Contracts Flashcards
(141 cards)
1
Q
Contracts Requirements
A
A contract (“K”) is a promise or set of promises enforced by law
Requirements to form a valid K—a K is formed when there exists:
1) Mutual assent—i.e., a meeting of the minds
–Demonstrated by an offer and valid acceptance
–Determined by parties’ objective (not subjective) manifestations of assent
2) Consideration
– A bargained-for exchange of legal value between the parties
3) No defenses to K formation
–No defenses to formation exist that would invalidate the K
2
Q
Void, voidable, & unenforceable Ks
A
if there is a valid defense to K formation or enforcement, a K may become:
Void—K never had any legal effect
Voidable—one or both parties may elect to void the K
Unenforceable—otherwise valid K that is unenforceable b/c a defense applies (e.g., Statute of Frauds)
3
Q
Bilateral K
A
Exchange of mutual promises
Each party is a promisor and promisee
E.g., A offers to sell his car to B for $5,000 and B promises to purchase A’s car at that price
4
Q
Unilateral K
A
offer requires performance as the manner of acceptance
Offeror-promisor agrees to pay upon completion of the act requested by the promisee; once act is completed, K is formed
E.g., A promises to pay B $100 if B paints A’s fence; B is not obligated to paint A’s fence, but if B does, K is formed and A must pay B $100
5
Q
Quasi-contract
A
not a K, but rather a restitution remedy designed to prevent unjust enrichment; an implied in law K arises when there is an unenforceable or non-existent agreement, but one side has realized a benefit
Look for:
1) P has conferred a benefit to D;
2) P reasonably expects to be paid;
3) D knowingly accepted the benefit; and
4) D will be unjustly enriched if P is not compensated
6
Q
Applicable Law
A
Most Ks are governed by either common law or the UCC
Common law—applies to most Ks, except sales of goods
Any K not involving the sale of goods should be treated under common law contract principles
Generally applies to Ks for real estate or services
UCC Article 2—governs the sale of goods
If both parties to a K are merchants, the UCC has additional special rules (e.g., acceptance with additional terms)
Mixed Ks—for Ks involving both goods and services, the predominant purpose of the K dictates the applicable law
Exception—if K terms divide payment between the goods and the services, apply the UCC to the sale of goods portion of the K and common law to the remainder
7
Q
Merchant Definitions
A
Article 2 generally defines “merchant” as one who regularly deals in goods of the kind sold or who otherwise by their profession holds themselves out as having special knowledge or skills as to the practices or goods involved.
8
Q
Duty of Good Faith
A
In both UCC and common law Ks, an obligation of good faith is imposed on the performance and enforcement of a K
9
Q
Offer
A
An objective manifestation of a present intent to contract
Demonstrated by a promise, undertaking, or commitment; definite and certain terms; and communication to an offeree
10
Q
Objective manifestation of intent
A
offer must give offeree a reasonable expectation that offeror is willing to enter into a K
Would a reasonable person believe the communication is an offer inviting acceptance?
11
Q
Definite and certain terms
A
terms included must be sufficient to allow a court to enforce the K (e.g., quantity, time for performance, price, etc.)
