CONTRACTS

Question 1

APPLICABLE LAW

Answer 1

Article 2 of the UCC governs contracts for sale of goods. Goods are defined as movable things. Otherwise, common law dictates, unless it’s a mixed contract, where the predominant purpose of the contract will determine the appropriate law.

Question 2

CONTRACT FORMATION

Answer 2

Contract formation requires:

(1) An Offer;
(2) An Acceptance;
(3) Consideration; and
(4) There must be no appropriate defenses to contract formation

Question 3

OFFER

Answer 3

An offer is:

(1) A manifestation of the intent to enter into a contract;
(2) With definite or reasonably certain terms,
(3) That is communicated to an identified offeree

Question 4

MERCHANT’S FIRM OFFER (UCC)

Answer 4

An offer is not revocable if it is made by a merchant, in a signed writing, that gives assurances that it will be held open for period that is stated in the writing.

If no time is stated, a reasonable time not to exceed 90 days.

Question 5

ACCEPTANCE

Answer 5

Acceptance requires a manifestation of assent to the terms of the offer.

For BILATERAL contracts, the start of performance manifests acceptance.

For UNILATERAL contracts, starting performance only renders a contract irrevocable, where acceptance exists only when performance is complete. If beginning performance, an offeree must inform the offeror of completion within a reasonable time of completion of performance.

Question 6

RETRACTION OF UNILATERAL OFFER

Answer 6

A unilateral offer may be retracted either by lapse of a reasonable time or earlier by effective revocation.

Question 7

REVOCATION

Answer 7

A revocation is the retraction of an offer by the offeror and is only valid if communicated to the offeree before acceptance.

Question 8

COUNTER-OFFER

Answer 8

A counteroffer is a response made by the offeree to the offeror that contains the same subject matter as the original offer but differs in terms. It operates as a rejection of the original offer as well as a new offer.

Question 9

CONSIDERATION

Answer 9

Consideration is a bargained for exchange of something of legal value. Courts generally will not question the adequacy of consideration - a mere peppercorn may suffice.

Question 10

ILLUSORY CONTRACT

Answer 10

An illusory contract is an attempt to contract, however, is not legally binding.

For example, “I will buy…if I decide to.” is an illusory contract because it does not offer an actual detriment. If the contract says a party can cancel before a certain date, it is illusory until that date, however, a binding contract after that date.

Question 11

IMPLIED IN FACT CONTRACT

Answer 11

A contract based on a tactic promise, inferred when conduct creates a contract, a benefit was received that could have been refused, and it would be fair to presume payment was expected.

Question 12

OPTION CONTRACT

Answer 12

An offer is not revocable if the offeree gives consideration for a promise by the offeror to refrain from revoking an offer for either a stated period time, or reasonable time if no time is specified.

Option contracts are an exception to the mailbox rule, and are accepted UPON RECEIPT, not upon mailing.

Question 13

MUTUAL MISTAKE

DEFENSES TO CONTRACT FORMATION

Answer 13

A contract is voidable (meaning it may be rescinded or reformed) when both parties are mistaken as to a basic assumption on which the contract is made, the mistake is material to the contract AND the party asserting the mistake did not bear the risk of the mistake.

Question 14

UNILATERAL MISTAKE

DEFENSES TO CONTRACT FORMATION

Answer 14

A mistake by one party that is unknown to the other party, concerning a basic assumption that has a material effect.

A unilateral mistake is generally not a valid defense to formation of a contract but can be if one party knew or had reason to believe that the other party was mistaken, or the non-mistaken party had a duty to disclose.

Question 15

CONTRACTUAL CONDITIONS

Answer 15

A condition makes a performance obligatory only when the condition occurs.

Concurrent conditions occur simultaneously, but each functions as a condition precedent to the other.

Question 16

BREACH

Answer 16

A contract breach occurs when a party fails to perform when:

(1) Conditions precedent are satisfied;
(2) Time to perform arrives; and
(3) Performance is not discharged.

