Contracts

Question 1

Merchant’s Firm Offer

Answer 1

Arises when a merchant offers to buy or sell goods in a signed writing and the writing gives assurances that the offer will be held open. If no specific time frame is stated in the offer, a merchant’s firm offer will remain open for a reasonable time (but in no event may such period exceed 3 months)

Only the offeror needs to be a merchant
No consideration is required from the offeree to keep the offer open

Question 2

When a contractor is under a contractual duty to construct a building and the building is destroyed by an act of nature while it is still a work in progress, the destruction ____

Answer 2

Will not discharge the contractor’s duty to perform, but will extend the date of performance

Question 3

Test for Impracticability

Answer 3

the party to perform has encountered extreme and unreasonable difficulty and/or expense, and its nonoccurrence was a basic assumption of the parties = party’s duties discharged

(In contracts for the sale of goods under the UCC, a party’s duty to perform may be discharge where performance would be impracticable. Impracticability exists where a party encounters extreme and unreasonable difficulty and/or expense, and such difficulty was not anticipated. Duties will NOT BE discharged where performance is merely more difficult or expensive than anticipated. The facts giving rise to impracticability must be such that their nonoccurrence was a basic assumption on which the contract was made.)

Question 4

Contractor/Risk of Loss General Rule

Answer 4

A contractor is responsible for destruction of the premises under construction prior to completion. Once the residence is completed, risk of loss shifts to the owner

Question 5

Risk of Loss Rules

Answer 5

(1) if the agreement allocates risk, the agreement of the parties controls
(2) if somebody is in breach, the breaching party bears the risk of loss (even if their breach was not related to the reason for the damaged/destroyed goods)
(3) if none of the above, in a noncarrier case:
- if the seller is a MERCHANT, risk of loss passes to the buyer only when they take physical possession
- if the seller is NOT a merchant, risk of loss passes to the buyer upon tender of delivery
(4) if none of the above, in a carrier case:
- if the contract authorizes or requires the seller to ship the goods by carrier, but does not require them to deliver the goods at a particular destination, it is a SHIPMENT contract and risk of loss passes to the buyer when the goods are delivered to the carrier (in the absence of a contrary agreement, Article 2 presumes a contract is a shipment contract)
- Seller’s Duties under Shipment Contract - in a shipment contract, the seller must:
(1) make a reasonable contract with the carrier on behalf of the buyer;
(2) deliver the goods to the carrier;
(3) promptly notify the buyer of the shipment; and
(4) provide the buyer with any documents needed to take possession of the goods

• if the contract requires the seller to deliver the goods at a particular destination, the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination = Destination Contract

Question 6

FOB = Free on Board

Answer 6

The letters FOB are always followed by a location (for example, a city name), and the risk of loss passes to the buyer at the named location
- The seller bears the risk and expense of getting the goods to the named location
- these contracts can be either shipment contracts or destination contracts, depending on the location named

If it is FOB, followed by seller’s city = shipment contract
If it is FOB, followed by any other city = destination contract

Question 7

Discharge by Impossibility, Impracticability, or Frustration

Answer 7

The occurrence of an unanticipated or extraordinary event may make contractual duties impossible or impracticable to perform or may frustrate the purpose of the contract. Where the nonoccurrence of the event was a basic assumption of the parties in making the contract and neither party has expressly or impliedly assumed the risk of the event occurring, contractual duties may be discharged.

Note that for MBE purposes, the term “impracticability” includes both impossibility and impracticability

Question 8

Discharge by Impossibility

Answer 8

Contractual duties will be discharged if it has become impossible to perform them

-For this rule to operate, the impossibility must be “objective” - that is, the duties could not be performed by anyone
-Subjective impossibility will not suffice - that is, where the duties could be performed by someone by not the promisor

Timing - the impossibility must arise AFTER the contract has been entered into

Effect of Impossibility
- if a contract is discharged because of impossibility, each party is excused from duties arising under the contract that are yet to be fulfilled - either party may sue for rescission and receive restitution of any goods delivered, payments made, etc.

