Contracts and UCC

8/6/2019 Contracts and UCC

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CONTRACTS, UCC ART. 2, AND ART. 2A

PART I. APPLICABLE LAW AND DEFINITIONS

I. DETERMINING WHICH LAW APPLIES

Whether UCC Art 2 AppliesGoodsArt 2 of the UCC applies to contracts for the sale of goods. Goods are defined as all thingswhich are movable at the time of identification to the contract for sale, which includes: (1) newor used products, (2) food, whether consumed on or off the premises, (3) living or unbornanimals, (4) growing crops or timber, regardless of whether the buyer or seller removes themfrom the land, (5) minerals (gravel, coal, sand), but only if it is removed from the land by theseller.

Sub-Rule: UCC Does NOT apply to:

1. real property2. personal service, employment, or agency contracts3. gifts4. bailment contracts: a transfer of possession without transfer of title5. construction contracts6. contracts for services rather than goods7. sale of electricity

Predominant Factor TestWhen a contract involves both goods and services, look to the essence of the transaction todetermine whether it is governed by the UCC. If the contract is predominantly for the sale ofgoods and the services are merely incidental to the contract, then Art 2 applies to the entire

contract.

Whether UCC Art 2A AppliesNY Distinction: UCC Article 2A applies to a lease or sublease of goods. Art 2A generallyfollows Art 2 by substituting the term lease for sale, but there are a few different rules. Besure to distinguish between true leases and a lease that is a disguised sale of goods on credit.

Whether Common Law Applies

The Common Law with NY distinctions applies to all other contracts.

II. DEFINITIONS

Merchants

Art 2 of the UCC defines merchants as persons who (1) regularly deal in goods of the kindinvolved in the transaction or (2) possesses or hires an intermediary with knowledge or skill inthe goods involved in the transaction. The code frequently imposes higher standards onbuyers/sellers of goods who are merchants.


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Good FaithArt 2 of the UCC imposes an obligation of good faith on buyers and sellers, which it defines ashonesty in fact in the conduct or transaction concerned. It implies that neither party will doanything that will impede the rights of the other party to receive all benefits of the contract

Sub-Rule: Merchants

For a merchant, acting in good faith also requires observance of reasonable commercialstandards of fair dealing in the trade.

TenderUCC Art 2 defines tender as the sellers act of placing and holding conforming goods and thengiving the buyer any necessary notification of the sellers readiness to perform under the contractterms to enable the buyer to take delivery. The time, place, and manner of tender are determinedby the parties contract and the provisions of Art. 2.

PART 2. CONTRACT FORMATION

Analysis1. look for an agreement

-was there an offer?

-was the offer terminated?-was there acceptance?-was there consideration?

2. look to see if it is legally enforceable/any defenses

III. TYPES OF CONTRACTS

Contract

A valid contract is a voluntary agreement containing definite terms, mutually assented to bycompetent parties, supported by valid consideration. To be legally enforceable, a contract mustcontain the following:TACO

(1) definite Terms, either expressed or implied,(2) Acceptance of a valid offer,(3) Consideration support the promise, and(4) a binding Offer inviting acceptance.

Express ContractAn express contract is created by the parties words (oral or written)

Implied Contract

An implied contract is created by the parties conductExam Tip: The same rules apply to express and implied contracts, but answer choicesmay ask to distinguish between them

Contracts Under UCC Art 2UCC Art 2 defines a contract as the total legal obligation created by a bargain. A contract maybe made in any manner sufficient to show an agreement including conduct by both parties thatrecognizes the existence of the contract.


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Sub-Rule: Sufficient WritingA contract is only required to state a quantity term. A writing is sufficient if it omits orincorrectly states an agreed term, however the contract is not enforceable beyond thequantity of goods shown in the writing.

Quasi-Contract: RestitutionUnder the common law, a quasi-contract is not a contract it is a fiction imposed by law to avoid

unjust enrichment or to compensate a performing party who detrimentally relied on theunenforceable contract. It is also known as the equitable remedy of Restitution. The party canrecover the reasonable value of the benefit conferred, NOT the contract price.Exam Tip: look for an unfair result where there was no express or implied agreement betweenthe parties or where the agreement is unenforceable due to illegality, Statute of Frauds, mutualmistake, impossibility, incapacity, duress, etc.

Bilateral ContractsUnder the Common Law, a bilateral contract arises where both parties make binding promises to

perform (either express or implied) and one promise is consideration for the other promise.T

oconstitute a binding bilateral contract, there must be an offer and acceptance (acceptance can beany reasonable way) of that offer and mutual assent to the agreement in which both partiesbecome contractually bound to perform under the terms of the contract.

Unilateral Contracts

Under the Common Law, a unilateral contract arises where the offeror promises to pay for acompleted performance. The offer can be accepted only by performance. The offeree has nocontractual duty to perform, even if he begins performance and no notice of performance isrequired to be given unless the offeror would otherwise not know of the performance.Exam Tip: MBE fact patterns1. offer that explicitly states it can only be accepted by performance2. reward, contest, prize

UCC Unilateral Contract OffersUnder UCC Art 2 in a sale of goods contract, a unilateral contract offer where the offeree hasbegun to perform is treated as a bilateral contract, cutting off the offerors power to revoke theoffer and requiring the offeree to complete performance or be in breach. The offeree must givenotice of acceptance within a reasonable time.

IV. THE OFFER

Offer

An offer is a partys manifestation of an immediate willingness to enter into a bargain, whichjustifies the other party in believing that his assent to that bargain is invited and that it willconclude in a binding contract. To be valid, the offer must:(1)be communicated to the offeree,(2)induce performance meaning the parties enter into a legal relationship, and(3)be sufficiently definite


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Sub-Rule: Standard for Determining Whether There Was an OfferThe court interprets the objective manifestations of the parties together with thesurrounding circumstances as what a reasonable person would construe them to be undersimilar circumstances. The parties subjective thoughts or intent are immaterial in theinterpretation of whether there was an offer.

ExamT

ip: If there is a series of communications between the parties, pay attention to the legalsignificance, if any, of each statement. Go through each communication looking for an offer andthe acceptance.

NOT Offers

(1)Advertisements, form letters, or catalogues (unless it makes an offer limited in number 200 notebook computers to the first 30 customers, first come first served)Exam Tip: Often tested exception

(2)Statements of intention(3)Preliminary contract negations or requests for price quotations(4)A written offer which indicates it is made to several persons simultaneously this is an

invitation to negotiation(5)Jokes(6)Identical offers to buy and sell which cross in the mail, because neither has been accepted

with knowledge of the others existence

Rewards

Where you find something and return it to the owner, later you find out that there was an awardbut you did not know of it, then you cannot sue for the reward.

Exception: Offers of reward by the government

Definiteness of Terms

Common Law

An offer must be sufficiently definite to be enforceable meaning that it contains the essentialmaterial terms in unambiguous language.

Sub-Rule: Real Estate ContractsThe offer must contain the particularly identified land and price terms. Most courts willNOT supply a missing price term.

Terms in a UCC ContractThe only essential contract term is quantity and a contract will fail for indefiniteness without it.Otherwise, if it is clear that the parties intended to make a contract and there is a reasonablycertain basis for giving an appropriate remedy, a contract for sale does not fail for indefinitenesseven though the parties leave one or more terms open.

UCC Contracts Price TermUnder UCC Art 2, where the price term is lacking, the court may determine a reasonable priceat time of delivery. A sale of goods contract is enforceable even if (1) nothing was said as to theprice, (2) the price is left to be agreed upon but the parties fail to agree upon the price, or (3) theprice is to be fixed by some agreed market set by a third person but where no price is set.


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Sub-Rule: If the price is to be fixed by the buyer or the seller, then it must be fixed ingood faith.Sub-Rule: If the parties did not intend to form a contract unless the price was firstagreed upon, then there is no contract if there was no agreed price.

UCC Output ContractUnder UCC Art. 2, a contract lacking in a specific quantity is enforceable if the seller agrees tosell his entire production to the buyer. This is known as an Output Contract. The seller must usehis best efforts to supply the buyer and is required to act in good faith, meaning he cannot get outthe contract by simply refusing to manufacture any further if he is not making a profit. However,the seller may cease production in good faith if further production would financially imperial hisbusiness. If there is no stated output estimate in the contract, then no quantity may be demandedthat is unreasonably disproportionate to any normal or otherwise comparable prior output.

