Contracts - Performance, Modification, & Excuse

Front 1

Carrier Case

Back 1

Where the parties to a sales of goods contract agree to use a common carrier.

Front 2

Non-carrier cases - Risk of Loss

Back 2

1) If seller is not a merchant then the risk of loss passes to the buyer upon tender of delivery.

2) If the seller is a merchant then the risk of loss passes to the buyer only when the goods are physically in the buyer’s possession.

Front 3

Shipment Contract

Back 3

A contract where the seller promises to turn the goods over to the carrier.

The default rule is if the contract is silent, then the contract is a shipment contract.

Risk of loss passes to the buyer when the goods are delivered to the carries (FOB Seller)

Front 4

Destination Contract

Back 4

A contract where the seller promises to tender delivery to a particular destination.

Risk of loss passes to the buyer when the goods are tendered at the destination point (FOB Buyer)

Front 5

Carrier cases - Risk of Loss

Back 5

Shipment contracts – the risk of loss passes to the buyer when the goods are delivered to the carrier
1) Identified as “FOB Seller”

Destination contracts – the risk of loss passes to the buyer when the goods are tendered at the destination point specified in the contract.
1) Identified as “FOB Buyer”

Front 6

Preexisting Duty Rule
(Common law - Modification)

Back 6

A promise to increase compensation for duties already owed under an existing contract is an unenforceable modification because there is no consideration.

Exceptions:
1. mutual modification
2. unforeseen circumstances

Front 7

Mutual Modification
(Exception - Preexisting duty rule)

Back 7

A promise to increase compensation under an existing contract is enforceable as a mutual modification if:

1) Both parties agree to a performance that is different from the one required by the original contract.

2) The difference of performance is not a mere pretense of a newly-formed bargain.

Front 8

Unforeseen Circumstances
(Exception - Preexisting duty rule)

Back 8

The preexisting duty rule will not apply if a promise of increased compensation is given in exchange for a promised performance that has been rendered substantially more burdensome than reasonably anticipated at formation.

Front 9

Modification
(UCC)

Back 9

The UCC specifically displaces the common law.

1) Modification needs no consideration as long as there is good faith.

2) Even when the modification is supported by consideration, it is unenforceable if the appearance of a mutual bargain is merely a pretext and bad faith change.

Front 10

Excusing Performance due to Faulty Assumptions

Back 10

A party entering a contract makes many assumptions about the present and future. When such assumptions turn out to be faulty, the parties may be excused under the doctrines of:

1. mistake
2. impracticability
3. frustration of purpose

Front 11

Mistake

Back 11

Must be material--significantly impact transactions the party values

Front 12

Unilateral Mistake

Back 12

One party is mistake about a present material fact--the person is not excused from performance.

Exceptions:
--the other party knew or had reason to know if the person's mistake
--(minority) a serious, almost unconscionable, clerical error--Except: will not apply if it is because of extreme negligence on the part of the party making the error and if the other party relied on the clerical error.

Front 13

Mutual Mistake

Back 13

Both parties have mutually made a mistaken assumption about a fact(s)

The contract will be voidable by the disadvantaged party where three requirements are met:
1) The mistaken assumption must relate to material facts
2) The mistake must be made by both parties
3) The disadvantaged party did not bear the risk of mistake under the parties’ agreement.

Front 14

Impossibility

Back 14

Excuses both parties from their obligations under a contract if the performance has been rendered impossible by events occurring after the contract was formed.

2 requirements:
1. objective
3 circumstances:
1. when the subjective matter of the contract is destroyed
2. where there is a personal services contract and the performing party has died or become incapacitated.
3. when supervening law has rendered performance legally impermissible.


2. the contingency to create the impossibility was not known to the parties at the time of making the contract.

Front 15

Impracticability

Back 15

Two requirements:
a. The contingency causing the impracticability was unforeseen.
b. The increase in the cost for burden of performance would be far beyond what either party anticipated.

Does not apply: increase costs, rise and collapse of market

Does apply: war, embargo, local crop failure, unforeseen shut downs of major supply sources

Front 16

Frustration of Purpose

Back 16

Where a contingency occurs that dramatically reduces the value of performance to the receiving party, the doctrine of frustration of purpose may be available to excuse the receiving party from its contractual obligations.

