Essays Contracts Short Review Outline

Contracts Short Review Outline I. II. III. IV. V. VI. Does the UCC Apply? Is There a Valid Contract? – Mutual Assent (offer and acceptance) and Consideration. Terms of the Contract. Third Parties Rights or Obligations. Performance. Remedies. I. Does the UCC Apply? A. The UCC governs all contracts for the sale of goods. a. Mixed deal: all or nothing approach, ask which is the more important part. b. Exception: if the contract divides payment between goods, non-goods, then apply UCC to that part. B. The UCC also has special rules governing transactions between merchants. Writing tip: Do not confuse the general UCC reqs with the special rules for merchants. Set forth the basic UCC rule and then explain why the UCC applies. In a separate sentence, explain whether the special rules for merchants apply. Example: “The UCC governs ks for the sale of goods. This contract involves the sale of tables. Because tables are goods, the UCC will govern this k. In addition, the UCC has special rules, which apply when merchants are involved. Here, both Dan and Mary are merchants because they regularly buy and sell computers. Thus, the special rules for merchants will apply to this k.” C. If UCC does not apply – then apply Common Law – contracts not governed by the UCC are governed by the CL. a. Express Contract: words. b. Implied Contract: based in part on conduct. c. Bilateral Contract: results from an offer that is open as to the method of acceptance. d. Unilateral Contract: results from an offer that expressly requires perf as the only possible method of acceptance. e. Quasi-contract: equitable remedy to prevent unjust enrichment. Contract rules don’t apply. II. Is There a Valid Contract? – Mutual Assent (offer and acceptance) and Consideration. A. Offer. a. Rule: “An offer creates a power of acceptance in offeree. To be valid, an offer must be (i) an express promise, undertaking, or commitment to enter into a k, (ii) definite and certain in its terms, and (iii) communicated to the offeree.” b. Manifestation of a present intent to contract demonstrated by a promise, undertaking, or commitment – would a RP in the position of the offeree believe that his assent creates a contract? i. Factors – lang used, surrounding circs, prior relationship, method of communication, custom in industry, degree of definiteness and certainty of terms. ii. Price quotations are not offers, unless it is a response to a specific inquiry. iii. Ads are not offers, unless it is in the nature of an award or if it is specific as to quantity and expressly indicates who can accept. c. Definite and certain terms. i. Sale of land requires price and description. ii. Sale of goods – Art. 2: no price req, offer if parties so intend; quantity must be certain or capable of being made certain. Requirements/Output contracts – “good faith” as to quantity (exclusivity); if unreas disproportionate demand then will get cut back. iii. Vague or ambiguous terms: [‘appropriate’ ‘fair’ ‘reas’] no offer, still negotiating. d. Communicated to an identified offeree. B. Has the offer been terminated? (4 methods) a. Lapse of time: time stated or reas time. b. Revocation: unambiguous words or conduct of the offeror terminating the offer (directly communicates or acts inconsistently w/ continued willingness to maintain offer and offeree receives correct info about this). i. Effective when received by offeree. ii. Offers not supported by consid or detrimental reliance can be revoked at will by offeror, even if he promised not to revoke for certain period of time. iii. Offeror can’t revoke if irrevocable: 1. Option k – promise to keep offer open supported by consid. 1 2. Merchant’s firm offer under UCC - (1) offer to buy/sell goods, (2) signed, written promise to keep the offer open, (3) party is a merchant (4) 3 mo max. 3. Detrimental reliance – reas foreseeable to offeror that offeree would detrimentally rely. 4. Unilateral k – if perf started then makes offer irrevocable for a reas time to complete perf. c. Rejection: words or conduct of the offeree rejecting the offer. (expressly or by counteroffer). i. Effective when received. ii. Rejection of option – doesn’t terminate offer. Offeree still free to accept w/in option period unless offeror has detrimentally relied on offeree’s rejection. iii. Counteroffer: terminates the offer and becomes a new offer. iv. Conditional acceptance: “if”, “provided”, “so long as.” v. Additional terms to a CL contract: “acceptance” that adds new terms is treated like a counteroffer rather than an acceptance. vi. Additional terms for sale of goods: Additional terms still an acceptance under UCC 2-207, as long as there is no language of condition. 