UCC Requirements ContractUnder UCC Art. 2, a contract lacking in a specific quantity is enforceable if buyer agrees to buy

all the goods of a particular kind that the buyer may require in its business.T

his is known as aRequirements Contract. The buyer is obligated to use its best efforts to promote the sale or useof the sellers goods and to act in good faith, meaning he may not buy his goods from anotherseller at more cheaply if the market price for the goods drops. However, a buyer may in goodfaith reduce his orders to nothing if his business falls off. If there is no stated requirementestimate in the contract, then no quantity may be tendered that is unreasonably disproportionateto any normal or otherwise comparable prior requirement.Exam Tip: MBE often tests output and requirements contracts with sudden increases in outputor requirement cannot be out of line or unfair to the other party

V. TERMINATION OF THE OFFER

Pieper Pneumonic: Offers expire when they areTIIRED

TimeIncapacity

Intervening illegalityRevocationExpress or implied rejectionDestruction of the subject matter of the offer

Lapse

The offeror is the master of the offer and may arbitrarily fix the lifetime of the offer and thecourts will not alter that time period, even if it is unreasonable. However, if the offer does notset a time limit for acceptance, then the court will infer a reasonable time limit, in light of thecircumstances.

Sub-Rule: Lapse of Oral OffersWhen the parties are dealing face to face or on the phone, unless otherwise agreed by theparties, the offer does not survive the conversation and must be renewed by the offeror.

Exam Tip: the unreasonable time period will be clearly long in the question


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Revocation

Generally, the offeror may directly or indirectly revoke the offer any time prior to acceptance,even if the offeror promises not to. The mode used to revoke should be the same mode used topublish the offer. Once an offer is accepted it cannot be revoked.

Direct Revocation: the offeror must communicate revocation of the offer directly to theoffereeIndirect Revocation:(1)the offeror engages in conduct that is inconsistent with the offer being valid, AND(2)the offeree must have knowledge of the offerors conductExam Tip: this is frequently tested

Revocation Effective Upon ReceiptThe revocation is valid when the offeree receives it.

Limitations on Offerors Power to Revoke

T

here are four exceptions to the offerors power to revoke an offer:

1. OptionsAn option is an irrevocable offer where the offerorpromises that the offer will remain open andnot be revoked for a reasonableperiod of time in exchange forconsideration. Using the wordoption in the contract gives the offeree assurances that the offer will be held open.

Sub-Rule: Oral OptionsAn oral option is enforceable if it is supported by consideration and not otherwise barredby the Statute of Frauds. Oral options not supported by consideration can becomeirrevocable when there is detrimental reliance on the offer by the offeree

NYDistinction: Options

UnderNY GOL 5-1109, an option need not be supported by consideration if (1) it states it isirrevocable in writing and (2) is signed. NY does not limit this gratuitous option to merchants orsale of goods contracts and is not limited in time to 3 months, although it is still only good for areasonable time.

2. UCC Merchant Firm Offers

Under UCC Art. 2, an offer in a sale of goods is irrevocable where:(1)a merchant(2)in a signed writing(3)promises to hold an offer open.The irrevocable offer it is enforceable even though it is not supported by consideration, but onlyfor up to 3 months, even if the merchant expressly stated it would be held open longer. After 3months, the firm offer converts to an ordinary revocable offer.

Termination of Options/Firm OffersAn option or firm offer may be terminated by:

DIE


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1. Destruction: An offer terminates by operation of law where the subject matter of the offer isdestroyed even if the offeree did not receive notice of the destruction.

2. Illegality: The offer terminates by operation of law due to intervening events, which renderthe subject matter of the offer illegal.

3. Expiration of the stated option time3. Foreseeable Detrimental Reliance Before AcceptanceWhere the offeror could reasonably expect that the offeree would rely to their detriment on theoffer, and the offeree does so rely, the offer will be held irrevocable as an option contract for areasonable length of time.Exam Tip: This is a very rare exception and the only situation where it regularly occurs is wherea general contractor relies on a subcontractors bid in submitting its final bid to the client. Thesubcontractors offer becomes an option.

4. Starting to Perform in a Unilateral ContractWhere the offeree either tenders performance or begins performance, the unilateral contract

becomes an option that the offeror may not revoke for a reasonable period of time. Merepreparation does not affect the offerors right to revoke the offer. If the offeror revokes, theofferee can sue for breach of contract and restitution.

Sub-Rule: Offers Irrevocable if Offerors Cooperation Necessary

Where the offerees performance requires some cooperation by the offeror in order forthe performance to take place and the offeree withholds that cooperation, the offereesperformance makes the unilateral contract offer irrevocable.

NYDistinction: UnilateralContractOffersRevocable UntilFullPerformanceIn NY, the offeror can revoke the offer at anytime up until full performance, because the offereewas not contractually bound to complete performance. However, the offeree has a claim forrestitution (in equity) to prevent unjust enrichment, but has no claim for breach of contract.

Rejection by the Offeree

Express RejectionThe offerees statement that he does not intend to accept the offer irretrievably terminates it.

Counteroffer: Common Law Mirror Image Rule

Under the common law, the offeree impliedly rejects the offer where he makes a counter-offer,which is an acceptance containing any additional or different terms, even if trivial, not containedin the offer. Acceptance must mirror the offer.Exam Tip: Remember that a counteroffer is both a rejection and a new offer, reversing the rolesof the parties.

Compare: UCC Battle of the Forms (See Acceptance)

Conditional Acceptance

An offerees response to an offer containing conditions to the acceptance is not acceptance.

RejectionThe power to accept terminates when the offeror receives a rejection.


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Termination by Operation of Law

An offer terminates by operation of law where:1. the subject matter of the offer is destroyed even if the offeree did not receive notice of the

destruction,

2.

the offeror or offeree dies or has been adjudicated mentally incompetent prior to acceptanceException: if the offeror has a non-delegable duty perform and offeree has accepted theoffer but the contract has not yet been performed, the offer DOES terminate under thedoctrine of impossibility of performance.

3. there are intervening events, which render the subject matter of the offerillegal

VI. ACCEPTANCE OF THE OFFER

Definition: AcceptanceAcceptance of an offer is an unconditional manifestation of assent by the one to whom the offer

was made (class or individual), to all the terms and conditions of the offer and in the mannerinvited or required by the offer. The offeree must know of the offer in order to accept it.

Sub-Rule: Unilateral ContractsIn a unilateral contract, the offer is accepted by completing performance.

Sub-Rule: Bilateral ContractsA bilateral contract offer may be accepted by a promise to perform or by beginningperformance. Beginning performance carries with it an implied promise to completeperformance.

Mode of Acceptance

Acceptance must be by a reasonable mode, usually in the same mode the offer was made, unlessthe offer expressly demands an exclusive mode of acceptance.

Sub-Rule: Exclusive Mode of AcceptanceThe offeror has the right to demand an exclusive mode of acceptance from an offeree andno other mode will be effective acceptance. The offeror may dictate the mode ofacceptance however they see fit, even if unreasonable or difficult (but notunconscionable). The offerors intention that the mode of acceptance is exclusive mustbe clearly expressed in the offer itself. If the offeree does not utilize the exclusive modeof acceptance, the offerees response will be treated as a counter-offer.

Common Law Improper Performance as AcceptanceUnder the common law, if a party improperly performs in response to an offer, this constitutes anacceptance AND simultaneously gives rise to a buyers cause of action for breach of contract.

UCC Improper Performance as AcceptanceUnder the UCC, if a seller intentionally ships non-conforming goods to the buyer, this constitutesacceptance AND a breach of the contract UNLESS the seller seasonably notifies the buyer thatthe nonconforming shipment is offered as an accommodation. The buyer is not obligated toaccept the non-conforming goods, but if he does, the seller will NOT be liable for breach ofcontract.


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When Acceptance is Effective: Mailbox Rule

Acceptance is effective upon dispatch, meaning when it is put out of the offerees possession(mailed, faxed, emailed or instant messaged), even if the dispatch is never received or wassubsequently withdrawn the offeree.

Exceptions to the Mailbox Rule1. The offeror may override Ex: the offer states that acceptance is not effective untilreceived

2. an irrevocable offer is involved so acceptance is effective upon receipt3. if the offeree sends an acceptance and then a rejection, the acceptance is effective

UNLESS:(1)the rejection arrived first, AND(2)the offeror relied on it

4. if the offeree sends a rejection and then sends an acceptance, whichever arrives first iseffective.

The mode of acceptance must be reasonable, so if the offeree utilizes a slower mode of

acceptance than the offer was made, then acceptance is not effective until received by theofferor.Exam Tip: commonly tested

SilenceAcceptance must be an affirmative response. Silence cannot be construed as acceptance.

NYDistinction: If someone sends unsolicited merchandise in the mail it is considered agift; the party receiving the goods does not assent to a contract by keeping the goods.

Common Law Mirror Image Rule

Under the common law, the acceptance must be absolute and unequivocal of each and every termof the offer.