Question 17

MINOR OR MATERIAL BREACH

Answer 17

If a party does not receive the substantial benefit of their bargain, the breach is material and:

(1 )They are no longer obligated to continue their performance under terms of the contract, and

(2) Will have an immediate right to all remedies for breach of the entire contract, including total damages.

A breach of a contract is minor if a party gains the substantial benefit of their bargain despite defective performance. A minor breach does not relieve the aggrieved party of performance under the contract, it merely gives them a right to damages for the minor breach.

Question 18

STATUTE OF FRAUDS

Answer 18

The following contracts are invalid unless they are in writing:

(1) Marriage
(2) A contract that cannot be performed within 1 year
(3) Land sale or land leases for over a year in length
(4) Executor guarantees to pay
(5) Contracts for the sale of goods valued over $500
(6) Suretyships

Writings must be signed by the party charged, reasonably identify the subject matter, indicate there is a contract and state the essential terms.

Where there is part performance which unequivocally indicates acceptance, a party will be estopped from claiming there was no contract based on a lack of a writing. Can be a number of writings, no need for only one signed document. E-mail messages suffice, including signatures or not.

Question 19

EXCEPTION TO THE STATUTE OF FRAUDS

Answer 19

(1) Full performance
(2) Judicial acknowledgment of the agreement
(3) Estoppel

NOTE: The promise will not fall under the SOF when the purpose of making the guarantee was to benefit the person making the promise.

Question 20

UCC STATUTE OF FRAUDS EXCEPTIONS

Answer 20

(1) Merchant’s confirmatory memorandum [the other party does not object in a reasonable time]
(2) The goods are accepted and paid for
(3) Custom made goods
(4) Party admission of contract formation

Question 21

MODIFICATIONS

Answer 21

Under common law, contract modifications must be supported by consideration. Exceptions include when there is a change in the performance of a promise, if a fair and equitable modification is due to a changed circumstance, and the contract is not yet fully performed by either party.

Under the UCC, consideration is not required for contract modifications made in good faith.

Question 22

PARTIAL PERFORMANCE

Answer 22

Requires two of three:

(1) Payment in whole or in part
(2) Possession, OR
(3) Valuable improvements

Question 23

PAROL EVIDENCE RULE

Answer 23

A party cannot introduce evidence of a prior or contemporaneous agreement that contradicts a later integrated writing.

Exceptions include proof of a condition, clerical error, to establish a defense of formation, to interpret vague terms, or supplement a contract that is only partially integrated.

For example, if the price is wrong in the contract but was agreed upon previously ⇢ This is a mistake in integration, so it is admissible to reform the contract.

If the contract contains no time or date of completion, or no merger clause, then assume the contract is only partially integrated.

Question 24

CONDITION PRECEDENT

Answer 24

Renders performance conditioned upon the completion of the condition.

Two exceptions:

(1) When the protected party fails to cooperate in good faith (a party will buy if they get the loan, but then they don’t bother to apply for one)
(2) When the protected party voluntarily excuses the condition.

Question 25

FRUSTRATION OF PURPOSE

Answer 25

Frustration of purpose discharges performance under a contract if the purpose of the contract no longer exists.

Performance is excused if:

(1) The principal purpose is substantially frustrated;
(2) By an unforeseeable supervening event; AND
(3) Both parties knew the purpose at formation

Question 26

IMPOSSIBILITY

Answer 26

IMPOSSIBILITY DISCHARGES performance if it would be objectively impossible to perform due to unforeseen circumstances.

Question 27

DURESS

Answer 27

Duress is a wrongful pressure exerted upon a person in order to coerce that person into a contract that he or she ordinarily wouldn’t enter.

Question 28

IMPRACTICABILITY

Answer 28

The defense of impracticability is available when an event occurs after contract formation that is unanticipated by both parties makes the performance unreasonably difficult or expensive.

Question 29

UNCONSCIONABILITY

Answer 29

A contract may be void where the provisions are so one-sided that they are unconscionable at the time of formation. Applies where one party has unequal bargaining power.