1. Both parties are merchants. 2. Additional term does not materially change the offer (arbitration is material!). 3. Offeror does not object to the change. d. Termination by operation of law. i. Death of insanity of either party (unless offer is of a kind offeror couldn’t terminate like option supported by consid). ii. Destruction of subject matter of the contract. iii. Supervening illegality. C. Acceptance. a. Rule: Valid acceptance of a bilateral k requires: (i) an offeree w/ power of acceptance, (ii) unequivocal terms of acceptance, and (iii) communication of acceptance. b. Mirror Rule: under common law, acceptance must mirror the offer. c. Under the UCC, an acceptance which adds terms to the offer is valid. i. Nonmerchants – if one of the parties isn’t a merchant, terms of offer control. New/diff terms are considered mere proposals. ii. Between merchants, the additional terms become part of the contract unless (1) they materially alter the contract, (2) the offer expressly limits acceptance to the terms of the offer, or (3) the offeror objects w/in a reas time to the additional terms. (“battle of the forms”). d. Method of Acceptance. i. Offer can control method of acceptance (“only by doing this”), if not then any reas manner. ii. Start of perf – viewed as implied promise to finish so creates bilateral k (words from one guy, no words from other but just starts doing). Unilateral k – must complete perf in order to accept. Offeror becomes obligated upon start of perf so can’t revoke. But offeree can walk away. iii. Improper perf – both accepts offer to create a k and breaches the k. UCC accommodation exception: Sale of goods if seller sends wrong stuff w/ explanation it is a counteroffer. Counteroffer doesn’t accept the offer so no k, no breach. Buyer can accept shipment and pay list price or reject the shipment w/ no other remedy. iv. Conflicting communications – Mailbox rule only applies to acceptance (effective upon dispatch). Exceptions: 1. offer says otherwise; 2. option k (effective upon receipt); 3. if sends rejection then sends acceptance (whichever arrives 1st); 4. if offeree sends acceptance then rejection, acceptance effective (unless rejection arrives 1st and offeror detrimentally relies). v. Offeree is silent – generally no acceptance, except if the offeree by words or conduct agrees that silence is acceptance. D. Consideration (typically not a prob) a. Rule: Cts will enforce a bilateral/unilateral k only if it is supported by consid or sub for consid. Consid requires a bargain and legal value. b. Bargained-for exchange. i. Parties must exchange something (bilateral – exchange promises; unilateral – exchange promise for an act). ii. Allowed - Perf. Forbearance. Promise to perform. Promise to forbear. (but must benefit promisor) iii. Past or moral consid: A promise given in exchange for something already done doesn’t satisfy bargain req. Exceptions: expressly requested and expectation of payment. (ok if emergency you ask someone to do something then later promise). iv. Illusory promise: words that give illusion of promise don’t create obligation (“I promise to do this if I feel like it”). Promisor has not committed himself in any manner – no consideration. 2 c. Legal detriment or legal benefit. i. Adequacy of consid – cts don’t care unless totally devoid of any value (token consid). ii. Maj require a party incur detriment (by doing something he isn’t legally obligated to do or by refraining from something he has a legal right to do) to satisfy legal value element. Min allow conferring benefit. iii. “Pre-existing” duty rule. 1. CL: Performing or promising to perform an existing legal duty is insuff consid. Exceptions: a. Any new or diff consid promised. b. Promise to ratify a voidable obligation (promise to ratify a minor’s k after reaching maj; promise to go through w/ k despite other party’s fraud). c. Third party promises to pay. d. Unforeseen difficulty so severe it excuses perf (so if you agree for more $, enforceable). e. Honest dispute as to the duty. 2. UCC: “good faith” changes in an existing sale of goods contract is ok. iv. Part payment to settle existing debt: If debt is due and undisputed and no new detriment (or benefit) from creditor’s promise to release rest of debt, part payment is not consid for a release. Exception: If debt is in dispute or if payment even 1 day early then, part payment is consid. v. Forbearance to sue: A promise to refrain from suing on a claim may constitute consid if claim valid or