Common Law Last Shot Doctrine

Under common law contract rules, and offeree (usually the seller) could do three things with thebuyers offer: (1) accept it, (2) expressly reject it, or (3) accept certain terms in the offer, but withadditional or different terms to the acceptance. Such an acceptance was a mere counter-offer(implied rejection) which could be impliedly accepted by a buyer if the buyer accepted thosegoods when were shipped. This is referred to as the last shot doctrine because the terms of thelast document controlled the terms of the contract once the delivered goods were accepted by thebuyer creating a binding contract. This unfairly gave the sender of the last form the power torewrite the contract.

UCC Acceptance

Under UCC Art 2, acceptance is the assent of the offeree, meaning the one to whom the offerwas made, to the terms and conditions of the contract. It must be an affirmative response andsilence cannot be construed as acceptance. An acceptance is not required to mirror the offer. Aunilateral or bilateral contract can be accepted by either a promise or by performance, thusacceptance of a buyers offer occurs:(1) by a return promise accepting the offer, OR


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(2) by the sellers act of shipping conforming or nonconforming goods or by beginning thisperformance, provided that buyers is given notice of acceptance within a reasonable t ime.

UCC Battle of the Forms ProvisionUnder UCC Art 2, an enforceable contract exists even though the acceptance states terms that are

additional or different from those in the offer if the offeree makes a definite and seasonableexpression of acceptance or a written confirmation that is sent within a reasonable time, unlessacceptance is expressly made conditional on assent to the additional or different terms. Theexpression is definite where it reflects the parties intent to be bound, it is seasonable where it istimely, and the offer has not expired.Exam Tip: usually unread purchase forms

Note: UCC 2-207 does not apply where no pre-printed forms where used and a disputedterm was subject to protracted negotiations here, common law offer and acceptancerules applyNYDistinction: UCC 2A has no battle of the forms section for leases

Subsequent Conduct Recognizing the Existence of a ContractConduct by both parties that recognizes the existence of a contract is sufficient to establish acontract for sale although the writings of the parties do not otherwise establish a contract. Usingthe Knock-Out Rule, the resulting contract consists of those terms on which the writings agreetogether with the provisions in Art 2 (as to price, risk of loss, delivery, or warranties) for thoseterms on which the parties disagree.Ex: such as where the seller accepts the offer but the acceptance includes additional or differentprice, delivery or quantity/quality terms and the buyer subsequently physically accepts thegoods,

Exam Tip: The contract is usually formed, but the offerees different/additional term does notmake it into the contract

Different Terms

Note: A different term corresponds to a term in the other form but it does not say the exact samethingUnder UCC Article 2, a definite and seasonable acceptance containing different terms creates acontract consisting of those terms on which the two forms agree, but any conflicting provisionscancel each other out and the court may use the UCC as a gap-filler to replace the conflictingprovisions.

Sub-Rule: Price, Delivery, Quantity, or QualityUnder UCC Article 2, there is no definite and seasonable expression of acceptance wherea term regarding price, delivery, or quantity/quality in the acceptance conflicts with theoffer. Such an acceptance is considered a counter-offer and neither party is liable fornon-performance if the dispute arises before either party partially or fully performs

Additional TermsNote: A term is additional where there is not a corresponding term in the other form at allUnder the UCC, additional terms in an acceptance are merely considered proposals for additionto the contract and do not become part of the parties agreement. To become binding, any


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additional terms must be expressly accepted in writing by the offeror. However, additional termsin a definite and seasonable acceptance become part of the agreement between two merchantsUNLESS:

(1)the offeror objects to additional terms within a reasonable time,(2)the offer expressly conditions the agreement exclusively to those terms contained in the

offer, OR(3)the additional terms materially alter the offer, meaning it would result in surprise orhardship if incorporated without express awareness by the other party.Sub-Rule: Common Materially Altering Terms *this is not an exclusive list*J STRAW

1. clause bestowing Jurisdiction on a particular court or requiring offeror to consent tojurisdiction in a particular court

2. shortening the Statute of limitations3. limiting Tort liability4. altering the UCC rules forRisk of loss5. adding an Arbitration clause, unless arbitration is the customary practice in that trade6.

clause negating express or implied Warranties such as those of merchantability orfitness

Common Alterations that are NOT Material1. a term that is customary in the industry (commonly tested)2. fixing a reasonable time for complaints3. fixing a sellers standard credit terms if within the practice in the trade provided they

do not alter any bargained for credit terms4. charging interest on over-due invoices5. restricting the buyers right to reject defective goods falling within trade tolerances6. a commercial impracticability clause

VII. CONSIDERATION

DefinitionCourts will only enforce an agreement as a contract if it is supported by consideration.Consideration exists where both parties make promises involving a legally valuable benefit ordetriment and those promises are bargained for, meaning both made the promise to receive thereturn promise.

Exam Tip: The following are the most frequently tested issues involving consideration: Past Consideration

A promise given in exchange for something already done does not constitute considerationbecause the promise was not bargained for.

NYDistinction

past consideration is binding if:(1)the promise and consideration are expressly stated(2)in a writing signed by the promisor, AND(3)the past consideration can be proven


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Ex: As thanks for helping me move, I promise to pay you $300. /signed/ Paula

Adequacy of ConsiderationGenerally, the court does NOT inquire into the adequacy or fairness of consideration as long asthere is a bargain, meaning the party actually wants what is bargained for.

Exception: Nominal ConsiderationThis is actually a gift disguised as a bargain

Illusory PromiseAn illusory promise is statement that may sound like a promise but the words used makeperformance entirely optional. There is no legal detriment because there is not an actual promisedespite using promissory language, because it does not commit the promisor to anything.Ex: I promise to sell you my car, unless I decide not to or I promise to buy all the coal Iwant from you, if you promise to sell me all the coal I want to purchase (the word want is

subjective)

Contract ModificationCommon Law: Contract Modification

To modify a contract, the parties must both offer new or additional consideration. Simplyperforming a pre-existing duty is not sufficient.

NYDistinction: Contract Modification

Additional consideration is unnecessary to modify a contract if the modification is in a signedwriting.

UCC Art 2: Contract Modification

Additional consideration is unnecessary to modify a contract, provided there is a good faithreason for the modification.

Partial Payment of a Debt

Where the debt is not in dispute, a creditors promise to forgive the balance of a debt in exchangefor the debtors partial payment is not enforceable due to lack of consideration because there isno legal detriment to the debtor.

NYDistinction: Partial PaymentIf the agreement is in writing, it is enforceable.

Promise to Pay a Time-Barred Debt

Where a debtor makes a written promise to pay a debt, the collection of which is barred by thestatute of limitations, is enforceable even without consideration because the signed writing is asubstitute for consideration.

Promissory Estoppel as a Substitute for ConsiderationConsideration is not necessary where the facts indicate that the promisor should be estoppedfrom not performing. A promise is enforceable if necessary to prevent injustice where:(1)a promisor made a unilateral promise to a promisee


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(2)the promisee actually detrimentally relied on that promise(3)it was reasonable for the promisee to rely on the promise, and(4)there was harm done to the promisee by relying on the promiseDamagesT

he promisee may receive expectation damages (value of the contract) or reliance damages(what was spent in reliance on the promise), depending on the jurisdiction.

VIII. DEFENSES

Absence of Mutual Assent

Mutual MistakeWhere both parties to a contract make a mistake of fact relating to the agreement, the contract isvoidable by the adversely affected party if:(1) the mistake goes to a basic assumption of the contract

(2) the mistake has a material effect on the agreed-upon exchange, AN

D(3) the party seeking to void the contract did not assume the risk of mistakeparty in a position to better know the risks than the other party or party knew their assumptionwas doubtful

Sub-Rule: ValueA mistake as to value is generally not considered material so it is not a defense

Unilateral Mistake

Where only one party made a mistake of fact relating to the agreement, the mistake will not be adefense to formation UNLESS the other party knew or had reason to know of the mistake.

Misunderstanding

Misunderstanding is a defense to contract formation where both parties believed they understoodeach other correctly, but made a mistake in drafting the terms of the contract or both parties wereaware of the ambiguity. However, ifone party knows or has reason to know of themisunderstanding, it is not a defense and a contract is formed based on the innocent partysunderstanding of the meaning of the contract.

Fraudulent Misrepresentation or Non-Disclosure of a Material FactWhere a party induces another to enter into a contract using a fraudulent misrepresentation ornon-disclosure of a fact, the contract is voidable by the innocent party if theyjustifiably reliedon it.

Non-fraudulent Misrepresentation or Non-Disclosure

An innocent and honest misrepresentation can be a defense to contract formation where it isregarding a material element of the contract, meaning the information asserted would induce aperson to agree, and the innocent partyjustifiably relied on it.