Vague terms or terms of negotiation are insufficient
12
Q
Communication to an identified offeree
A
offeree must know of the offer and have the power to accept it
Advertisements—generally not offers, unless highly specific as to quantity and clearly indicate who may accept
13
Q
UCC Offers
A
quantity must be certain or capable of being made certain
Requirement/output Ks—no unreasonably disproportionate increase in quantity allowed
Missing terms OK, particularly price, if parties clearly intended to make a K and there is a reasonably certain basis for giving a remedy
14
Q
Termination of Offer - Acts of Parties
A
An offer may be terminated by an act of a party or by operation of law
Acts of parties:
1) Revocation by offeror
2) Rejection by offeree
3) Lapse of time
–Offeror can set a time limit for acceptance, at the end of which offeree’s power of acceptance automatically terminates
15
Q
Termination of Offer - Operation of Law
A
1) Death or insanity of either party
2) Destruction of proposed K’s subject matter
3) Supervening illegality
16
Q
Revoking Offers
A
An offeror may revoke her offer, which effectively terminates the offer and the offeree’s power of acceptance
17
Q
Methods of Revocation
A
1) Unambiguous statement by the offeror to the offeree
3) Offeree becomes aware of offeror’s unambiguous conduct or statement indicating an unwillingness or inability to contract
18
Q
Limits on Revocation
A
Revocation is only effective upon receipt by offeree
Offer cannot be revoked once it has been accepted
Unilateral Ks—start of performance makes the offer irrevocable for a reasonable time to complete performance
—Start of performance must go beyond mere preparation
19
Q
Irrevocable Offers - Option Ks
A
Option K—promise to keep an offer open
Common law—consideration required in exchange for option
UCC—when UCC firm offer does not apply (see below), apply option K: consideration required
20
Q
UCC Firm Offers
A
a merchant’s offer made in a signed writing that assures the offer will be held open is irrevocable for the time stated; no consideration is required
If no time stated, irrevocable for up to three months
21
Q
Detrimental reliance by offeree
A
Reliance must be reasonable
22
Q
Rejection of Offer
A
Rejection by offeree terminates the offer and the offeree’s power of acceptance
23
Q
Methods of Rejection
A
1) Express rejection—effective when received
2) Counteroffer—terminates original offer and becomes a new offer
–Bargaining or requests for information are not counteroffers
3) Conditional acceptance—terminates original offer and becomes a new offer (look for terms such as “if,” “provided,” “so long as,” etc.)
–E.g., offer to mow lawn; offeree says “I accept if you also trim the hedges”; this is a new offer; original offeree is now offeror
Exception—a condition that would be included anyway (e.g., implied warranty) does not terminate original offer
4) Acceptance with additional terms
Common law—acceptance must mirror the offer; acceptance with additional terms creates a rejection and counteroffer
UCC—depends on whether both parties are merchants
K involving non-merchant—terms of offer govern; K is formed, but additional terms are excluded and considered mere proposals to modify the K
Both parties are merchants—additional terms become part of the K unless certain exceptions apply
24
Q
Acceptance
A
Acceptance arises upon offeree’s clear expression of assent to the terms of the offer
Offeror controls method—offeror is the master of the offer and can dictate the manner by which an offer is accepted
25
Silence as Acceptance
Generally, an offeree can’t be forced to speak or have their silence treated as acceptance. However, a court may find silence works as an acceptance if, because of prior dealings or trade practices, it would be commercially reasonable for the offeror to consider silence an acceptance.
Also, if the recipient of services knows or should have known that the services were being rendered with the expectation of compensation and, by a word, could have prevented the mistake, the recipient may be held to have accepted the offer if they fail to speak.
26
Mirror Image Rule (CL)
acceptance must mirror the offer’s terms; it cannot add, omit, or change terms of the offer
27
UCC Acceptance with Additional Terms
Are both parties merchants?