claimant in good faith believed claim was valid. vi. Payment of debt barred by SOL: If a legal obligation not enforceable under law (barred by SOL), a new promise to fulfill the legal obligation is enforceable if in writing. But only enforceable according to new terms, not old ones. d. Promissory estoppel or detrimental reliance as substitute for consideration. i. Rule: Promissory estoppel or detrimental reliance is suff sub. (i) promisor should reasonably expect (foreseeable that) her promise to induce action or forbearance, (ii) of a definite and substantial character, and (iii) such action or forbearance is in fact induced. Only use if no valid k. ii. Enforcement is necessary to avoid injustice. E. Defenses to Formation. a. Statute of Frauds [SOF is a defense to enforcement of the agmt that is within the SOF if SOF is not satisfied.] i. Is the contract within the Statute of Frauds? 1. M: Marriage – promises made in consid of marriage to do something or refrain from doing something if we marry (pre-nups, post-nups). 2. Y: Year – promises by their terms can’t be performed w/in 1 yr from date k formed. Lifetime ks not w/in SOF b/c they could be performed in 1 yr. Capable means theoretically possible w/ unlimited resources. 3. L: Land – transfer of an interest in real estate of more than 1 yr duration. When you’re selling something it’s forever so more than 1 yr. 4. E: Executor – promise by estate rep to pay estate’s expenses from her own funds. 5. G: Goods – sale of goods for $500 or more (Exceptions – specially manufactured goods, a written confirmation of an oral agmt btwn merchants, admission in pleadings/ct that a k for goods existed, or partial payment or delivery made and accepted). 6. S: Surety – promise to answer for/guarantee the debt of another. (Exception – if you are told main purpose for the debt that’s being guaranteed is to benefit guarantor then not w/in SOF). ii. Is the Statute of Frauds satisfied? 1. Performance. a. Services Contract: full perf by either party satisfies SOF. Part perf doesn’t satisfy – try to get quasi-k. b. Sale of Goods: i. Ordinary Goods: Part perf of a contract for the sale of goods satisfies SOF to the extent of the part perf. (So if you deliver part of it on oral agmt then can recover). But watch for claim of non-delivery of part/all of oral k – doesn’t satisfy SOF. ii. Specially Manufactured Goods: SOF is satisfied as soon as the seller makes a “substantial beginning” of making or obtaining the goods. c. Real Estate Transfer Contract. i. Full payment by buyer of real estate does NOT satisfy SOF. ii. Part perf by buyer can satisfy SOF. Two of three: 1. Payment (full or party). 2. Possession. 3. Improvements. 2. Writing. 3 a. b. c. d. e. f. Other than UCC: (1) Material terms (who and what) (2) signed by the person to be charged (D). Incl – identity of parties sought to be charged, k’s subject matter, terms and conditions, what consid is. b. UCC: (1) quantity, (2) signed by the person being charged (D). i. Exception: Answer the damn letter rule. If sale of goods and both parties are merchants and the person who receives a signed writing (by P) with a quantity term that claims there is a k fails to respond within 10 days of receipt then satisfies SOF and no sig of D necessary. 3. Judicial Admission of Sale of Goods Agmt: Satisfy SOF if pleading, testimony, response to discovery reveal an agmt that wasn’t put in writing (D admits). 4. Related Issues. a. An authorization to execute a k for someone else must be in writing if the contract to be signed is within the SOF. b. Modification of a k must be in writing if the deal with the alleged change would be within the SOF. c. Contract provision requires a writing to modify. i. CL: ignore the provision. ii. UCC: effective unless waived. Misrep: If a false assertion of fact or a concealment of facts, the k is voidable by innocent party if she justifiably relied on the misrep. i. Fraudulent OR material misrep as to the terms of the contract + inducement (causation) makes it voidable. ii. Unlike in torts, don’t need scienter – even an honest/innocent misrep can get you out of the deal. iii. Misrep as to the nature (what it is) of the contract makes it void. Illegality: (1) if the subject matter is illegal, then the k is void; (2) if the subject matter is legal, but the purpose is illegal, the agmt is enforceable only by the person who didn’t know of the illegal purpose. Incapacity: infant – under 18; mental incompetents; intoxicated persons, if other party has reason to know. i. Right to disaffirm k by person without capacity. ii. Implied affirmation – agmt made