Lack of Consideration


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Consideration is an element of a contract and the lack of consideration can be put forward as adefense to the contract.

Public Policy

Illegality

If the subject matter of a contract is illegal, the contract is void.

Covenants Not-To-Compete

The court will invalidate or narrow the scope of a covenant not to compete that operates as anunreasonable restraint of trade. In determining whether the covenant is legally-enforceable, thecourt will consider the duration and geographic scope of the covenant, the necessity of thecovenant based on the uniqueness of the employees services, and the ability of the party seekingto bar enforcement to find employment elsewhere.

Exculpatory ClausesAn exculpatory clause can eliminate liability for negligence, but NOT for gross negligence or

intentional torts.

Lack of Capacity

Minors

A minor (under 18) may disaffirm a contract any time before or shortly after reach the age ofmajority and must return anything received under the contract that still remains. The contractremains enforceable against the adult.

Sub-Rule: Affirmation

A minor may affirm the contract upon reaching majority and be bound by it. A minorwill be found to have impliedly affirmed the contract if they continued to retain thebenefit of the contract after gaining or regaining capacity.Exception: A minor is liable for the reasonable value necessaries such as food, shelter,clothing, or medical care on a quasi-contract basis, not for the entire contract price

NYDistinction: Contracts of MinorsBy statute, minors cannot void contracts in the following situations:1. life insurance contracts by those 14 years or older2. educational loans by those 16 years old and older3. all contracts by 18 year olds4. realty contracts related to the marital home, and5. contracts involving artistic or athletic servicesMental IncapacityA contract is voidable by a person whose mental capacity is so deficient that he is incapable ofunderstanding the nature and significance of a contract.

Exception: An incapacitated person is liable for the reasonable value necessaries such asfood, shelter, clothing, or medical care on a quasi-contract basis, not for the entirecontract price

NYDistinction: Mental Incapacity


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Contracts by those adjudicated incompetent are void. Contracts by those who are notadjudicated incompetent are NOT voidable unless the incompetent person can restore the otherparty to their previous position.

Intoxication

A contract is voidable by a person who was so intoxicated that he did not understand the natureand significance of the agreement IF the other party had reason to know of the intoxication.Exception: An intoxicated person is liable for the reasonable value necessaries such asfood, shelter, clothing, or medical care on a quasi-contract basis, not for the entirecontract price

Economic Duress

It is rarely a successful defense against formation accept where the other party is threatening tobreak an existing contract and the victimized party has no reasonable alternative available forobtaining needed goods or services.

UnconscionabilityThe court may refuse to enforce a provision or an entire contract to avoid unfairness that shocks

the conscience of the court. The unconscionability may be substantive or procedural.Substantive Unconscionability

The terms of the contract are grossly unfair; however, unfair price alone is not sufficientProcedural Unconscionability

The process by which the parties reach an agreement is unfair significant powerimbalance, inconspicuous risk-shifting provisions (small print), adhesion contracts

Statute of FraudsExam Tip: if the word oral appears in the question, check whether the contract is within theStatute of FraudsGenerally, oral contracts are valid. However, the contracts below must be in a writing signed bythe party to be charged or his lawful agent reflecting the material terms of the agreement in orderto be enforced. The Statute of Frauds must be asserted as an affirmative defense in the Answer;if not, then it is deemed to be waived. A party can sue for the reasonable value of services orpart performance rendered, or restitution of any other benefit conferred.

MY LEGSMarriage contractYear contractLand contract (real property sale or lease)Executor contractGoods Sale contractSuretyship contract (guarantee the debt of another)

NYDistinction:The following contracts are also within the Statute of Frauds1. promise to pay a discharged debt2. an assignment of an insurance policy or promise to name a beneficiary of such a policy3. contracts to pay a commission or finders fee, except for contracts with an attorney,

auctioneer, or licensed real estate brokerSub-Rule: Signature Requirement


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Signature is broadly construed it can be printed or typed, initials, or letterhead.Exam Tip: Remember to be sure that the party being sued is the one who signed thewritingSub-Rule: Satisfactory Writing

1. A sale of goods contract under UCC Art 2 must contain a quantity term and besigned by the party to be charged2. A lease of goods contract under UCC Art 2A must state that it is a lease, include thequantity, duration, and rental payments and be signed by the party to be charged.

3. All other contracts must contain a statement of the parties to the contract, the subjectmatter of the contract, and be signed by the party to be charged.

Sub-Rule: Contract ModificationA contract modification must also be in writing if the contract, as modified, is within theStatute of Frauds.

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

Year Contract

Contracts where performance absolutely cannot be completed within a year must be evidencedby a writing. The clock begins to run when the agreement was made, not when performancebegins.

Exceptions:

1. Lifetime contracts are NOT within the statute of frauds (because a person could die atany time).NYDistinction: Lifetime contract ARE within the statute of frauds.

2. Full Performance Where the party has already fully performed the contract for over1 year, a writing is not necessary.

Exam Tip: it does not matter if performance actually takes more or less than a year. Ifperformance within a year is theoretically possible, no writing is required. Specific tasks cantheoretically be accomplished within a year, so dont be tricked by tasks that appear they willtake a long time.

Land ContractAny contracts for the sale or lease of real property or express easements formore than one year,or mortgages, must be evidenced by a writing signed by the party to be charged .

Sufficient Writing

A memorandum for the sale of land is sufficient if it contains the price, a description ofthe party, which does not need to be a legal description, and a designation of the parties

Sub-Rule: Equal Dignities RuleWhere an agent is acting on behalf of a principal when dealing with an interest in land,the agent must be authorized in writing concerning the real property or the principal mustratify.

Exceptions:1. leases for one year or less


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2. part performance: A real property contract does NOT have to be in writing where thebuyer (1) is in possession of the property, (2) has made some payment, or (3) madeimprovements to the property 2 out of 3 required!

Executor Contract

A promise by an executor or administrator to pay the estates debts out of his own funds must beevidence by a writing signed by the party to be charged.

Sale of Goods ContractUnder UCC Art 2, a contract for the sale of goods for $500 or more is unenforceable unless inwriting sufficient to indicate that a contract has been made and signed by the party to be chargedor his authorized agent or broker.NYDistinction: Under UCC Art 2A, a lease must be in writing if total of payments under thelease will be $1,000 or more

Exceptions to Statute of Frauds for Sale of Goods Contracts

T

here are four exceptions where oral contracts are enforceable without a writing: MAPS1. Merchant Memo RuleUnder UCC Art 2, an oral contract between two merchants is enforceable when eithermerchant (1) confirms the oral contract in a signed, written confirmation and (2) the othermerchant receives it within a reasonable time after the oral contract is made, (3) had reasonto know of its contents, and (4) does not object within 10 from its receipt. The memo neednot refer to the prior oral agreement; however, it must state the quantity and any additionalterms which materially alter the oral agreement will not be part of the contract.Memorandum may be a purchase order, acknowledgment of an order, invoice, a writtencontract, or an irrevocable letter of credit

2. AdmissionUnder UCC Art 2, an oral contract is enforceable for the quantity of goods that the partyagainst whom enforcement is sought admits he orally contracted for in his (1) pleadings, (2)pre-trial testimony during Discovery, or (3) his testimony at trial.

3. Part PerformanceUnder UCC Art 2, an oral contract is enforceable for only the quantity of goods for which (1)payment as been made and accepted, OR (2) delivery has been made and accepted.

4. Specially manufactured GoodsUnder UCC Art 2, the entire oral contract is enforceable if: (1) circumstances indicate thatthe goods where specially made for the buyer, (2) the seller has made a substantial beginningof their manufacture or has made a commitment for their procurement before the sellerreceives notice of the buyers repudiation, AND (3) the goods are not suitable for re-sale toothers in the ordinary course of the sellers business.

Suretyship Contract

A promise to answer for the debt of another must be evidence by a writing signed by the partyto be charged.


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Exception: Main PurposeIf a suretys main purpose in making a promise is to benefit himself, then the contract isnot within the statute of fraudsNYDistinction: there is NO main purpose exception

PART 4. DETERMINING CONTRACT TERMS

IX. WORDS AND CONDUCT OF THE PARTIES

Parole Evidence RuleWhere the parties have created an integration, meaning a writing intended to be the full and finalexpression of the bargain, any evidence of a prior or contemporaneous agreement (either oral orwritten) that contradicts a later writing is inadmissible. In determining whether the writing is anintegration, the court considers the specific circumstances, the identity of the parties, and theexistence of a merger clause.

Evidence Outside the Scope of the Parole Evidence RuleThe following extrinsic evidence is admissible because it does not seek to contradict anintegration:1. to correct a clerical error or reform a mistake2. to establish a defense against formation

such as a formation defect or the existence of a condition precedent

3. to interpret a vague or ambiguous termif the meaning of the agreement is not plain, outside evidence is admissible

4. to supplement a partially-integrated writingUCC Parole EvidenceUnder UCC Art 2, ONLY a merger clause will exclude extrinsic evidence.

