannot assert the promisee’s defenses; if the promise is not absolute, the promisor can assert the promisee’s defenses.

Front 446

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Third-Party Beneficiary vs. Promisee

Back 446

A CREDITOR beneficiary can sue the promise on the existing obligation between them. She may also sue the promisor, but may obtain only one satisfaction. A donee beneficiary has no right to sue the promise unless grounds for a detrimental reliance remedy exist.

Front 447

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Promisee vs. Promisor

Back 447

A promise may sue the promisor both at law and in equity for specific performance if the promisor is not performing for the third person

Front 448

Assignment of Rights and Delegation of Duties: Assignment

Back 448

In the typical assignment situation, X (the obligor) contracts with Y (the assignor). Y assigns his right to X’s performance to Z (the assignee).

Front 449

Assignment of Rights and Delegation of Duties: What Rights May be Assigned

Back 449

Generally, all contractual rights may be assigned.

Exceptions:
1. An assignment that would SUSBTANTIALLY CHANGE the obligor’s duty at risk (e.g., personal service contracts where the service is unique, requirements and output contracts where the assignee will substantially vary the quantity);
2. An assignment of future rights to ARISE FROM FUTURE CONTRACTS (not future rights in already existing contracts); and
3. An assignment PROHIBITED BY LAW (e.g., wage assignments)

Front 450

Assignment of Rights and Delegation of Duties: Express Contractual Provision Against Assignment

Back 450

A clause prohibiting assignment of “THE CONTRACT” will be construed as barring only delegation of the assignor’s duties. A clause prohibiting assignment of CONTRACTUAL RIGHTS generally does not bar assignment, but rather merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign WILL BE VOID, the parties can bar assignment. Also, if the assignee has notice of the nonassignment clause, an assignment will be ineffective.

Front 451

Rescission

Back 451

Rescission is a remedy whereby the original contract is considered voidable and rescinded. The parties are left as though a contract had never been made. The grounds for rescission must have occurred either BEFORE OR AT THE TIME the contract was entered into. The grounds are:

1. MUTUAL MISTAKE of a material fact;
2. UNILATERAL MISTAKE IF THE OTHER PARTY KNEW or should have known of the mistake;
3. UNILATERAL MISTAKE IF HARDSHIP BY THE MISTAKEN PARTY IS SO EXTREME it outweighs the other party’s expectations under the contract;
4. MISREPRESENTATION OF FACT OR LAW by either party as to a material factor in the negotiations that was relied upon; and
5. OTHER GROUNDS, such as duress, undue influence, illegality, lack of capacity, and failure of consideration.

Front 452

Rescission: Defenses

Back 452

Generally all equitable defenses (e.g., laches, unclean hands) are available in a rescission action. Note that the plaintiff’s negligence is not a defense.

Front 453

Rescission: Additional Relief

Back 453

If the plaintiff has paid money to the defendant, she is entitled to restitution in addition to rescission

Front 454

Reformation

Back 454

Reformation is the remedy whereby the writing setting forth the agreement between the parties is changed so that it conforms to the original intent of the parties. A reformation action is usually based on mutual mistake; i.e., the parties agree to a set of terms and the written contract fails to reflect those terms. Reformation is also possible if there is a unilateral mistake and the party who knows of the mistake does not disclose it and when the writing is incorrect because of misrepresentation.

Front 455

Reformation: Clear and Convincing Evidence Standard

Back 455

The variance between the antecedent agreement and the writing must be established by clear and convincing evidence

Front 456

Reformation: Parol Evidence Rule and Statute of Frauds Do Not Apply

Back 456

The parol evidence rule is not applied in reformation actions. Likewise, the majority rule is that the Statute of Frauds does not apply—but may courts will deny reformation if it would add land to the contract with complying with the Statute of Frauds.

Front 457

Reformation: Defenses

Back 457

In addition to the general equitable defenses, the existence of a bona fide purchaser for value is also a defense to reformation. Similarly, reformation is not permitted if the rights of third parties will be unfairly affected.

Front 458

Statute of Limitations under UCC

Back 458

For sales contracts, the UCC provides for FOUR-YEAR STATUTE of limitations. The parties may shorten the period by agreement to NO LESS THAN ONE YEAR, but they may not lengthen the period.