by person w/out capacity who later gains capacity and retains benefits of agmt w/out complaint. iii. Liability for necessities – food, clothing, medical care, shelter. Based on quasi-contract, not contract law, so pay reasonable value (not contract price). Unconscionability: ct can refuse to enforce all/part of a k if there is unfair surprise and oppressive terms tested at the time the agmt was made. Duress; Fraud. III. Terms of the Contract. A. Interpretation of Terms. a. Basic test is the “intent of the parties” as to whether a promise or condition. Failure of promise gives rise to a breach but failure of condition relieves a party of the obligation to perform. b. Judged by words of the agmt, prior practices of the parties, and custom in the bus. B. Ambiguous Terms. No contract if – a. Parties use a material term that is open to at least two reas interpretations, AND b. Each party attaches a diff meaning to the term, AND c. Neither party knows or has reason to know the term is open to at least two reas interpretations. (If 1 party knows, there is a k under the terms of the innocent party.) C. Mistake. a. Mutual Mistake of Material Fact. No contract if – i. Both parties are mistaken; ii. About a basic assumption of fact; iii. That materially affects the agmt. b. Unilateral Mistake of Fact: generally, no relief for mistaken party, except – i. Obvious mistake: other party to the contract knows or should have known of the mistake. ii. Mistakes discovered before sig reliance by the other party. D. Parol Evidence Rule: Evid of prior or contemporaneous agmts that contradict or modify contractual terms is inadmissible if the written k is intended as integrated (complete and final expression of the parties). Merger clause (recital that k is complete on its face) is presumption of integration. a. Changing the written deal (reformation): If integration, not going to allow earlier/contemporaneous words. Exception – ct may consider evid of earlier agmts as a source of terms for the limited purpose of determining whether there was a mistake in integration (typographical error). 4 b. Establishing a defense to the enforcement of a written deal (rescission): Regardless of integration, ct can consider evid of earlier words of the parties to determine whether there is a defense to enforcement (misrep, fraud, duress, mistake, illegality). Arguing deal shouldn’t be enforced b/c prob w/ bargaining process. PER does not affect formation, only terms; SOF prevents formation! c. Explaining written k: Even though evid of what was said/written earlier is parol evid it can be used by ct to interpret the words of agmt and not asking to change the words. d. Adding to a written deal: Additional, consistent terms from a previous agmt can be considered only if ct finds partial integration. Only time it matters whether complete or partial is when we’re trying to say something left out. e. Summary: Can never use parol evid to change/contradict anything k says. Can always use to interpret/explain or to establish defense. Can only use for partial integration to say something was left out and we need to add. E. Modification. a. CL: Additional consid needed. b. UCC: No consid needed so long as in good faith. c. Modification may need to satisfy SOF. F. Conduct as Source of Terms: Cts can look to these things to fill in gaps in contracts. (in order) a. Course of Perf: same people, same contract. b. Course of Dealing: same people, diff but similar contract. c. Custom and Usage: diff but similar people, diff but similar contract. G. UCC Terms. a. Delivery Obligations of Seller of Goods. i. No place of delivery agreed upon: deliver to seller’s place of business unless both parties know that the goods are someplace else. ii. Place of delivery if common carrier is agreed upon: 1. Shipment contracts: delivery complete when seller (1) gets the goods to a common carrier, (2) makes reas arrangements for delivery, (3) notifies buyer. (FOB –city where seller is) 2. Destination contracts: seller does not complete delivery obligation until the goods arrive where the buyer is. (FOB – city where buyer is) b. Risk of Loss: when AFTER the k has been entered into, goods are lost or damaged without fault of either buyer/seller, which party has risk of loss? i. Agmt controls. ii. Breaching party liable for any uninsured loss, even if breach is unrelated to the prob. iii. If common carrier – seller has risk of loss until completion of delivery obligation. iv. If no common carrier – 1. Merchant S has risk of loss until B actual receives (ie, takes physical possession) of the goods. 