Subsequent Developments

Remember that the parole evidence rule has nothing to do with what happens after the agreementis reduced to writing.

Conduct

A written contracts terms may be explained or supplemented by the following, whether or notthe writing appears to be ambiguous: (descending order of importance)1. course of performance: what the parties did under this contract2.

course of dealing: what the parties did under prior contracts with each other3. usage of trade: what others in the trade do in similar contracts

UCC Battle of the Forms(See Acceptance)

UCC Gap-Filler Terms


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Delivery Terms and Risk of Loss

If the contract is silent as to risk of loss, the party bearing the loss depends upon how the goodsare delivered.

Delivery by Common CarrierW

here delivery is made by a common carrier, the risk of loss shifts to the buyer when theseller completes his delivery obligations, which depends upon the type of deliverycontract.

i. Shipment Contract (FOB sellers location)Where the contract authorizes or requires the seller to ship the goods by carrierbut does not specify a destination (FOB sellers location), the risk of loss passesto the buyer when the seller delivers the goods to the carrier.

ii. Destination Contract (FOB buyers location)Where the contract requires the seller to deliver the goods to a particulardestination, the risk of loss passes to the buyer when the goods are tendered to thebuyer at the destination.

Where a Carrier is NOT InvolvedWhere the parties make no provision for goods to be delivered by a carrierEx: buyer is to pick up the goods or seller is to deliver the goods directly to buyer

i. Seller is a MerchantThe risk of loss passes to the buyer when he takes possession of the goods.

ii. Seller is NOT a merchantThe risk of loss passes to the buyer upon the sellers tender of the goods.

When Goods Held by a BaileeIf the goods are held by a bailee (warehouse) and the goods are to be delivered to the buyerwithout being moved or shipped then risk of loss passes to the buyer upon: (1) the buyersreceipt of a bill of lading (contract and receipt issued by a carrier) or (2) the bailee notifies thebuyer of his right to take possession of the goods.

When Goods are Destroyed through No Fault of Either PartyWhen the goods are totally destroyed through no fault of either party before the risk of losspasses to the buyer, the UCC rescinds the contract allowing the buyer to assert a claim forrestitution damages to recover any deposit paid, but the buyer cannot assert a claim forexpectation damages for the lost bargain.

NYDistinction: Risk of Loss for Lease of Goods Under UCC Art 2AGenerally, the risk of loss is always on the lessor.

Exception: If the lessor is a bank, the risk of loss is on the lessee.

UCC WarrantiesContracts for the sale of goods may include certain implied and express warranties.

Express Warranties

A seller is liable for breach of any express warranty, which includes statements of fact, promises,descriptions of the goods, and the use of a sample or model, which is the basis of the bargain,


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The Perfect Tender Rule

UCC Art 2 requires the seller to exactly perform all contract obligations. The perfect tender rulepermits the buyer to reject goods that fail to conform to the contract in any respect, includingquantity, quality, or timeliness.

Exceptions to Perfect Tender RuleHowever, UCC Art 2 does NOT apply the perfect tender rule to the following contracts:

ICOP1. Installment contracts

A buyer in an installment contract is precluded from rejecting an installment UNLESS thenon-conformity substantially impairs the value of the whole contract and the non-conformity cannot be cured. A buyer is not prevented from suing the seller to recoverdamages due to the non-conformity of installment.

2. Commercially impracticabilityWhere the delivery was late, but the original delivery date was made commercially

impracticable by an event that was not considered by the parties when the K was executed(floods, snowstorms, civil unrest)3. Objective and reasonable belief

If a seller in good faith (1) sends nonconforming goods objectively and reasonably believingthat such goods ARE conforming, and (2) when notified of the non-conformity the sellerindicates to the buyer its intention to cure the breach, then (3) the buyer must give the selleradditional, reasonable time to tender conforming goods, even beyond the date fixed in thecontract for performance. If the buyer does not give the seller this additional, reasonabletime to cure, but instead invokes the perfect tender rule and repudiates the contract based onsellers breach, then it is the buyer who has wrongfully breached the contract.

4. Prior to performance rejectionIf the buyer rejects nonconforming good prior to the date for performance fixed in thecontract, then the seller has the option to cure the tender before the performance date expires.

Time Has Expired: Seller has no option to cure unless if, based on the parties priorperformance and dealings, the buyer has shown flexibility in accepting non-conforminggoods

Installment ContractsAn installment contract under the UCC is one where separate lots are to be separately delivered,accepted, and paid for. The court will treat the contract as a series of separate and independentcontracts within the whole and each part/installment as separately enforced regardless of theperformance of another part. Breach or defective performance of one part/installment does notnecessarily breach the entire contract, UNLESS (1) the breach of the part/installment evinces anintent to repudiate the whole contract; or (2) the breach of the part/installment impairs the valueof the whole contract.

Buyers Acceptance of the Goods

Acceptance

After a reasonable opportunity to inspect the goods, the buyer signifies to the seller that thegoods are conforming or that the buyer will take them despite their non-conformity. After the


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buyer accepts the goods, he cannot reject them, but he may revoke the acceptance under certainconditions.

Sub-Rule: Implied Acceptance1. the buyer keeps the goods without objection after having a reasonable opportunity to

inspect them and reject them if nonconforming, or

2.

the buyer continues to retain and use the goods after a rejection or revocation ofacceptance

Rejection of Non-Conforming GoodsUnder UCC Art 2, when nonconforming goods are tendered, the buyer may reject the entirenonconforming shipment or accept any reasonable commercial unit and reject the rest. Therejection must be within a reasonable amount of time after delivery.

Definition: Commercial Unita commercial unit is a single whole for the purposes of sale, the division of which wouldmaterially impair its character or value (ex: a furniture set or a quantity like a bale orgross)N

ote: risk of loss stays with seller because seller breached

Revocation of AcceptanceUnder UCC Art 2, generally a buyer cannot revoke acceptance of goods.

Exceptions:1. The buyer may revoke his acceptance of nonconforming goods within a reasonable

time after he discovers or should have discovered a latent defect that is a substantialimpairment of the worth of the goods to the buyer, OR

2. The buyer accepted the goods with knowledge of the nonconformity, but the sellergave assurances that the defect would be cured and it was not.

Consequences of Rejection/Revocation of Acceptance

If the buyer rejects the goods or revokes his acceptances, he may (1) return the goods to theseller at the sellers expense, (2) obtain a refund of any money the buyer has paid for the non-conforming goods, and (3) sue for damages for breach of contract.Exam Tip: Although the consequences are the same, questions will ask you to distinguishbetween rejection and revocation in the answer choices (look for implied acceptance)

Sub-Rule: Buyers Responsibilities for Goods after Rejection/Revocation

1. If, after rejecting nonconforming goods or revoking acceptance of nonconforminggoods, the goods are left in the buyers possession, then the buyer must hold thegoods for a reasonable time and with reasonable care

2. If the buyer is a merchant and the seller is not from the buyers geographic area, themerchant-buyer has a duty to follow any reasonable instructions received from theseller. Instructions are not reasonable if expenses for undertaking those instructionsare not promptly assumed by the seller.

3. If the nonconforming goods are perishable or threaten to rapidly decline in value andthe merchant-buyer has not received instructions from the seller, then he must make areasonable effort to sell the goods on the sellers behalf.


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XI. PERFORMANCE OF COMMON LAW CONTRACTS

Substantial Performance

Definition

A partys basic duty at common law is to substantially perform the contract. The doctrine of

substantial performance is an equitable rule designed to prevent an injustice where a contractbreach inadvertently caused a minor or nonessential deficiency which can be inexpensivelyremedied. If the breaching party substantially performed, then the breach is consideredimmaterial.usually arises in the context of construction contracts

Timing of Performance

Generally, failure to perform by the time stated in the contract is not a material breach ifperformance is rendered within a reasonable period, UNLESS the contract expressly states thattime is of the essence. What is a reasonable period depends on the circumstances and indetermining reasonableness the court will consider: (1) the hardship to the party if the contract is

not performed by the stated date, (2) the parties intent, and (3) the presence or absence of goodfaith.

Substantial Performance Factors

The court considers the following factors in determining whether there was substantialperformance and the breach was immaterial:

HAIL1. Hardship on the breaching party is high if a total material breach is declared2. Amount of benefit bestowed on the nonbreaching party (substantial)3. Innocent breach and not willful (not in bad faith)4. Likelihood or ease of full performance being achieved by the nonbreaching party (high/easy)

XII. EXCUSE FROM PERFORMANCE DUE TO SUBSEQUENT EVENTS

Other Partys Breach

The other partys breach may provide an excuse for non-performance, depending upon the natureof the contract.