Question 30

TIME IS OF THE ESSENCE CLAUSE

Answer 30

Failure to perform by a specified date is generally not deemed to be a material breach UNLESS the contract contains a specific time is of the essence clause. This is a term of art - a normal contract can be completed within a reasonable time, even if there is a completion date listed.

Question 31

UCC PERFECT TENDER RULE

Answer 31

A seller must deliver conforming goods. The smallest non-conformity is a breach, where the buyer may reject all or a portion of the goods.

Two exceptions:

(1) If seller has a right to cure (time of performance hasn’t expired)
(2) installment contracts where the installment must be so defective it substantially impairs the value of the entire contract.

Question 32

NON-CONFORMING GOODS SALE

Answer 32

Upon receiving non-conforming goods, the buyer may sell the goods in a public or private sale but must notify the seller beforehand.

Question 33

MIRROR IMAGE RULE

Answer 33

Under the common law, an acceptance must mirror the offer.

Question 34

MERCHANT

Answer 34

A merchant is one who regularly deals in goods of the kind sold in the contract or who holds themselves out as a merchant.

Question 35

BATTLE OF THE FORMS

Answer 35

Unlike common law, which has the mirror image rule [acceptance must exactly mirror the offer, and any additional terms is a counteroffer that revokes the offer], UCC states that acceptance does not need to mirror the offer, and can include different or additional terms.

Offeree’s additional terms are deemed included only if:

(1) Both parties are merchants;
(2) The terms are not a material change
(3) The offer doesn’t limit acceptance to the exact terms, AND
(4) No objection was made within reasonable time.

Question 36

PROMISSORY ESTOPPEL

Answer 36

A plaintiff can pursue damages when:

(1) The plaintiff reasonably and foreseeably relied to their detriment on the promise,
(2) The promisor should have reasonably expected a change in position in reliance on that promise, and
(3) Enforcement of the promise is necessary to avoid injustice

Question 37

ADEQUATE ASSURANCES

Answer 37

A party with reasonable grounds for insecurity regarding performance may request adequate assurances.

If the other party does not provide these assurances within a reasonable time, the asking party may treat that as an anticipatory repudiation.

Question 38

ANTITIPATORY REPUDIATION

Answer 38

Occurs when a party communicates they are unable or unwilling to perform before performance is due.

The aggrieved party may:

(1) Treat the anticipatory repudiation as a breach and sue immediately
(2) Suspend performance and wait to sue when performance is due
(3) treat the repudiation as an offer to rescind/contract as discharged, OR
(4) Ignore and urge performance

Question 39

ANTITIPATORY REPUDIATION RETRACTION

Answer 39

A repudiation can be retracted unless the aggrieved party has:

(1) Cancelled the contract,
(2) Materially changed position, OR
(3) Indicated repudiation as final

Question 40

EXPECTATION DAMAGES

Answer 40

Expectation damages include all expected profits that would have been realized if the contract was fully performed by the breaching party.

Question 41

RELIANCE DAMAGES

Answer 41

If a plaintiff’s expectation damages are too speculative to measure, they may elect to recover based on their reasonable reliance on the contract.

Reliance damages award the plaintiff the cost of performance and are designed to place the plaintiff in the position they would have been if the contract was never formed.

Question 42

MISREPRESENTATION

Answer 42

Defendant makes a misrepresentation of material fact for the purpose of inducing the plaintiff to rely on the misrepresentation to their detriment. Nominal damages are not available.

Question 43

ASSIGNMENT OF RIGHTS

Answer 43

An assignment of rights is a transfer of rights. This is a situation where an obligor contracts with an assignor. The assignor then assigns their right to the obligor’s performance to the assignee.

Generally, all contractual rights may be assigned, other than ones that:

(1) Would substantially change the obligor’s duty or risk,
(2) Assign future rights to arise from future contracts, AND
(3) Are prohibited by law.