IF Yes—K is formed with additional terms unless either:
1) Additional terms materially change the offer,
2) Offer expressly limits acceptance to the offer’s terms, or
3) Offeror objects within a reasonable time
IF No—K is formed, but without additional terms
28
Acceptance by Shipment
a merchant may accept an offer to buy goods by either:
1) Providing a promise to ship goods (usually by written confirmation), or
2) Promptly shipping conforming goods
--Shipment of nonconforming goods—acts as an acceptance, but may give rise to breach
29
Mailbox Rules - Offers & Rejections/Counteroffers
effective upon receipt
Rejections and counteroffers are also effective upon receipt
30
Mailbox Rules - Acceptance
effective upon dispatch
31
Mailbox Rules - Methods of Communication
unless otherwise provided, offers invite acceptance in any reasonable manner under the circumstances
E.g., A sends offer to B via e-mail and B accepts via text message; valid K has been formed
If acceptance is via instantaneous two-way communication (e.g., phone), it is treated as if the parties are in each other’s presence
32
Limitations on Mailbox Rule
If the offer stipulates acceptance is not effective until received, the offer controls (i.e., offeror can opt out of mailbox rule)
If offeree sends both a rejection and acceptance, first to arrive controls
Option K's—acceptance is effective upon receipt
33
Revocation
Revocation is effective only upon receipt
I.e., mailbox rules do not apply
34
Acceptance by Performance
Unless acceptance is limited by terms of the offer, offeree may accept by partial performance (for bilateral Ks) or complete performance (for unilateral Ks)
35
Unilateral Ks
Complete performance required
1) Offeree is not obligated to start or complete performance
2) Failure to perform does not give rise to breach b/c no K is formed absent complete performance
3) Revocability—offer may become irrevocable upon the start of performance until completion
4) Notice only required upon completion—offeree is not required to give notice upon start of performance, but must notify offeror within a reasonable time upon completion
36
Bilateral Ks
partial performance gives rise to acceptance
Offeree must make offeror aware of acceptance
37
Offers requiring acceptance by promise
an offer requiring acceptance by promise may still be accepted by performance if:
1) Offeree begins to perform; and
2) Offeror knows offeree has begun performance and acquiesces
38
Consideration
bargained-for exchange of legal value between parties; there must be a benefit to promisor or detriment to promisee
A required element of every K
39
“Bargained-for exchange” Defintion
The promise must induce the detriment and the detriment must induce the promise
Detriment = an obligation to do or refrain from doing something one would otherwise not be obligated to do or refrain from doing
Pre-existing duty—a promise to perform a pre-existing duty or obligation generally does not constitute consideration
Exception—new or different consideration promised (e.g., additional consideration, different payment medium, accelerating performance)
40
Invalid consideration
the following do not constitute consideration:
Promises of gifts or conditional gifts
Illusory promises—a promise where there is no obligation to perform (e.g., A promises to do B’s chores if he has time)
41
Promissory estoppel
courts may enforce a promise if:
1) Promisor should reasonably expect to induce action or forbearance by promisee;
2) Promisee acts or refrains from acting in detrimental reliance; and
3) Injustice will occur without enforcement of the promise
42
Defenses to Contract Formation
1) Incapacity (see Card 13)
One or both parties lack capacity to enter into a K
2) Statute of Frauds (SoF)
Ks subject to SoF that fail to meet SoF requirements are invalid
3) Illegality
Subject matter or purpose of K is illegal
4) Misrepresentation/Fraud
K that is formed based on fraud or misrepresentation
5) Duress
K that is induced by force, coercion, or duress
6) Unconscionability
K that is unfair or oppressive to one party
7) Misunderstanding
Where there is ambiguity concerning terms of a K
8) Mistake
Where one or both parties is mistaken concerning underlying facts of a K
43
Defense to Formation - Incapacity
Infants (minors) and mentally incompetent persons lack capacity to contract
Intoxication—intoxicated persons may lack capacity to contract if the other party has reason to know of intoxication
44
Incapacity - Right to Disaffirm
person who lacked capacity to contract (e.g., infant) may disaffirm the K, which renders it void
45
Infancy Exceptions
Ks involving minors may be enforced or otherwise recognized where:
1) Affirmance (ratification)—a K can be enforced against one who was an infant at the time of K formation if they have gained capacity and affirm the K either expressly or by conduct (e.g., retained benefits or failed to disaffirm K within a reasonable time after reaching majority)
2) Infant liability for necessities—infants are legally obligated to pay for necessities (e.g., food, clothes, medical care)
Liability is based on quasi-K, so infant cannot be sued for breach (b/c there is not an enforceable K)
46
Statute of Frauds
Contracts subject to the Statute of Frauds (“SoF”) require special proof of their existence (MY LEGS)
Failure to satisfy SoF requirements may result in an invalid K
47
How to Satisfy SOF
Signed writing—a writing containing essential terms and the signature of the party to be charged (i.e., the party asserting the SoF defense)
UCC exception—signed writing not required if:
1) Both parties are merchants; and
2) The party asserting SoF defense received a signed writing memorializing the agreement and its essential terms and failed to object in writing within 10 days of receipt
48
Performance as a Way to Satisfy SOF
1) Service K—only full performance satisfies SoF
2) Sale of goods K—payment or acceptance of goods satisfies SoF to extent of goods paid for or accepted
--Custom-made goods—SoF satisfied if seller makes a substantial start and goods are not suitable for sale in ordinary course of business
3) Real estate—part performance by the buyer satisfies SoF if buyer has done two of the following three:
a) Full or part payment
b) Possession of property
c) Valuable improvements to property
49
Contracts within SOF
If a contract is within the SoF, it must satisfy SoF requirements to be valid
Contracts within the SoF:
1) Marriage Ks—promises made in consideration of marriage
2) Service Ks incapable of being performed within 1 year
SoF does not apply to: “lifelong” deals or Ks that say nothing about time for performance—both are technically capable of performance within one year
3) Land-related Ks—transfers of property interests, including leases for terms greater than one year
4) Executor promises—promises by executors/administrators to personally answer for the debts of the decedent’s estate
5) Suretyship promises—promises to pay the debt of another
6) Sales of goods of $500 or more
50
Illegality Defense
Illegality — look for an illegal subject matter or purpose for the K
1) Illegal subject matter — K is not enforceable
2) Legal subject matter but illegal purpose — K only enforceable by one who did not know about its illegal purpose
3) Legality is based on existing law at the time of K formation
4) To avoid frustrating public policy, a K may be enforced if its terms violate a policy intended to benefit a party seeking relief
51
Misrepresentation - Defense
false assertions, concealment, or misstatements about a material fact before K formation or performance
K is voidable if a party detrimentally relies on the misrepresentation
52
Undue Influence - Defense
K entered into under excessive pressure by someone unduly susceptible to pressure is voidable
53
Duress - Defense
wrongful act or threat that overcomes a party’s free will
Physical — Ks induced by physical duress are void
Non-physical — voidable by the coerced or threatened party
54
Unconscionability - Defense
courts may refuse to enforce all or part of a K that is unfair or oppressive to one party based on bargaining or terms
Arises with adhesion Ks, exculpatory clauses for intentional acts, etc.
Look for an absence of meaningful choice by the disadvantaged party
55
Misunderstanding - Defense
ambiguity concerning terms of the K
1) Neither party aware of ambiguity—no K formed unless both parties intended the same meaning
2) One party aware of ambiguity—K formed
K enforced according to the intention of the unaware party
E.g., If A knows B misunderstands but A remains silent, K enforced according to B’s understanding
3) Both parties aware of ambiguity—no K formed unless both parties intended the same meaning
56
Mutual Mistake - Defense
both parties are mistaken about an underlying factual assumption at the time of K formation
K is voidable by an adversely affected party if:
1) Both parties are mistaken concerning a basic assumption of fact;
2) Mistake materially affects the agreed-upon exchange; and
3) Adversely affected party did not assume risk of the mistake
57
Unilateral Mistake - Defense
one party makes a mistake concerning facts of an agreement; usually arises with computational errors
Unilateral mistake will not prevent K formation
Exception—mistaken party may void K if mistake is material and non-mistaken party knew/should have known of mistake