Sale of Goods (Art 2)

If the seller does not perfectly perform all contract obligations, the buyer may:1. accept the entire shipment, including non-conforming goods,2. reject the entire shipment, including conforming goods, OR3. accept the conforming goods and reject the non-conforming goods.Regardless of what the buyer chooses to do with the goods, he may sue the seller for breach ofcontract for damages.

Common Law Contracts

Under the common law, only a material breach by the other party excuses the nonbreaching partyfrom further performance or their duty to pay.


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Anticipatory Repudiation

DefinitionAnticipatory repudiation of a bilateral contract arises before the date for full performance whereone party clearly and unequivocally announces an unwillingness or inability to perform the

contract.a request to renegotiate, refusal to perform an honestly disputed or ambiguous contract, or astatement that the party might not be able to perform is not anticipatory breach

When Remedies for Anticipatory Breach Are Not Available

Remedies for anticipatory breach are not available where the nonbreaching party has fullyperformed and the breaching partys only obligation is to pay money in future installments.Here, the nonbreaching party must await the future payment dates to sue for breach of contract.An Acceleration Clause avoids this problem and accelerates all future payment installments inthe event that one payment installment is breached.

Nonbreaching Partys RemediesIn the event of an anticipatory breach, the nonbreaching party is not required to perform thecontract further but must be able to establish that they were ready, willing, and able to performthe contract but for the other partys repudiation. The nonbreaching party may:1. immediately sue and claim damages for a total breach or rescission of the contract2. wait until the day that performance is due to sue for damages, OR3. wait and urge the breaching party to reconsider performance this is not considered an

election of remedies and the party may sue any time thereafter.

Retraction of Repudiation

After a party anticipatorily repudiates the contract, he may retract his repudiation any timeUNTIL the aggrieved party has:1. commenced a suit on the breach2. relied on the repudiation and materially changed his position (ex. entered a new contract to

cover); OR3. effectively communicated to the breaching party an intent to treat the repudiation as final and

the contract as breached.

Failure to Give Adequate Assurances

Demanding Assurances of PerformanceIf reasonable grounds exist for a partys insecurity about the other partys ability to performthe contract then, if commercially reasonable, the party can suspend further performance and inwriting demand adequate assurances of their future performance. If the other party does not giveadequate assurances within 30 days of the requesters demand, then they can treat this as arepudiation of the contract by the other party. However, the party cannot demand a particulartype of assurances or use this as an opportunity to rewrite the contract.Ex. good faith rumors of buyers unwillingness/inability to pay, anticipatory repudiation ofcontractNYDistinction: This remedy also applies to non-sale of goods contracts


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Adequate assurances include:The reasonableness of the assurances will depend on the surrounding facts and circumstances.The party must tender proof that he can and will perform through, for example:1. a sureity promise by a person that they will pay the debts of another2. a bond3.

bank line of credit4. an audit or financial report that clearly shows buyers solvency

5. credit report prepared by the buyers bank Later Agreement

Mutual RescissionA mutual rescission is an agreement to cancel the contract, excusing both parties fromperformance. The parties may only rescind the contract where both have performance remainingon the contract for there to be adequate consideration for the rescission agreement.

Modification

If a contract is subsequently modified by the parties by mutual agreement, this will serve todischarge those terms of the original contract that are the subject of the modification, but not theentire contract.NYDistinction: Partial Discharge by Modification of Contract

No consideration is need ifthe modification is in writing and signed by the party to be charged,or by his agent.

Accord and Satisfaction

A duty under a contract may be discharged by an accord and satisfaction. An accord is anagreement in which one party agrees to accept some other, different performance as satisfactionof a duty under the existing contract. It does not matter if the new, different performance is lessthan what was previously due. Satisfaction is the performance of the accord agreement,discharging the original contract and the accord.

Bilateral Executory AccordA bilateral executor accord is an agreement that an existing claim be discharged in the future bythe rendition of a substituted performance. This is essentially a promise for a future accord andsatisfaction.

Novation

A novation is an agreement to substitute a new party for an existing one. The novation is onlyvalid ifall parties to the original contract and the new party agree to the substitution.Exam Tip: The MBE frequently asks you to distinguish between a novation and a delegation.

Discharge by ImpossibilityAt common law, a later unforeseen event (after the contract has been entered into) makingperformance objectively impossible may discharge contractual duties if:(1)the nonoccurrence of the event was a basic assumption of the parties in making the contract,

and(2)neither party has assumed the risk of the event occurring.


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Destruction of Contracts Subject Matter

If the contracts subject matter is destroyed or the designated means for performing the contractare destroyed, contractual duties will be discharged. This does NOT apply to contracts to buildsomething where the work in progress is destroyed because the contractor can rebuild.

Death or Incapacity of an Essential PersonDeath or physical incapacity of a person necessary to effectuate the contract serves to dischargeit. In contracts for services, if the services the person was to provide are unique, thenperformance is excused. If the services the person was to provide are not unique, then the personcan delegate them to another, so the performance is NOT excused.

payment of money can always be delegated.

Supervening Governmental Regulation or Illegality

Supervening governmental regulations or illegality may serve to discharge a contract.

Discharge by ImpracticalityUnder UCC Art 2, a later unforeseen event (after the contract has been entered into) making

performance impracticable may discharge the sellers contractual duties to the extent of theimpracticability if:(1)the seller has encountered extreme and unreasonable difficulty and/or expense, AND(2)the nonoccurrence of the event was a basic assumption of the contract.

Sub-Rule: Identification to the ContractThe seller is excused only if the damaged or destroyed goods have been identified to theparticular contract.Ex: set aside for the buyer, tagged with buyers name

Sub-Rule: Risk of LossA seller who bore the risk of loss when the goods were damaged or destroyed is excusedfrom performance, but a buyer bore the risk of loss when the goods were damaged ordestroyed is NOT excused.

Increase in the Cost of Sellers Performance

Generally, a mere increase in costs, even a doubling in costs, is insufficient to dischargeperformance unless they change the nature of the contract because the seller assumes the risk ofprice increase by entering into a fixed price contract.NYDistinction: Price Increase

NY courts look at the absolute amount of the increase and the percentage of increase

Discharge by Frustration of Purpose

A buyers performance under a contract may be discharged for frustration of purpose if:(1)there is a supervening event or act which renders the buyers primary purpose for entering

the contract nearly or completely valueless,(2)at the time of contract, the parties did not reasonably foresee the act or event occurring, AND(3)the seller knew the buyers purpose for entering at the contract.


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Ex: a person rented a venue for a specific purpose known to the owner and there a subsequentevent that was not reasonably foreseeable that renders the purpose for renting the place mootExam Tip: frequently tested

Failure of an Express Condition

DefinitionA contract may provide, either impliedly or explicitly, that a party who is bound does not comeunder a duty to perform unless or until some specified condition occurs. A condition is an event,other than the passage of time, the occurrence or non-occurrence of which will create, limit, orextinguish the other contracting partys duty to perform. The failure of a condition or legalexcuse relieves a party of the obligation to perform.

Classification of Express Conditions

1. Condition Precedentone that must occur before an absolute duty of immediate performance arises in the otherpartyE

x: agreement to pay $10,000 if my house is sold by April 12. Conditions Concurrentones that are capable of occurring together and that the parties are bound to perform at thesame timeEx: Tiger lets Jeter use is golf clubs as long as Jeter is a Yankee

3. Condition Subsequentone the occurrence of which cuts off an already existing absolute duty of performanceEx: agreement to buy Blackacre unless zoning is changed

4. Satisfaction Clausessatisfaction is measured by a reasonable person standard unless the contract deals withmatters of art or personal test which are judged by a subjective standardEx: agreement to pay $7,500 for a portrait if satisfied with the work

Excuse of a Condition

Occurrence of a condition may be excused by the later action or inaction of the person who isprotected by the condition. The party protected by the condition can excuse the other partysperformance by1. failing to cooperate2. material breach, anticipatory repudiation3. waiver: the party receiving the benefit may indicate by words or conduct that they will not

insist on the conditions being met; this does not require considerationSub-Rule: Estoppel Waiver

If the protected party indicates they are waiving the condition beforehand and the otherparty detrimentally relies on this, the protected party may not retract the waiver

BREACH

Common Law Remedies for Substantial PerformanceThe breaching party who substantially performed can recover the contract price, minus the costto correct any defects and reach complete performance. The nonbreaching partys remedy is the


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cost of completion or correction, unless that cost is grossly out of proportion with any benefit tobe achieved. Then the measure of damages is the difference in the value of the substantialperformance and the value of what would have been tendered if there had been full performance.