Question 44

ASSIGNMENT CLAUSES

Answer 44

A clause prohibiting the assignment of the contract will be construed as barring only the delegation of the assignor’s duties. A clause prohibiting the assignment of rights, like the right to payment, generally will not bar the assignment of those rights. The assignor has the power but not the right to assign, so if an assignment is made, the obligor has the right to sue for the breach.

Question 45

GRATUITOUS PROMISE

Answer 45

If consideration is provided for past-services, the promise is invalid.

Question 46

DELEGATION OF DUTIES

Answer 46

A delegation is a transfer of duties. It generally consists of a situation where the obligor/delegator promises to perform for the obligee but then delegates their duty to the delegatee.

Generally, all duties may be delegated except:

(1) Those that involve personal judgment and skill,
(2) The delegation would change the obligee’s expectancy,
(3) A special trust was created in the delegator by the other party to the contract, and
(4) Where there is a contractual restriction on the delegation.

Question 47

ENFORCEMENT OF EXPIRED DEBT

Answer 47

An exception to the pre-existing duty rule. No consideration is required to contract to receive pre-existing, defaulted debt.

Question 48

QUASI-CONTRACT

Answer 48

When there is a failed contract, the defendant is required to make restitution to the plaintiff.

Requires:

(1) Plaintiff confers a non-gratuitous benefit to the defendant,
(2) The defendant knows the plaintiff’s expectation because they knew of the benefit and did not decline, and
(3) The defendant would be unjustly enriched if they retain the benefit.

Question 49

ILLEGAL CONTRACT

Answer 49

A statute to raise revenue will not prevent contract enforcement If the contractor has not obtained a statutorily required license.

This typically occurs when a client refuses to pay an unlicensed contractor, and claims the contract was illegal and therefore unenforceable.

Question 50

NOVATION

Answer 50

When all parties to a contract agree to release a party to a contract and substitute a third party in their place.

Question 51

ADDITIONAL TERMS IN UCC CONTRACT

Answer 51

UCC § 2-207 allows contracts to be formed even when the acceptance differs from the offer.

Under this rule, between merchants, the additional terms proposed in the acceptance can become part of the contract under certain circumstances if the other party remains silent.

As a general rule, an additional term will automatically be part of the contract - if the additional term materially alters the contract or the other party objects to the addition of the contract, it will not automatically be added to the final “four corners” of the agreement. Whether an additional term materially alters the contract is decided on a case-by-case basis

Question 52

UCC - BUYER BREACHES CONTRACT

Answer 52

Under the UCC, when a buyer has breached a contract for the sale of goods, the seller may recover the difference between the contract price and the re-sale price or lost profits.

When a buyer repudiates before the goods are shipped, the seller will typically re-sell them to a third party. If the sale is made in good faith and in a commercially reasonable manner, the seller may recover the difference between the resale price and the contract price together with any incidental damages, but less expenses saved in consequence of the buyer’s breach. This puts the seller in approximately the same position he would have been in had the buyer performed under the original contract.

If the buyer paid a deposit, a typical seller can keep up to a maximum of 20% of the original contract price or $500, whichever is less, even without a showing of actual damages, but must return the balance to the buyer.

Question 53

UCC BUYER BREACH - LOST VOLUME SELLER

Answer 53

A special situation arises when, in the course of business, a seller makes or acquires enough supply to meet all foreseeable demand, deeming him a lost volume seller. Someone who has a large volume of supply will typically be able to re-sell an item to another customer promptly and at the same price.

However, as a result of the breach, the seller loses a customer (I.e., only sells one item instead of the two items he would have sold the original contract been performed). As such, when a buyer breaches a contract with a lost volume seller, the seller will be entitled to damages in the amount of that lost sale.

Question 53

UCC - IMPRACTICABILITY

Answer 53

Impracticability prevents performance of a contract because it would be extremely costly, time-consuming, or otherwise impracticable, though not literally importable to complete a full performance. According to courts, if due to changed circumstances, performance would be infeasible from a commercial viewpoint, the promisor is excused just as he would be if performance were literally impossible.