Question 9

Specific Impossibility Situations

Answer 9

(1)Death or Physical Incapacity
- death or the physical incapacity of a person necessary to effectuate the contract serves to discharge it

*A contract is NOT discharged by the death or incapacity of the person who was to perform the services if the services are of a kind that can be delegated. Thus, if the contract was for personal services of a UNIQUE kind (for example, the painting of a portrait by a famous artist), the death or incapacity of that person could make performance impossible. But, if the services are not unique (such as the painting of a farmer’s barn), the death or incapacity of that person would NOT make performance impossible

(2)Supervening Illegality
- Supervening illegality may serve to discharge a contract - many courts treat supervening illegality as a form of impossibility

(3)Subsequent Destruction of Contract’s Subject Matter or Means of Performance
- if the contract’s subject matter is destroyed or the designated means for performing the contract are destroyed, contractual duties will be discharged

-COMPARE - Contracts to Build
- A contractor’s duty to construct a building is NOT discharged by destruction of the work in progress (construction is still possible - the contractor can rebuild)
- However, if the destruction was not caused by the contractor, most courts will excuse the contractor from meeting the original deadline

• By contrast, a contract to repair or remodel a building that is destroyed after work has begun is discharged (there is nothing left to repair), and to the extent the contractor has already performed, the contractor is entitled to recover in restitution for the value of the work done prior to the building’s destruction.

Question 10

Impossibility - If Risk of Loss has already passed to Buyer

Answer 10

The rules relating to discharge because of destruction of the subject matter will NOT apply if the risk of loss has already passed to the buyer

Question 11

Sufficient consideration for a promise by a creditor to discharge an existing debt

Answer 11

An alternative method of payment

(When the proposed consideration is in any way new or different (e.g., an alternative method of payment), there is usually sufficient consideration to change a preexisting duty, such as discharging an existing debt.)

Question 12

Preexisting Duty Rule Exceptions

Answer 12

There is new consideration if:
(1) new or different consideration is promised;
(2) the promise is to ratify a voidable obligation (for example, a promise to ratify a minor’s contract after reaching majority or a promise to go thru with a contract despite the other party’s fraud);
(3) the preexisting duty is owed to a third person rather than to the promisor;
(4) there is an honest dispute as to the duty; OR
(5) there are unforeseen circumstances sufficient to discharge a party (such as impracticability), or under the modern view, if the modification is fair and equitable in view of circumstances not anticipated when the contract was made

Question 13

Writing Requirement for SOF

Answer 13

The SOF does not require a formal written contract. The SOF requires only one or more writings that:
(1) reasonably identify the subject matter of the contract;
(2) indicate that a contract has been made between the parties; and
(3) state with reasonable certainty the material terms

Material Terms:
- Sale of Goods: quantity term and must indicate that a contract has been made
- Land Sale: description of land & price
- Employment: length of employment

Question 14

In a contract for the sale of goods priced at $500 or more, if the goods _____ or ______, the contract will be enforced even if there is no writing

Answer 14

Received and accepted; paid for

If goods are either received and accepted or paid for, the contract is enforceable without a writing. However, the contract is not enforceable beyond the quantity of goods accepted or paid for

Question 15

Specially Manufactured Goods - SOF

Answer 15

A writing is not required where the contract is for specially manufactured goods not suitable for resale in the ordinary course of the seller’s business and the seller has made a substantial beginning of their making or commitments for their procurement

Question 16

UCC Single Delivery Contract - Defective/NonConforming Goods

Answer 16

If buyer finds that goods are defective at the time of delivery, the buyer can reject the goods, but the seller then has the right to cure within the original time for performance of the contract

When a buyer has rejected goods because of defects, the seller may, within the time originally provided for performance, cure by giving reasonable notice of intention to do so and making a new tender of conforming goods, which the buyer must then accept.