Common Law Breach

DefinitionA breach of contract is the total or partial failure, without legal excuse, to perform any promisethat forms the whole or part of the contract. A breach by one party entitles the other party todamages. A breach may occur where (1) one party fails to give the promised performance orthere was full performance, but it was deficient; (2) one party prevents the other partysperformance; (3) one party repudiates the contract; or (4) there is an anticipatory breach.

Material BreachA breach is material where the nonbreaching party does not receive the substantial benefit of thebargain. The aggrieved party is entitled to all remedies for breach of the entire contract.

NY and Majority Rule: The materially breaching party cannot assert a claim for unjust

enrichment and cannot recover anything for benefits bestowed on the nonbreaching partyby services rendered.

Immaterial Breach

Where the breach is immaterial, meaning it is trivial or minor, or the element breached is merelyincidental to the contract, the nonbreaching party is not relieved of the duty of performance or ofpaying for the performance rendered.

Damages/ Statute of LimitationsDamages will be assessed and the statute of limitations will begin to run from the date thenonbreaching party learned of the anticipatory breach. The party bears the risk of loss due to anyadverse changes in market price during the delay.

PART 6. REMEDIES

BuyersRemedy List

When a seller breaches the contract, either because the seller repudiates, fails to timely deliver,or where the delivered goods fail to conform to the contract (quantity or quality), the buyer has

the following remedies:CIDSWAAR

1. Cover2.

Incidental and Consequential

D

amages3. Damages for Lost Bargain or for the Price Paid4. Specific Performance of Unique Goods5. Breach ofWarranty6. Acceptance Revoked7. Demand AdequateAssurances8. RejectNon-Conforming Goods


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SellersRemedy Listof possibleremediesavailabletosellerUnder UCC Art 2, where the buyer wrongfully repudiates the contract, wrongfully rejectsconforming goods, or fails to pay the contract price for delivered goods, the seller has thefollowing remedies against the breaching buyer:

SPARKLE

1. S

topping goods in Transit2. Sue for the entire contractPrice3. DemandingAssurances of performance4. Resell the goods to another buyer5. Keeping part of the buyers deposit6. Sue forLost profit7. Exercise right to reclaim goods delivered to insolvent buyer

XIII. NON-MONETARY REMEDIES

Specific PerformanceSpecific performance is an equitable remedy available only if monetary damages are inadequate

to compensate the injured party. The court orders the breaching party to perform or facecontempt of court charges. Availability of specific performance depends on the nature of thecontract.

Real PropertySpecific performance is always available and is the usual remedy for real property contractsbecause real property is considered unique.

Service ContractsSpecific performance is never available for breach of contracts to provide services, even if theyare rare or unique, because the court will not force a party to work against their will. However,injunctive relief may be available.

Sale of Goods Contracts

Under UCC Art 2, a buyer may request that the court exercise its equitable power to decreespecific performance: (1) where the goods are unique (heirloom or priceless), (2) in other propercircumstances, such as where damages would be uncertain or difficult to ascertain or where thebuyer cannot readily buy the goods in the market.

Other Non-Monetary Remedies Under UCC Art 2

Buyers Non-Monetary Remedies

1. Cancellation

If a buyer rightfully rejects goods because they do not conform to the contract, one of theiroptions is to simply cancel the contract.

Sellers Non-Monetary Remedies

1. Stopping Goods in Transit or Refuse Delivery


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Under Art. 2 of UCC, when a buyer wrongfully repudiates the contract (Anticipatory Breach) orfails to make a timely required payment, a seller refuse delivery or can stop goods in transit, butonly if the shipment is a large quantity or in bulk. However if the breaching party is insolventthen any goods in transit can be stopped regardless of the size of the shipment.Note: This remedy is lost once the carrier has effected delivery and acknowledges buyers right

to the goods.

2. Exercise Right to Reclaim Goods Delivered to Insolvent Buyer

Generally, an unpaid seller does not have the right to reclaim goods from the buyer. However, ifthe seller has delivered goods on credit and discovered that the buyer was insolvent at the time ofdelivery, then the seller may: (1) commence an action for the entire contract price, however thejudgment will have little value, OR (2) reclaim the goods from the buyer by making a demandfor the goods within 10 days after delivery, provided the buyer was insolvent at the time thegoods were delivered on credit or paid for the goods with a check that bounced. If the sellersuccessfully reclaims the goods, he is precluded from exercising any other remedies.

Sub-Rule: Seller has Priority Over Other Creditors

Under UCC Art 2, the seller has priority to reclaim the goods over the buyers otherjudgment or lien creditors but the sellers right to reclaim is defeated by a good-faithpurchaser of those goods who purchased the goods in the ordinary course of business.Exception (that will not remember): The seller may reclaim the goods at any time ifthe buyer misrepresented its solvency in writing within three months before deliver.Sub-Rule: Definition of Insolvency

Under UCC Art 1, a party is in solvent where it ceases to pay its debts in the ordinarycourse of business, when it cannot pay its debts as they become due, or as defined underfederal bankruptcy law.

Demand Assurances(See above)

XIV. MONETARY REMEDIES DAMAGES

Types of Damages

Expectation DamagesExpectation damages are the standard measure and the goal is to put an injured party in as good aposition as full performance would have.

Consequential DamagesConsequential damages are additional losses particular to that a reasonable person would haveforeseen. To recover consequential damages, the must show:(1) the loss was caused by the breach,(2) that the s particular needs were known to the at time of contract,(3) reasonable certainty as to the amount of damages, and(4) that the damages could not have been mitigatedNote: Under the UCC, only the buyer may recover consequential damages

Incidental Damages (Under UCC)


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Under UCC Art 2, incidental damages are any commercially reasonable expenses incurredincident to the other partys breach.buyer can recover: expenses reasonably incurred in inspection, receipt, transportation, care, andcustody of goods rightfully rejectedseller can recover: expenses incurred in storing, shipping, returning, and reselling the goods

Punitive DamagesPunitive damages are NOT awarded for breach of contract.

Nominal Damages

Nominal or token damages may be awarded when there was a breach but no actual loss.

Liquidated DamagesThe parties to a contract may stipulate what damages are to paid in the event of a breach, even ifthe nonbreaching party did not suffer any pecuniary damages. A liquidated damages clause in acontract will be upheld if:

(1)damages would be difficult to estimate, and(2)the amount agreed upon is a reasonable forecast of probable damages they cannotoperate as a penalty

Even if the liquidated damages clause is struck down, the nonbreaching party is still entitled to

actual damages

Expectation Damages Common LawDamages are based on an expectation measure or the benefit of the bargain.

Expectation Damages UCC Sale of Goods

Buyers Damages

1. Cover Damages [cover price contract price + incidental, consequential savings]

Under UCC Art 2, where the seller fails to tender the goods or the buyer properly rejects/revokesacceptance of non-conforming goods, a buyer may effect cover by purchasing or contracting topurchase similar goods from another seller in substitution for those due from the seller. Thepurchase must be made in good faith and without unreasonable delay. The buyers measure ofdamages is the difference between higher cost to cover and the original contract price, plusconsequential damages for lost profits and incidental damages and minus any savings as a resultof the breach. Under the UCC, effecting cover is a condition for recovering consequentialdamages.

2. Market Damages [market price contract + incidental, consequential savings]

Under UCC Art 2, where the seller fails to tender the goods, the buyer properly rejects/revokesacceptance of non-conforming goods, or the seller anticipatorily repudiates the contract, thebuyer is entitled to damages. Where the buyer does NOT cover or does not cover in good faith,the buyers measure of damages is the difference between the higher market price at the time helearned of the breach and the lower contract price, plus consequential damages for lost profitsand incidental damages and minus any savings as a result of the breach.

3. Lost Bargain [value promised value accepted + consequential/incidental]


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Under UCC Art 2, where the buyer accepts nonconforming goods and gave the seller notice ofthe nonconformity within a reasonable time after its discovery, the measure of the buyersdamages is the difference between the value of the goods promised in the contract and the valueof the goods accepted plus consequential damages for lost profits and incidental damages.

Sellers Damages1. Resale Damages [contract price resale price + incidental damages-expenses saved]Under UCC Art 2, when a buyer wrongfully repudiates the contract or refuses to acceptconforming goods, the seller may promptly re-sell those goods and sue the buyer for the resultingdamages. The resale must be performed in a commercially reasonable manner (good faith) at apublic or private sale and it should be with notice to the breaching buyer. The damages are thedifference between the higher price in the sales contract and the lower resale price, plus anyincidental damages suffered by the seller and minus any expenses saved.