58
Parol Evidence Rule
Under the Parol Evidence Rule (“PER”), evidence that is extrinsic to a written K is inadmissible to supplement or contradict the written K
Applies if K is a complete integration—parties must intend the K to express their full final agreement; existence of merger clause can be a factor in showing an agreement is integrated, but is not dispositive
59
Parole Evidence Rule Bars:
evidence of:
1) Prior or contemporaneous expressions (written or oral) that contradict later written K
Exceptions—extrinsic evidence may be allowed if either:
a) K was only partially integrated, or
b) Additional terms would ordinarily be in a separate agreement
60
PER Allowances
Evidence of:
1) Mistake in the process of reducing an agreement to writing
2) Misrepresentation, fraud, duress, or illegality
3) Condition precedent to agreement becoming effective
4) Modifications (oral or written) made after the writing
5) Meaning parties intended to give particular terms in the writing
6) UCC—a written K’s terms may be explained or supplemented by evidence of a course of dealing, performance, or trade
--Can be used to show parties’ customs take precedence over an industry’s custom of trade
61
Delivery & Risk of Loss in UCC Contracts
Under UCC Ks, risk of loss issues arise when goods are lost or destroyed
62
Risk of Loss - Shipment by carrier (e.g., FedEx)
K type determines risk of loss (“ROL”):
1) Shipment Ks—seller only obligated to ship goods to buyer
Risk of loss passes to buyer when seller delivers goods to carrier
If K is otherwise silent on shipment terms, shipment K is presumed
if K requires shipment by third-party carrier
2) Destination Ks—seller obligated to ensure goods reach buyer
Risk of loss passes to buyer only when buyer takes delivery
63
Risk of Loss - Non-Carrier Delivery
goods not shipped by common carrier
Merchant seller—ROL passes to buyer when he takes physical possession
Non-merchant seller—ROL passes to buyer upon tender of delivery
64
Goods destroyed before ROL passes
K is avoided if no party at fault
65
“FOB [location]”
seller bears risk and expense of getting goods to the named location, at which point risk passes to buyer
E.g., A in Akron sells goods to B in Boise; K states “FOB Boise”; A is responsible for getting goods to Boise, then risk passes to B
66
Breach & ROL
if buyer rejects defective goods or revokes acceptance, ROL does not pass to buyer until defects are cured or she accepts
67
Warranties
A warranty is a promise regarding a contract
UCC Ks have default implied warranties, which can be disclaimed
68
Express Warranty
promise about the quality or feature of a product
E.g., manufacturer claims cell phone is water proof to 20 feet
Breached if the product falls short of seller’s promise or description
69
UCC - Implied warranty of merchantability
merchant seller automatically warrants goods are fit for their ordinary purpose
70
UCC - Implied warranty of fitness for a particular purpose
seller (whether or not a merchant) warrants that goods are fit for buyer’s purpose if:
1) Buyer has a particular purpose;
2) Buyer relies on seller to select suitable goods; and
3) Seller has reason to know of buyer’s purpose and reliance on seller
71
Limiting warranty liability
K can limit liability for warranties
1) Disclaimer—limits liability for implied warranties
“As is” or “with all faults” language is enforceable
--Disclaimers will not limit liability for express warranties
2) Remedy limitation—limits recovery upon breach of warranty
Generally valid for all warranties
72
Damages for Breach of Warranties
generally damages amount to the difference between current value and value as warranted by seller
73
Perfect Tender
Under UCC Ks, seller’s performance must be perfect with respect to the goods delivered and the manner of delivery
Imperfect tender = seller sends defective/nonconforming goods
74
Rejection of Imperfect Goods
Buyer’s options upon seller’s imperfect tender—buyer can either:
1) Keep—retain goods delivered and sue for damages, or
2) Reject—reject some or all goods and sue for damages
Requirements—buyer who rejects goods must:
a) Notify seller of rejection in a reasonable time;
b) Hold the rejected goods using reasonable care; and
c) Give seller reasonable time to arrange for removal of goods
If seller gives no information regarding removal, buyer can return goods to seller, store goods for seller, or resell goods on behalf of seller (i.e., for seller’s profit)
75
Installment K & Perfect Tender Rule
where delivery of goods occurs in separate lots
Rejection—buyer can only reject a delivery/installment if:
1) Defect substantially impairs the installment; and
2) Defect cannot be cured