2. Nonmerchant seller has risk of loss until seller tenders (ie, makes goods available). c. Warranties of Quality: a term in a sale of goods contract. i. Express: words that promise, describe, or state facts; use of a model/sample. (Not puffery, opinion) ii. Implied warranty of merchantability: goods sold by merchant which are fit for the ordinary purpose for which such goods are used. (Seller must deal in goods of that kind!) iii. Implied warranty of fitness for a particular purpose: seller has reason to know the particular purpose for which the goods are to be used and the buyer relies on the seller’s skill and judgment to selecting. d. Contractual Limitations on Warranty Liability. i. Disclaimer eliminates implied warranties, but express warranties cannot be disclaimed. ii. Implied warranty of merchantability and fitness can be disclaimed with “as is” or conspicuous language of disclaimer. iii. Can recover for personal injuries – prima facie unconscionable to limit remedies so you couldn’t. IV. Third Parties Rights or Obligations. A. Third Party Beneficiaries. a. Def: Where a promisee contracts w/ promisor for promisor to render some performance to Third Party Beneficiary (TPB). i. TPB can only enforce k only when his rights have vested. ii. Can’t cancel/modify after rights have vested – knowledge and either (i) detrimental reliance or (2) assent as requested. b. Intended v. Incidental TPB: Only intended bens have contractual rights. Look to see whether ben is named in k, receives perf directly from promisor, or has some relationship w/ the promisee to indicate intent to benefit. c. Creditor v. Donee ben: Creditor – person whom a debt is owed by the promisee. Donee – person the promisee intends to benefit gratuitously. d. Who can sue whom? i. TPB can sue promisor. ii. Promisee can sue promisor. 5 iii. Donee ben can’t sue promisee. But creditor ben can sue promisee on pre-existing debt (but not on the TPB k). B. Assignment of Rights: a transfer of rights and benefits. a. Contract Provisions. i. Prohibition: language of prohibition that takes away the right to assign but not the power to assign means that the assignor is liable for breach of contract, but an assignee who does not know of the prohibition can still enforce the agreement. (“rights hereunder are not assignable”). ii. Invalidation: language of invalidation takes away both the right to assign and the power to assign so that if there is a breach by the assignor and no rights in the assignee. (“all assignments of rights under this contract are void”). b. CL bars assignments that substantially change the duties or risks of the obligor. i. Assignment of right to payment: does not substantially change. ii. Assignment of other perf rights: substantial change. c. Rights of Assignee. i. Assignee can sue the obligor. ii. Obligor has the same defenses against the assignee as it would against assignor. iii. Payment by obligor to assignor is effective until obligor knows of assignment. Modification agmts between obligor and assignor are effective if the obligor did not know of the assignment. d. Multiple Assignments. i. Gratuitous assignments: last assignee wins. Gratuitous assignments are freely revocable ii. Assignments for Consideration: first assignee wins. Exceptions: iii. Multiple Assignments for Consideration is a Breach of Warranty: assignor makes a warranty that the rights assigned are assignable and enforceable. C. Delegation of Duties: transfer of duties and burdens. a. Def: Y (obligor/delegator) promises to perform for X (obligee). Y delegates her duty to Z (delegatee). b. Delegation of duties is permitted except where: i. Prohibited by the k (“no assignment also means “no delegation”); ii. Duties involve special skills or reputation; or iii. Delegation would change the obligee’s obligations. c. Liability. i. Delegating party always remains liable (delegator). ii. Delegatee liable only if she receives consideration from delegating party. V. Performance. A. Sale of Goods. a. Goods. i. Perfect Tender Rule: general standard. Seller is obligated to deliver perfect goods. ii. Buyer’s options: (1) reject all, (2) accept all, or (3) accept some goods, reject nonconforming ones… and sue for money damages. iii. Cure: iv. Rejection of Goods: must occur before acceptance of goods. v. Installment Sales Contract: requires or authorizes (1) delivery in separate lots, (2) to be sold separately. Buyer has the right to reject an installment only when there is a substantial impairment in that installment that can’t be cured. So if minor probs must accept and those probs will be adjusted in later deliveries. vi. Acceptance of Goods: express acceptance, implied acceptance – retention after opp for inspection without objection. 