Sub-Rule: When the Goods are Unfinished at Time of Breach

When a buyer repudiates the contract and the seller has not completed production ofthose goods, then the seller in good faith may:

1. complete the goods and re-sell them,2. cease production and sell the goods for scrap, OR3. to proceed in any other reasonable manner

2. Market Damages [contract price market price + incidental damages-expenses saved]If the seller does resell the goods, does not resell in good faith, or fails to give notice to thebreaching buyer, then the seller can recover only the difference between the higher price in thesales contract and the fair market price at the time and place of delivery (which is not necessarilythe resale price) plus any incidental damages and minus any expenses saved.

3. Lost Profit: Volume Dealers

[contract price cost of goods + incidental damages expenses saved]

The difference between the breached contract price and the resale price is an inadequate remedyfor the volume seller who has an unlimited supply of goods because he is able to immediatelyresell the goods for the same price to another buyer. Here, the sellers measure of damages is hislost profit, which is the contract price minus the cost of the goods to the seller plus any incidentaldamages and minus any expenses saved.

4. Contract PriceUnder Art 2 of UCC, the seller may sue the buyer for the entire contract where:1. the seller delivers conforming goods on credit but the buyer fails to pay for those goods,2. conforming goods were destroyed after risk of loss passed to the buyer, OR3. the buyer wrongfully fails to accept conforming goods and the seller cannot re-sell them

because they are obsolete or not usable by anyone except the buyer.

5. Keeping Part of the Buyers Deposit

If a breaching buyer paid a deposit on the contract, the buyer is entitled to restitution in theamount of the deposit. However, the buyers right to restitution is limited and the seller can keep20% of the total purchase price or $500, whichever is less, plus any damages caused by thebuyers breach.


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Sub-Rule: Real Estate ContractsIn a real estate contract, the seller is entitled to keep the buyers deposit if the buyerbreaches as liquidated damages. The amount of the deposit must be a reasonable forecastof the sellers damages in the event of breach to be valid.

Building Contracts

Where an owner breaches a construction contract after construction has been started but beforeconstruction is completed, the building is entitled to recover any profits he would have derivedfrom the contract plus any costs he has incurred up to the date of breach. (contract price minuscost of completion)

Duty to Mitigate

The nonbreaching party has a duty to mitigate their damages and cannot recover damages theycould have avoided with reasonable effort.

The duty to mitigate is built into UCC remedies.Sub-Rule: Employment Contracts

If the employer breaches, the employee has a duty to use reasonable care in finding aposition of the same, kind, rank, and grade in the same city. If the employee is notrequired to take a job, but they will only be able to recover the difference between thecontract salary and the comparable job salary.

XV. RESTITUTION

PART 7. THIRD PARTIES TO A CONTRACT

XVI. THIRD-PARTY BENEFICIARIES Definitions

Third Party BeneficiaryA third party beneficiary arises where two parties enter into a contract that will render someperformance or benefit to a third party.

PromisorThe party who promises to perform for the third-party beneficiary.

Promisee

The party who secures the promise.

Intended BeneficiaryThe intended third-party beneficiary is the person who is not a party to a contract but hascontractual rights because the parties intended the contract to benefit him. In determiningwhether the beneficiary was intended, consider whether the beneficiary:1. is identified to the contract2. receives performance directly from the promisor, or3. has some relationship with the promisee to indicate intent to benefit


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Donee BeneficiaryA donee beneficiary is an intended third-party beneficiary whom the promisee intends tobenefit gratuitously.Creditor Beneficiary

A creditor beneficiary is an intended third-party beneficiary to whom the promisee

intends the contract to pay off a debt.

Incidental Beneficiary

If the third party was not an intended beneficiary, they are merely an incidental beneficiary withno contractual rights.

Rescission and Modification of Third-Party Beneficiary Contracts

Vesting of Beneficiary RightsA third party can only enforce a contract if his rights have vested. This occurs when he:1. materially changes position in justifiable reliance on the promise,2. brings a suit to enforce the promise, or3.

manifests assent to a promise in the manner requested by the parties

Modification and RescissionThe promisor and promisee cannot rescind or modify the contract after the third partys rightshave vested without the third partys consent.

Exception

Contrary language in the contract controls.

Rights and Liabilities

Promisor to Intended Third Party Beneficiary

An intended third party beneficiary may sue a breaching promisor to the contract to enforce theirrights and the promisor may raise any defense that the promisor has against the promisee.

Promisee to Creditor Beneficiary

A creditor beneficiary can sue the promisee on the existing obligation between them, doneebeneficiaries cannot.

Promisor to Promisee

A promisee may sue the promisor at law and in equity for specific performance if the promisordoes not perform for the third party (creditor or donee).

XVII. DELEGATION OF DUTIES AND ASSIGNMENT OF RIGHTS

Delegation of DutiesA party to a contract, known here as the delegator, may delegate his contractual duties, eitherorally or in writing, without the consent of the person to whom performance is owed, known asthe obligee. The person to whom the duties are delegated is known as the delegate. Thedelegator must manifest a present intention to make a delegation.


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Exam Tip: The MBE uses the terms assignment and delegation loosely the question may sayassigned rights but the facts may show that there was also a delegation of duties

Exceptions

Generally, all duties may be delegated. However, the following duties may not be delegated:

1. *

there is a contractual restriction on delegation or assignment2. *duties involving the partys particular judgment, skill, or reputation3. delegation would change the obligees expectancy

Ex: requirements or output contract4. a special trust was reposed in the delegator by the other party to the contractRights and Obligations of the Parties

The delegator remains liable to the obligee on the contract, so the obligee may sue the delegatorfor nonperformance of the delegate OR the delegate.

Sub-Rule: Requiring the Delegate to PerformThe obligee may only require the delegate to perform if the delegate assumes the duties

of the contract by promising to perform in exchange for consideration.

Exam Tip: Distinguish from novation substitutes a new party for an original party to thecontract, completely releases the original party, and requires assent of all parties

Assignment of Rights

An assignment of rights is where two parties create a contract and one party, the assignor,transfers his rights to the other partys performance to a third party, the assignee. The party whoowes the duty to perform is the obligor. The assignor must manifest an intent to immediatelyand completely transfer rights. Gratuitous assignments are permissible as consideration is notrequired. The effect of an assignment is to establish privity of contract between the obligor andthe assignee, extinguishing it between obligor and assignor.Exam Tip: Distinguish from a contract with a third party beneficiary assignment: two partiescontract and then another person is brought in; third party beneficiary: all three people arepresent from the beginning

ExceptionsGenerally, all contractual rights may be assigned. However, rights may not be assigned where:1. *a contract clause providing that attempts to assign are void

Sub-Rule: Contract Language

Assignment of the contract is prohibited only bars delegationAssignment of contractual rights is prohibited assignment valid but obligor can suethe assignor for breachAssignment is void only this bars assignment

2. *the assignment would substantially change the duties or risk of the obligorEx: personal service contracts changes; right to payment does not

3. it is an assignment of future rights4. the assignment is prohibited by law


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Assignment of the Entire ContractAn assignment of an entire contract transfers both rights and obligations.

Revocable Assignments

Generally, gratuitous assignments, meaning no consideration was given for them, are revocable

by:1. notice of revocation2. assignor taking performance directly from the obligor3. subsequent assignment of the same right to another4. death/bankruptcy of assignor

Exceptions:However, a gratuitous assignment is not revocable if:1. the obligor has already performed2. the assignee can show detrimental reliance on the gratuitous assignment

NYDistinction: A gratuitous assignment is irrevocable if in writing and signed by the assignor.

Irrevocable AssignmentsAn assignment for consideration is irrevocable.

Rights and Obligations of the Parties

Assignee can sue the obligor because the assignee is the party entitled to performance. Theobligor can raise any defense inherent in the contract.

The assignee can sue the assignor for wrongfully revoking an irrevocable assignment.

Successive Assignments of the Same Rights

The last gratuitous assignee in time prevails over earlier gratuitous assignees because a latergratuitous assignment revokes an earlier one.

The first assignee for consideration prevails over all subsequent assignees and all prior gratuitousassignees.

Exceptions: A later assignee for consideration who took the assignment without noticeof the prior assignment will prevail if the subsequent assignee is the first to get paymentor a judgment against the obligor.

Exam Tip: If you encounter multiple assignments in a question, you should analyze eachassignment in the order it was made to see if that particular assignment was valid.

EntrustmentAn owner who entrusts goods to a merchant who deals in goods of the kind has no rights againsta bona fide purchaser, meaning they bought it in the ordinary course of business withoutknowledge that the sale is in violation of the ownership rights of another.

Exam Tip: On the bar exam, the fact pattern is always the same an owner takes jewelry or acar in to be repaired by a merchant who also sells that particular kind of good and the merchantaccidentally sells the item to someone else.

Contracts and UCC

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