Rejection is limited to the defective installment, not the entire K
--Buyer can only cancel entire K due to a defective installment if the installment substantially impairs the entire K’s value
76
Perfect Tender & Acceptance of Goods
Under UCC Ks, buyer does not officially accept until goods are delivered and she has an opportunity to inspect and/or notify seller
77
Perfect Tender & Acceptance of Goods - When Acceptance Happens
Acceptance of goods occurs if either:
a) Buyer confirms acceptance—buyer, after a reasonable opportunity to inspect the goods, indicates to seller that goods conform or that she will keep them despite nonconformance; or
--Payment without an opportunity to inspect is not acceptance
--If buyer accepts goods, she cannot later reject them
b) Buyer is silent—buyer fails to reject or notify seller of rejection within a reasonable time
78
Perfect Tender & Acceptance of Goods - Revoking Acceptance
buyer cannot reject after acceptance unless she discovers a defect
Requirements—buyer can revoke acceptance within a reasonable time after discovering a defect if:
1) Defect substantially impairs the goods’ value and either:
a) Buyer accepted goods on the reasonable belief that defect would be cured and it has not been, or
b) Buyer was excusably ignorant of defect or reasonably relied on seller’s assurance that goods conformed
79
Perfect Tender & Seller’s Ability to Cure
If buyer has notified seller of imperfect tender (i.e., delivery of nonconforming goods), seller may have an opportunity to cure
Requirements—seller can cure if:
1) Seller gives buyer notice of intent to cure and time for performance has not yet expired
--Seller must give buyer reasonable notice and deliver conforming good
2) Seller had reasonable grounds to believe nonconforming goods sent would be acceptable
--Reasonableness is usually based on seller’s prior dealings with buyer
--Seller will have additional reasonable time period to tender conforming goods
Note—buyer cannot compel seller to cure
80
Common Law Performance Issues - Substantial Performance
Under a common law K, if one party has substantially performed, the other party is obligated to perform and complete performance
“Substantial”—usually considered at least halfway complete
Less than perfect performance by one party does not excuse the other party from his obligation
Thus, substantial performance by A obligates B to perform; but B may seek money damages for the difference between the performance rendered and the performance expected
Note—look for substantial performance issues in construction Ks or other similar service Ks
81
Common Law Performance Issues - Material Breach
Material breach occurs when one party’s failure to perform under the K substantially deprives the other party of the benefit they bargained for
Rules concerning common law material breach:
Material breach by one party excuses performance by the other
Materiality of breach is a question of fact
Damages—recoverable for any breach to the extent they are foreseeable as a probable result of the breach
82
CL Material Breach - Timeliness of Performance
Failure to perform by the time stated in a K is not a material breach if performance is rendered within a reasonable time after the time stated
Exception—“time is of the essence” clauses
If timely performance is essential as stated in the K, failure to perform by that time is a material breach
Arises if one party indicates as a term of the K that performance by a given date is essential
83
Conditions
Conditions are agreed-upon limitations on performance in a K
Performance is contingent on the occurrence of some event
--E.g., A agrees to buy B’s car if B gets new tires; B getting new tires is a condition of A’s performance (buying the car)
Indicated by—words such as “if,” “provided that,” “subject to,” etc.
Condition vs. promise—failure of a promise leads to a breach; failure of a condition relieves a party’s performance obligation
84
Types of conditions
conditions can be implied or express
Condition precedent—condition must occur before performance due; non-occurrence excuses performance
Condition subsequent—condition that occurs after performance has begun and excuses duty to perform
85
Purpose controls interpretation of Conditions
substantial performance of a condition may suffice if it fulfills the condition’s purpose
Parties’ intent controls—e.g., if a condition is clearly designed to protect one party, it will be interpreted consistently with that intent
A party protected or benefitted by a condition may waive or estop the condition from being enforced
86
Conditions - Excuse
conditions may be legally excused by breach, repudiation, etc.