1. Payment without opp for inspection is NOT acceptance. 2. If buyer accepts the goods, can’t later reject them. vii. Revocation of Acceptance of Goods: sometimes, buyer can cancel the contract by revoking acceptance. 1. Nonconformity substantially impairs the value of the goods, AND 2. Excusable ignorance of grounds for revocation or reas reliance on seller’s assurance of satisfaction, AND 3. Revocation within a reas time after discovery of nonconformity. B. Conditions. a. Express perf condition: an event the occurrence or nonoccurrence of which will create, limit, or extinguish the duty to perform. (“if”, “provided that”, “so long as”, “subject to”, “in the event that”, “until”, “on condition that.”) i. True condition: an event beyond the influence of either party that affects the duty to perform. “Payment of a premium, provided that S does something.” ii. Covenant: not a condition, but a promise. “S covenants that it will do something.” iii. Condition coupled with an express covenant: “S covenants that it will do something the next day and C promises to pay a premium only if S does what he promises the next day.” 6 iv. Condition coupled with an implied covenant: “This sale is conditioned upon A’s obtaining an 8% mortgage.” A must make a reasonable effort. v. Standard for express conditions: strict compliance. Except when a condition is based on approval of one of the contracting parties, it is satisfied if a RP would approve, unless subject is art or other matters that are inherently discretionary. b. Constructive conditions: condition created by operation of law – doing the work is a constructive condition precedent to the payment performance. i. Substantial perf standard for satisfaction. ii. Divisible contracts: If the k itself divides perf of each party in to the same number of parts with each part perf by one party serving as consideration for the corresponding part, the k is a divisible contract and the substantial perf test is applied to each divisible part of the k. c. Excuse of conditions. i. Estoppel: one party indicates that he will not insist on a condition, BEFORE the conditioning event was to occur + other party relies on it. ii. Waiver: applies AFTER the conditional event was to occur and does not require reliance. iii. Wrongful prevention of the condition to occur; Voluntary disablement; Anticipatory repudiation. C. Discharge or Duties. a. Excuse by Reason of Other Party’s Breach. i. Sale of goods: seller’s tender is less than perfect. ii. CL: material breach is required to discharge the other party. Material breach is anything less than “substantial performance.” b. Anticipatory Repudiation: (1) an unambiguous statement (2) that the repudiating party will not perform, (3) made prior to the time that performance is due. c. Excuse by Reason of Later Contract. i. Rescission: duties may be discharged by mutual rescission as long as the contract is executory on both sides. Rescission is not valid where one party has already performed. ii. Accord and Satisfaction: accord is an agmt in which one party agrees to accept perf diff from that originally promised. Generally, an accord requires consideration. iii. Modification: iv. Novation: v. Impossibility vi. Illegality: later law makes perf illegal. d. Impracticability: extreme and reasonable difficulty that was unanticipated (subjective test). e. Frustration of purpose: later law makes mutually understood purpose of the contract illegal. D. Breach. VI. Remedies. A. Duty to Mitigate: No recovery for loss that could have been avoided by appropriate steps. Burden of proof on avoidability is on the D. Opportunity must be comparable. B. Damages. a. Compensatory damages.- Expectation i. Incidental damages: costs of finding a replacement. ii. Consequential damages available only if foreseeable. b. Liquidated damages (no penalty allowed). c. Punitive damages: not generally recoverable for breach of contract. C. Damages for Sale of Goods: expectation damages. D. Quasi-contractual relief: grant relief for unjust enrichment. Anytime contract rules lead to an unfair result, apply equity. E. Non-monetary Remedies. a. Specific performance: available only if money damages are insufficient (always wrong answer!). b. Reformation: must have a written contract. c. Rescission and Restitution d. Adequate Assurance of Future Performance e. Reclamation: right of an unpaid seller to get its goods back. (insolvency of buyer) f. Rights of Good Faith Purchaser in Entrustment: (keep goods) 7