Front 459

Statute of Limitations under UCC: Accrual of Action

Back 459

The statutory period begins to run when a party can bring suit—i.e., when breach occurs. The period begins to run regardless of whether the aggrieved party knows about the breach.

Front 460

Statute of Limitations under UCC: Breach of Warranty Actions

Back 460

For a breach of warranty action, the breach occurs and the limitations period begins to run upon DELIVERY of the goods. This is true even if the buyer does not discover the breach until much later.

Front 461

Statute of Limitations under UCC: Warranty Extends to Future Performance

Back 461

If there is an EXPRESS warranty that explicitly extends to future performance of the goods, the four-year period does not begin to run until the buyer should have discovered the breach

Front 462

Statute of Limitations under UCC: Implied Warranties Breached on Delivery

Back 462

Because implied warranties cannot “explicitly” extend to future performance, they are breached, if at all, upon delivery.

Front 463

Rights and Duties of Third Parties to the Contract: Introduction

Back 463

Nonparties to a contract may have rights or duties in connection with the contract.

Front 464

Rights and Duties of Third Parties to the Contract: Third-Party Beneficiaries

Back 464

In the typical third-party beneficiary situation, A (the promise) contracts with B (the promisor) that B will render some performance to C (the third-party beneficiary).

Front 465

Rights and Duties of Third Parties to the Contract: Intended vs. Incidental Beneficiaries

Back 465

Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining if a beneficiary is intended, consider whether the beneficiary:
1. Is IDENTIFIED in the contract;
2. RECEIVES PERFORMANCE DIRECTLY from the promisor, or
3. Has some RELATIONSHIP WITH THE PROMISEE to indicate intent to benefit

Front 466

Rights and Duties of Third Parties to the Contract: Creditor vs. Donee Beneficiary

Back 466

There are two types of intended beneficiaries:
1. A creditor beneficiary—a person to whom a debt is owed by the promise, and
2. A donee beneficiary—a person whom the promise intends to benefit gratuitously.

Front 467

Rights and Duties of Third Parties to the Contract: When Do the Rights of the Beneficiary Vest?

Back 467

A third party can enforce a contract only if his rights have vested. This occurs when he:
1. MANIFESTS ASSENT to a promise in the manner requested by the parties;
2. Brings a SUIT TO ENFORCE the promise; or
3. MATERIALLY CHANGES POSITION in justifiable reliance on the promise.

Prior to vesting, the promise and promisor are free to modify or rescind the beneficiary’s rights under the contract.

Front 468

Rights and Duties of Third Parties to the Contract: Significance of Vesting

Back 468

Before the intended third-party beneficiary’s rights vest, the promisor and the promise are free to modify their contract—including removing the third-party beneficiary altogether—without consulting the third party. Once the third party’s rights vest, the promisor and promise cannot vary his rights without his consent.

Front 469

Exam Tip

Back 469

One the exam, look at the call of the question to see who is bringing the suit. If the THIRD-PARTY BENEFICIARY is bringing suit to enforce the contract, the act of bringing the suit vests his rights. No other act is required. Accordingly, if the third-party beneficiary is suing, any answer choice that states the third-party beneficiary’s rights have not vested is INCORRECT.

Front 470

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Third-Party Beneficiary vs. Promisor

Back 470

A beneficiary may sue the promisor on the contract. The promisor may raise against the third-party beneficiary any defense that the promisor has against the promise. Whether the promisor may use the defenses the promise would have against the third-party beneficiary depends on whether the promisor made an absolute promise to pay or only a promise to pay what the promise owes the beneficiary. If the promise is absolute, the promisor cannot assert the promisee’s defenses; if the promise is not absolute, the promisor can assert the promisee’s defenses.

Front 471

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Third-Party Beneficiary vs. Promisee

Back 471

A CREDITOR beneficiary can sue the promise on the existing obligation between them. She may also sue the promisor, but may obtain only one satisfaction. A donee beneficiary has no right to sue the promise unless grounds for a detrimental reliance remedy exist.