3 requirements:
1. the party’s principle purpose in entering the contract is frustrated.
2. the frustration was substantial in nature
3. the nonoccurrence of the event precipitating frustration must have been a basic assumption of the contract.

Ex: coronation of King - guy contracts for hotel room, King gets ill

Front 17

Ways to Excuse Performance by Agreement of the Parties

Back 17

1. Rescission
2. Accord and Satisfaction

Front 18

Rescission

Back 18

Is permissible where both parties to a contract are mid-performance, consideration is provided by each party’s discharge of the other’s duties.

Must be in writing (unless transfer of property)

Note: The Statute of Frauds will not prevent an oral agreement of rescission that discharges unperformed duties from being enforced unless rescission of a transfer of property is involved

Front 19

Accord and Satisfaction

Back 19

The parties may make an accord, which is a contract under which the obligee promises to accept substitute performance in satisfaction of the obligor’s existing duty.

Accord and satisfaction satisfies the obligor’s original obligation

The accord alone does not discharge the obligor’s duty but only suspends it.

Must be consideration.

Front 20

Validity of Accord
(accord and satisfaction)

Back 20

There may be sufficient consideration if:

a. Where the accord involves an agreement for partial or substituted performance, the substitute of the performance differs significantly from the original performance or its obligation is doubtful.

b. Where the accord involves an agreement for partial payment, there must be a good faith or bona fide dispute about the amount owed.

Front 21

Anticipatory Repudiation
(Definition)

Back 21

May be established by:
1. A party’s definitive statement indicating that it will commit a breach of contract.

2. A party’s voluntary act that renders the party unable to perform its contractual obligations (e.g. sell the widget to someone else).

Front 22

Adequate Assurance of Performance
(Anticipatory repudiation)

Back 22

If anticipatory repudiation cannot be established but there are reasonable grounds for insecurity, the insecure party may make a demand for adequate assurance of performance.

Upon making a demand for assurances, a party with reasonable grounds for insecurity may suspend his own performance so long as it is commercially reasonable to do to.

The failure to respond with reasonable assurances constitutes a repudiation by the non-responding party. This can occur where the other party:
a. The other party does not respond to the demand for assurances in a reasonable time. (this is 30 days under the UCC)
b. The other party does not respond in a way that provides reasonable assurances.

Front 23

Rights of the Aggrieved Party upon Repudiation
(Anticipatory repudiation)

Back 23

1) The aggrieved party can cancel the contract and terminate all rights and obligations under it.
2) The aggrieved party can bring an action for damages or specific performance
3) It if wants, the party can ignore the repudiation and continue under the contract.

Front 24

Retraction of Repudiation
(Anticipatory repudiation)

Back 24

1) Acts in reliance on the repudiation
2) Accepts the repudiation by signaling this to the breaching party
3) Commencing a suit for damages for specific performance.

Front 25

Conditions

Back 25

The obligation to perform is conditioned upon some event or action by the other party--obligations are triggered when that conditioning event or action occurs.

Front 26

Promissory Conditions vs. Pure Conditions

Back 26

1) Promissory conditions:
Where the contract performance is conditioned on the occurrence of the promised performance by the other party.

2) Pure conditions:
Where the contract performance are conditioned on the occurrence of events beyond the control of either party.

Front 27

Express Conditions vs. Implied Conditions

Back 27

1) Express conditions:
Those that the parties expressly include in provisions of the contract.

2) Implied conditions:
Those that are a fiction employed by the courts to deal with the potential effect of breaches of contract.

Front 28

Failure of Express Conditions

Back 28

The failure of an express condition will discharge a party’s obligation to perform.

Can be excused in three situations:
1. waiver
2. bad faith conduct
3. gross forfeiture (to remedy disproportionate loss for relatively minor infraction)

Front 29

Failure of Implied Conditions

Back 29

Courts can treat as:
1. material breach
-aggrieved party generally discharged from obligations

2. substantial performance
-treat as substantial performance so aggrieved party will not be discharged from obligations

Front 30

Material breach vs. Substantial Performance
(failure of implied conditions)

Back 30

Five Factors:
1. The extent to which the aggrieved party will be deprived of the benefit that she reasonably expected to receive under the contract.