A party whose performance is subject to a condition cannot prevent or hinder the condition’s occurrence; will result in excuse of condition
87
Insecurity
Insecurity arises when a party to a K has reasonable grounds to believe the other party will be unwilling or unable to perform under the K
Insecure party may demand adequate assurances the other party will perform and suspend performance in the meantime
Arises out of UCC, but many states apply to non-UCC Ks
88
Demand for adequate assurances
must be made in writing based on reasonable and justified grounds for insecurity
No response required if demand is unjustified or unreasonable (i.e., if party seeking adequate assurances is unreasonably insecure)
Suspension of performance—a justifiably insecure party may suspend performance until adequate assurances are provided
89
Adequate assurances
Commercially reasonable commitment from a party that it will perform under the K
If not provided, insecure party may treat K as repudiated
Failure to respond to unreasonable demand is not a repudiation
If adequate assurances are provided, the formerly insecure party must perform; failure to do so will constitute a breach
90
Insecurity vs. anticipatory repudiation
Insecurity involves uncertainty regarding the other party’s performance, whereas anticipatory repudiation involves a clear indication the other party will not perform
91
Anticipatory Repudiation
Anticipatory repudiation (a.k.a. “repudiation”) arises when one party to a K makes it clear that he will not perform under the K
Effect—excuses performance by the other party
92
Anticipatory Repudiation Requirements
anticipatory repudiation arises if one party to a K:
1) Unambiguous act—makes an unambiguous statement or conduct
2) Prior to full performance—prior to the time performance is due
3) Indicating non-performance—which indicates he will not perform
E.g., A hires B to remodel A’s kitchen. B is almost finished when A tells B she does not want the remodel and will not pay; B can treat K as breached, which excuses B’s obligation to continue working
Note—distinguish from insecurity, which involves mere uncertainty regarding other party’s performance
93
Withdrawal of Anticipatory Repudiation
repudiation can be withdrawn unless other party has either:
1) Materially changed position in reliance on the repudiation,
2) Cancelled the K in response to the repudiation, or
3) Indicated they consider the repudiation to be final
94
Non-repudiating party’s options
she may either:
a) Treat the anticipatory repudiation as a total repudiation and sue,
b) Suspend performance until performance date is due and wait to sue,
c) Treat repudiation as an offer to rescind and treat K as discharged, or
d) Ignore repudiation and urge promisor to perform
95
Excuses for Nonperformance - Impossibility & Impracticability
If an unforeseen event occurs after K formation but before performance is complete, performance may be excused as impossible or impracticable
96
Excuses for Nonperformance - Impossibility & Impracticability - Requirements
an unforeseen event, which neither party assumed would occur, must make completing performance either:
a) Impossible—performance is objectively impossible, or
--Must be objective, i.e. duties cannot be performed by anyone
b) Impracticable—performance is only possible with extreme and unreasonable difficulty or expense AND Its nonoccurrence was a basic assumption of the parties
Common unforeseen events:
1) Substantial damage or destruction of K’s subject matter
Damage or destruction must not have been either party’s fault
2) Death—K obligations generally survive the death of a party, unless deceased party’s K obligations are non-delegable
Usually only unique personal services are non-delegable
3) Subsequent law or regulation (e.g., supervening illegality)
If performance becomes illegal, excuse by impossibility
97
Excuses for Nonperformance - Frustration of Purpose
A party’s duty to perform under a K may be discharged if an unforeseen event occurs that undermines (i.e., frustrates) one or both party’s principal purpose for entering into the K
98
Requirements for Frustration of Purpose
a K may be discharged if:
1) An unexpected event destroys one or both party’s purpose for entering into the K;
--Whether performance is possible after the event is irrelevant
Issue is whether performance after the unforeseen event nullifies one or both party’s original purpose for the K
2) The unforeseen event is not the fault of the frustrated party; and
3) The non-occurrence of the event was a basic assumption of the K
--Does not have to be a stated assumption in the K
99
Frustration of purpose vs. impossibility
distinction is that impossibility concerns duties specified in the K, whereas frustration of purpose concerns the reasons a party entered into the K
E.g., A landlord rents space to B restaurateur to open ice cream parlor; if the property is destroyed by an earthquake, A & B are excused from performing due to impossibility
However, if the city passes an ordinance banning the sale of sweetened food, the K’s purpose is frustrated b/c A knew B intended to open an ice cream parlor
100
Recission of K
serves to discharge duties under the K
Occurs when parties agree to rescind their K
Agreement to rescind is itself a new, binding K supported by consideration, except in at-will employment
101
Limitations of Rescission
Mutual rescission may be made orally
Exception—writing required if the K to be rescinded is subject to the SoF and/or UCC
Parties cannot rescind a K if the rights of a third-party beneficiary have vested
102
Unilateral rescission
when only one party wants to rescind the K
Usually only granted where there is a defense to K enforcement or formation (e.g., mistake, misrepresentation, duress, lack of consideration, etc.)