Front 472

What Are the Rights of the Third-Party Beneficiary and the Promisee?: Promisee vs. Promisor

Back 472

A promise may sue the promisor both at law and in equity for specific performance if the promisor is not performing for the third person

Front 473

Assignment of Rights and Delegation of Duties: Assignment

Back 473

In the typical assignment situation, X (the obligor) contracts with Y (the assignor). Y assigns his right to X’s performance to Z (the assignee).

Front 474

Assignment of Rights and Delegation of Duties: What Rights May be Assigned

Back 474

Generally, all contractual rights may be assigned.

Exceptions:
1. An assignment that would SUSBTANTIALLY CHANGE the obligor’s duty at risk (e.g., personal service contracts where the service is unique, requirements and output contracts where the assignee will substantially vary the quantity);
2. An assignment of future rights to ARISE FROM FUTURE CONTRACTS (not future rights in already existing contracts); and
3. An assignment PROHIBITED BY LAW (e.g., wage assignments)

Front 475

Assignment of Rights and Delegation of Duties: Express Contractual Provision Against Assignment

Back 475

A clause prohibiting assignment of “THE CONTRACT” will be construed as barring only delegation of the assignor’s duties. A clause prohibiting assignment of CONTRACTUAL RIGHTS generally does not bar assignment, but rather merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign WILL BE VOID, the parties can bar assignment. Also, if the assignee has notice of the nonassignment clause, an assignment will be ineffective.

Front 476

Assignment of Rights and Delegation of Duties: Effect of Assignment

Back 476

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor.

Front 477

What is Necessary for an Effective Assignment?

Back 477

For an assignment to be effective, the assignor must manifest an intent to immediately and completely transfer her rights. A writing is usually not required to have an effective assignment. The right being assigned must be adequately described. It is not necessary to use the word “assign”; any accepted words of transfer will suffice. A gratuitous assignment is effective; consideration is not required.

Front 478

Is the Assignment Revocable or Irrevocable?

Back 478

Assignments are divided into two categories: assignments for value and gratuitous assignments.

Front 479

Assignment for Value

Back 479

An assignment is for value if it is:
1. Done for CONSIDERATION, or
2. Taken as security for or payment of a PREEXISTING DEBT.

Assignments for value cannot be revoked.

Front 480

Gratuitous Assignments

Back 480

An assignment not for value (i.e., a gratuitous assignment) generally is revocable.

Exceptions: A gratuitous assignment is irrevocable if:
1. The obligor has already performed;
2. A token chose (i.e., a tangible claim, such as a stock certificate) is delivered;
3. An assignment of a simple chose (i.e., an intangible claim, such as a contract right) is put in writing; or
4. The assignee can show detrimental reliance on the gratuitous assignment (i.e., estoppel)

Front 481

Methods of Revocation for Gratuitous Assignments

Back 481

A revocable gratuitous assignment may be terminated by:
1. The death or bankruptcy of the assignor;
2. Notice of revocation by the assignor to the assignee or the obligor;
3. The assignor taking performance directly from the obligor; or
4. Subsequent assignment of the same right by the assignor to another.

Front 482

Effect of Revocation of Gratuitous Assignment

Back 482

Once an assignment is revoked, the privity between the assignor and the obligor is restored, and the assignor is once again the real party in interest.

Front 483

What Are the Rights and Liabilities of the Various Parties?: Assignee vs. Obligor

Back 483

The assignee can sue the obligor, as the assignee is the real party in interest; i.e., the assignee—not the assignor—is entitled to performance under any contract. (The obligor has a defense against the assignee any defense inherent in the contract, e.g., failure of consideration and other defenses that came into existence before the obligor has knowledge of the assignment.) The obligor cannot raise by way of defense any defenses the assignor might have against the assignee.

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What Are the Rights and Liabilities of the Various Parties?: Assignee vs. Assignor

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In every assignment FOR VALUE, the assignor warrants that:
1. He has not made a prior assignment of the same right;
2. The right exists and is not subject to any undisclosed defenses; and
3. He will do nothing to interfere with the assigned right.

The assignee may sue the assignor for breach of any of these warranties.

However, the assignor will not be liable to the assignee if the obligor is incapable of performing.

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What Problems Exist If There Have Been Successive Assignments of Same Rights?

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If the first assignment is revocable, a subsequent assignment revokes it.

If it is irrevocable, THE FIRST ASSIGNMENT WILL USUALLY PREVAIL over a subsequent assignment.