A buyer is not required to accept the defective goods - but if the seller properly cures the defect, the buyer must accept the cure or will be in breach of contract

How Seller Cures:
- Seller cures by giving reasonable notice of his intention to do so and making a new tender of conforming goods within the time originally provided for performance in the contract

Ordinarily, the seller has no right to cure beyond the original contract time. However, in cases where the buyer rejects a tender of nonconforming goods that the seller reasonably believed would be acceptable “with or without money allowance,” the seller, on reasonable notification to the buyer, has a further reasonable time beyond the original contract time within which to make a conforming tender. A seller will probably be found to have had reasonable cause to believe that the tender would be acceptable if the seller can show that trade practices or prior dealings with the buyer led the seller to believe that the goods would be acceptable, or the seller could not have known of the defect despite proper business conduct

Question 17

UCC Installment Contract - Defective/NonConforming Goods

Answer 17

In an installment contract, an installment can be rejected only if the nonconformity substantially impairs the value of THAT installment and cannot be cured

In addition, the WHOLE contract is breached only if the nonconformity substantially impairs the value of the ENTIRE contract

Question 18

Specific Performance

Answer 18

Definition: An order from the court directing the breaching party to perform as promised under the contract or face contempt of court charges

A nonbreaching party may seek specific performance only when the legal remedy is inadequate, such as when the subject matter of the contract is rare or unique. Specific performance is always available for land sale contract because all land is considered to be unique

Question 19

Injunctive Relief

Answer 19

When a party that offers a rare or unique service has breached a service contract, the court may grant injunctive relief to the nonbreaching party

*A court may grant injunctive relief to enjoin a breaching party from working for a competitor throughout the duration of the contract if the services contracted for are rare or unique

*Specific performance is not available for breach of a contract to provide services, even if the services are rare or unique because it is difficult to supervise and most courts find that is it tantamount to involuntary servitude

Question 20

Equitable Defense of Sale to a Bona Fide Purchaser

Answer 20

If the subject matter of a goods or land contract has already been sold to another who purchased for value and in good faith, the right to specific performance is cut off. This is known as the equitable defense of sale to a bona fide purchaser

Question 21

Mailbox Rule Exceptions

Answer 21

(1) the offer stipulates that acceptance is not effective until received
(2) an option contract is involved (an acceptance under an option contract is effective only upon receipt)
(3) the offeree sends a rejection and then sends an acceptance, in which case whichever arrives first is effective
(4) the offeree sends an acceptance and then a rejection, in which case the acceptance is effective (mailbox rule applies) unless the rejection arrives first and the offeror detrimentally relies on it

Question 22

Public Offers General Rule

Answer 22

An offer of reward is an offer to enter into a unilateral contract, and if made to the public generally, it may be accepted by anyone whom it becomes known. One who performs the requested act has done all that is necessary for acceptance, but if he does not intend that his acts constitute an acceptance, no contract results.

Question 23

Quantities Subject to Requirements Contracts

Answer 23

Quantities subject to requirements contracts may not be unreasonably disproportionate to any stated estimate or, in the absence of any stated estimate, to any normal or otherwise comparable prior requirements.

Question 24

Condition Precedent/Parol Evidence

Answer 24

In general, the parol evidence rule bars oral evidence contradicting a written agreement which was intended to be a final and exclusive embodiment of the parties’ agreement. However, one exception to this general rule provides that parol evidence is admissible to show a condition precedent to the existence of a contract

(A condition precedent to a written agreement’s enforceability may be shown by parol evidence)

Question 25

Effect of Anticipatory Repudiation

Answer 25

If there is an anticipatory repudiation, then the nonbreaching party can (1) sue for damages, (2) contract with a third party, or (3) do nothing

However, if there is only a prospective inability to perform, the innocent party may suspend performance until he receives adequate assurances that performance will be forthcoming.