Excuse on the grounds of impracticability will not be available if the event in question was sufficiently foreshadowed so as to fairly be viewed as part of the risks that the seller assumed when entering into a contract.

Question 54

REVOCATION BY INDIRECT COMMUNICATION

Answer 54

For a revocation by indirect communication to terminate the offer, the offeree must indirectly receive:

(1) Correct information
(2) From a reliable source
(3) Of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.

Question 55

An offer is a statement or act that creates the power of acceptance. When a person makes an offer, he is indicating that…

Answer 55

He is willing to be immediately bound by the other person’s acceptance without further negotiation. An offer creates a power of acceptance in the offeree. The offeror is the master of his offer, which means he may prescribe the method by which it may be accepted.

Question 56

An acceptance is a statement or act that indicates the offeree’s…

Answer 56

Immediate intent to enter into the deal proposed by the offer. An acceptance is the offeree’s manifestation of assent to the terms of the offer, made in a matter invited or required by the offer.

Question 57

NONDISCLOSURE

Answer 57

A person’s nondisclosure of fact may be tantamount to a misrepresentation of fact sufficient to allow recession of a contract where the person knows that disclosure of the fact would correct the other party’s mistake with respect to a basic assumption of the contract, and where nondisclosure amounts to a failure to act in good faith.

Question 58

The parol evidence rule bars parties to a written contract from presenting…

Answer 58

Extrinsic evidence of terms in a contract that contradicts, modifies, or varies the terms of a written agreement when that written agreement is considered complete and finalized.

A completely integrated agreement is an unambiguous written agreement that leaves no doubt that the parties intended it to be the final contract.

The parol evidence rule, however, does not bar extrinsic evidence offered to aid in the interpretation of existing terms.

Question 59

Specific performance will generally be awarded for breach of contract where…

Answer 59

Monetary damages would be inadequate or impracticable.

However, a court will not issue an affirmative injunction compelling a person to specifically perform a personal service contract.

Question 60

REMEDIES - RESTITUTION

Answer 60

Restitution is used as a remedy when there is no enforceable contract, or where expectation damages are too hard to prove, or the deal would have resulted in a loss for the non-breaching party had performed.

Restitution damages are calculated by what has been actually gained by the breaching party, while expectation damages take into account what actually or possibly was lost by the non-breaching party.

Restitution is designed to prevent unjust enrichment, on the contrary, expectation damages are designed to get the benefit of the bargain.

Question 61

If nondisclosure is fradulent or material, a contract is voidable for…

Answer 61

misrepresentation

Question 62

When a builder breaches a construction contract by improperly performing, the owner is entitled to….

Answer 62

The cost of fixing the defect.

If the builder breaches after performance has begun, the owner will be entitled to the cost of completing the project plus reasonable compensation for any delay in the performance.

However, if completion would involve economic waste, damages will be the difference between the value of what the owner would have received if the builder had properly performed and the value of what the owner actually received.

Question 63

REQUIREMENTS CONTRACT

Answer 63

A party’s obligations under a requirements contract subject to the UCC are measured by good faith.

A shut-down by a requirements buyer due to lack of orders or market conditions meets the good faith standard.

Question 64

Rights are ______

Duties are ______

Answer 64

Rights are assigned

Duties are delegated

Question 65

Unless there are circumstances suggesting otherwise, a clause prohibiting the assignment of the contract will be construed as…..

Answer 65

Barring only the delegation of the assignor’s duties.

Question 66

A party’s contractual right is only personal where…

Answer 66

The nature of the contract is such that the assignment would impair the other party’s reasonable expectations or would offend public policy.

Assignment of a right to payment of money is not the assignment of a personal right.

Question 67

When determining whether a contract may be unenforceable on grounds of unsconciondbility, the fairness of the exchange is determined..

Answer 67

As of the time that the contract was entered into.