Several exceptions exist (IF the second assignee has PAID VALUE AND TAKEN WITHOUT NOTICE of the first assignment):

1. The subsequent assignee gets the first judgment against the obligor;
2. The subsequent assignee gets the first payment of a claim from the obligor;
3. The subsequent assignee gets delivery of a token chose;
4. The subsequent assignee is the party to a novation releasing the assignor; or
5. The subsequent assignee can proceed against the first assignee on an estoppel theory (estoppel could, of course, operate against the subsequent assignee as well).

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Delegation

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In the typical delegation situation, Y (the obligor/delegator) promises to perform for X (the obligee). Y delegates her duty to z (the delegate).

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What Duties May be Delegated?

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Generally, all duties may be delegated.

Exceptions:
1. The duties involve PERSONAL JUDGMENT AND SKILL;
2. Delegation would CHANGE THE OBLIGEE’S EXPECTANCY (e.g., requirements and output contracts);
3. A SPECIAL TRUST was reposed in the delegator by the other party to the contract; and
4. There is a CONTRACTUAL RESTRICTION on delegation.

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What is Necessary for Effective Delegation?

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The delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral.

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Exam Tip

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Although “assignment” and “delegation” have precise meanings (rights are assigned and duties are delegated), on the MBE the terms are often used loosely. Thus, a question might state initially that “Y assigned the rights in the contract to X,” but the facts later show that duties were also delegated.

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Delegation: What Are the Rights and Liabilities of the Parties?

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The oblige must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract; thus, the obligee may sue the delegator for nonperformance by the delegate. The obligee may sue the delegate for nonperformance, but can require the delegate to perform ONLY IF there has been an ASSUMPTION (i.e., the delegate promises he will perform the duty delegated and this promise is supported by consideration or it equivalent). This promise creates a contract between the delegator and the delegate in which the obligee is a third-party beneficiary.

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Delegation: Terminology

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Today, words assigning “the contract” or “all my rights under the contract” are usually construed as including an assumption of the duties by the assignee, unless a contrary intention appears.

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Novation Distinguished

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Novation substitutes a new party for an original party to the contract. It requires assent of all parties and completely releases the original party.

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Power of Person Other than Owner to Transfer Good Title to a Purchaser: Entrusting

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Entrusting goods to a merchant WHO DEALS IN GOODS OF THAT KIND gives him the power (but not the right) to transfer all rights of the entruster to a BUYER IN THE ORDINARY COURSE OF BUSINESS.

Entrusting includes both delivering goods to the merchant and leaving purchased goods with the merchant for later pick-up or delivery. Buying in the ordinary course means buying in good faith from a person who deals in goods of the kind without knowledge that the sale is in violation of the ownership rights of third parties.

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Exam Tip

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Note that the requirements for entrustment are very specific: The merchant must be one WHO ORDINARILY DEALS IN GOODS OF THE KIND (e.g., a television repair shop that only repairs televisions does not qualiy). The sale must be IN THE ORDINARY COURSE OF BUSINESS (e.g., seizure by a credito to satisfy a lien does not qualify). Entrustment passes only the rights of the entruster (i.e., if the entruster is not the owner, ownership cannot pass).

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Power of Person Other than Owner to Transfer Good Title to a Purchaser: Voidable Title Concept

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Generally, if a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer (i.e., it is a voidable title). However, the defrauded seller may not recover the goods from a GOOD FAITH PURCHASER FOR VALUE who bought from the fraudulent buyer. The rights of a defrauded seller are cut off both by a buyer and by a person who takes a SECURITY INTEREST in the goods.

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Power of Person Other than Owner to Transfer Good Title to a Purchaser: Thief Generally Cannot Pass Title

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If a thief steals goods from the true owner and then sells them to a buyer, the thief is UNABLE to pass title to the buyer (because his title is VOID).

Rationale: A seller can transfer only the title he has or has power to transfer. Therefore, even a good faith purchaser for value generally cannot cut off the rights of the true owner if the seller’s title was void.

An exception to this rule may apply, however, if the buyer has made ACCESSIONS (i.e., valuable improvements) to the goods or the true owner is ESTOPPED from asserting title (e.g., if the true owner expressly or impliedly represented that the thief had title).