2. The extent to which the aggrieved party can adequately be compensated via damages for the defective performance

3. The extent to which the breaching party will suffer forfeiture if a material breach is found

4. The likelihood that the breaching party will cure his failure

5. The extent to which the breach was willful or in bad faith rather than merely negligent or innocent

Front 31

Failed Condition that cannot be excused

Back 31

other methods available - depends on divisibility of contract:

1) The breaching contract is divisible and only a part of it has been materially breached

2) The legal test for “divisibility” of the contract is where it is easily apportioned into agreed equivalents

3) Where a party failed to fulfill an express condition or is in material breach, he may still be able to recover in quantum meruit: (The breaching party may recover the reasonable value of the benefits conferred but this is reduced by the damages for breach)

Front 32

Perfect Tender Rule
(UCC Failure of a Condition)

Back 32

The terms of a contract for the sale of goods are enforced exactly. Every contract term is thus treated as an express condition, and a breach by the seller will relieve the payment obligation of the buyer.

The rule is that the seller is in breach if the goods fail in ANY respect to the conform of the contract

Only applies the first time.

Front 33

Remedy for Failing Perfect Tender

Back 33

1. buyer can accept
2. buyer can reject
3. buyer can accept in part and reject in part

Front 34

Buyer Rejects Goods
(failure of perfect tender)

Back 34

a) For a buyer to reject the goods, the buyer must exercise the right of rejection within a reasonable time after delivery and notify the seller.

b) Once a buyer rejects the goods, the buyer may bring an action for damages against the seller on account of the imperfect tender unless cure applied.

c) If the buyer does not effectuate rejection in the manner specified above, then he has failed to make a rejection, which will be deemed as an acceptance of the goods by the buyer.

Front 35

Buyer can Accept Goods
(failure of perfect tender)

Back 35

General rule: buyer has had a reasonable opportunity to inspect the goods and signifies acceptance

Signify acceptance:
1. tell seller
2. take goods
3. fail to effectively reject
4. taking inconsistent action with seller's ownership of goods

If accepts, buyer must:
1. pay contract price for goods
2. may seek damages for nonconformity if seasonably notify seller

Revoke acceptance:
1. nonconformity substantially impairs good's value; and
2. reason for acceptance - buyer was unaware of the nonconformity or seller assured buyer that a known nonconformity would be cured but then didn't cure it

Front 36

Buyer can accept part or reject part
(failure of perfect tender)

Back 36

Only applies to commercial goods.

Front 37

Works-Arounds for Seller's that breach perfect tender

Back 37

1. cure
2. reasonable grounds to think delivery was acceptable
3. proof of reasonable grounds by seller

Front 38

Right to Cure
(work around for seller's breach of perfect tender)

Back 38

if the seller makes a nonconforming tender, but the contract still has time for performance, then the seller can try to cure.

Two requirements:
1. seller must give buyer seasonable notice of intention to cure; and
2. seller must make the performing deadline

Front 39

For reasonable grounds to believe delivery was acceptable
(work around for seller's breach of perfect tender)

Back 39

1. Seller must give buyer seasonable notice of intent to cure
2. Seller must make conforming delivery within a reasonable time

after deadline

Front 40

proof of reasonable grounds by seller
(work around for seller's breach of perfect tender)

Back 40

seller may prove he had reasonable grounds to believe buyer would accept nonconformity:
1. buyer's express assurances
2. trade usage, course of dealing, and course of performance evidence

Front 41

Exception to Perfect Tender Rule

Back 41

when there is an installment contract

Front 42

Installment contracts
(UCC)

Back 42

Contracts that contemplate delivery of goods in separate lots for buyer's separate acceptances.

there are three possibilities that the UCC deals with
1. if the nonconforming tender substantially impairs the contract value--whole thing is breached and can be cancelled
2. if only certain installment is impaired--can reject installment but cannot cancel whole contract
3. if does not substantially impair value--allow seller opportunity to cure within reasonable time.