Question 26

Mailbox Rule Exceptions

Answer 26

(1) offer stipulates that acceptance is not effective until received
(2) an option contract is involved - acceptance effective on receipt
(3) offeree sends a rejection and then an acceptance, in which case whichever is received first is effective
(4) offeree sends an acceptance and then a rejection, in which case acceptance is effective, unless the rejection arrives first and the offeror detrimentally relies on it
(5) acceptance by unauthorized means - may still be effective if it is actually received by the offeror while the offer is still in existence

Question 27

Definition of “Good Faith”

Answer 27

Good faith means honesty in fact and and the observance of reasonable commercial standards of fair dealing. In essence, a legitimate commercial reason.

Question 28

Promissory Estoppel (substitute for consideration)

Answer 28

Consideration is not necessary if the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice if:
(1) the promisor should reasonably expect to induce action or forbearance, and
(2) such action or forbearance is in fact induced

Court will probably award reliance damages (whatever the promisee spent in reliance on the promise) - which is usually something less than expectation damages

Question 29

When is an action for contract price available? (UCC)

Answer 29

An action for the contract price is available under 3 circumstances:
(1) where the buyer has accepted the goods;
(2) where the goods are lost or damaged within a commercially reasonable time after the risk of loss has passed to the buyer; OR
(3) where the buyer has returned or rejected the goods and the seller is unable after reasonable efforts to resell the goods

Question 30

Accord and Satisfaction

Answer 30

An executory accord is an agreement by the parties to a contract by which one promises to render a substitute performance in the future and the other promises to accept that substitute performance in discharged of the existing duty. An accord does not discharge the previous contract duty at the moment the accord is made - no discharge occurs until the terms of the accord are performed. The performance, according to the terms of the accord, acts as a satisfaction. The original obligation will be discharged with the performance agreed to in the accord and the parties will not be able to sue for damages as a result of any injuries by the new performance.

**An accord generally requires consideration, which can be less than what was called for in the original contract. Partial payment of a liquidated debt is invalid for lack of consideration. However, this rule does not apply where there is a compromise on a claim disputed in good faith. In other words, payment of a lesser amount than is due on a valid claim constitutes valid consideration if there is a bona fide dispute as to the amount owed, made in good faith. This exception applies even if it later becomes apparent that the reason for disputing the claim was invalid.

Question 31

Restitution - Breaching Party

Answer 31

A breaching party is entitled to recover in restitution for the reasonable value of the benefit conferred on the non-breaching party in the way of part performance, less any damages that the non-breaching party suffered due to the breach

(even if the breaching party’s right to payment is expressly conditioned upon completion of performance, failure to satisfy the condition would not cut off the breaching party’s right to recover in restitution)*

*Breaching party is NOT entitled to recover expectation damages (which include lost profit)

Question 32

Main Purpose Exception to Surety SOF

Answer 32

If we can show that the main purpose of the guarantor in promising to answer for the debt of another was to benefit themselves, we can take the contract out of the SOF and enforce it (don’t need a writing)

Question 33

How does a Third Party Beneficiary’s Rights Vest?

Answer 33

3 ways:
(1) 3PB learns of the contract and assent to it
(2) 3PB learns of the contract and relies on it
(3) 3PB learns of the contract and immediately brings suit to protect their rights

Question 34

Delegation of Duties plus Assumption of Duty supported by consideration = 3P beneficiary situation

Answer 34

A delegation of duties plus an assumption of the duty on the part of the delagatee, supported by consideration, creates a third-party beneficiary situation in which the obligee can compel performance or bring suit for nonperformance against the delagatee

Question 35

Novation

Answer 35

A novation occurs where a new contract substitutes a new party to receive benefits and assume duties that had originally belonged to one of the original parties under the terms of the old contract. A novation discharges the old contract**

A novation will be found when there is:
(1) a previous valid contract;
(2) an agreement among the parties, including the new party to the new contract;
(3) the immediate extinguishment of contractual duties as between the original contracting parties; and
(4) a valid and enforceable new contract

Question 36

Promise to pay a past debt (exception to pre-existing duty rule)

Answer 36

A promise to pay a past debt that is barred by the statute of limitations is supported by consideration (a widely-accepted exception to the pre-existing duty rule).