i.e., as distinguished from mutual rescission, whereby parties agree to rescind a K, unilateral rescission often occurs as a court-ordered remedy where there is a valid defense to K enforcement or formation
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At-will employment
agreement may be terminated by either party
Permanent employment is generally considered to be “at-will”
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Modification
Modification occurs when parties change terms of the original K
Modification—subsequent change to terms of a K
Parties agree to discharge original K terms in favor of new terms
Does not discharge the entire original K
Requirements:
1) Mutual assent—mutual assent of the parties; and
2) Consideration—generally found to be present b/c parties have limited their rights under original K by the modification
Modern trend allows for modification if it is fair and due to circumstances unanticipated when K was made
*UCC—no consideration required for a good-faith modification
Modification must be in writing if K falls within the SoF as modified
Note—parol evidence is admissible to show subsequent modifications to a K; can be used as a defense as well
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Novation
Parties create a new K substituting a new party, who gets benefits and assumes duties that belonged to an original party to the K
Requirements:
1) a previous valid K;
2) all parties, including new party (or parties), agree to a new K;
3) new K extinguishes K duties between original parties; and
4) a new valid and enforceable K
The original party is excused from performance and no longer has any K obligations or liabilities
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Accord
new agreement to accept alternative performance in lieu of the original performance obligation
Consideration—generally required
Consideration of lesser value—OK if new consideration is either:
a) Different than originally bargained-for consideration,
b) To be paid to a third party, or
c) To resolve a good-faith dispute concerning the original K
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Satisfaction
performance of the accord agreement
Discharges the original K and the accord
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Effect of breach of Accord
a party may sue under either the original obligation or the accord if there has been no satisfaction
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Third-Party Beneficiaries
A third party that benefits from a K entered into between other parties is a third-party beneficiary (“TPB”)
Intended TPBs—parties to the K intend for TPB to benefit from the K; has rights under the K
Incidental TPBs—stands to benefit from K although not intended by parties to the K; has no rights under the K
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Determining TPB status
whether a TPB is an intended beneficiary under the K is a question of fact; courts look at the following factors:
a) Is TPB expressly designated in the K?
b) Does TPB directly benefit from some performance under the K?
c) Does TPB have rights under the K?
d) Does TPB stand in such a relationship to the promisee under the K that an intent to benefit the third party can be inferred?
If answer to any of the above is “yes,” more likely that TPB is intended
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TPB characteristics
Not parties to the K; TPBs are merely beneficiaries
Intended TPBs have a right to sue for breach of K even though they are not parties to the K
Creditor TPBs—benefit is conferred based on a debt owed by the promisee to the K
Donee TPBs—benefit is conferred gratuitously
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Rights of Third-Party Beneficiaries
In order to enforce rights under a K, a TPB’s rights must vest
Vesting of rights—occurs when the TPB either:
a) Assent—manifests assent to the promise in a manner invited or requested by the parties,
b) Sues to enforce—brings suit to enforce the K, or
c) Detrimental reliance—detrimentally relies on the K (i.e., materially changes position in justifiable reliance on the K)
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How do TPB Enforce the K
a) TPB can sue promisor
--Promisor can assert any of his own defenses
b) Promisee can sue promisor at law and in equity for specific performance
c) Creditor beneficiary can sue promisee on existing obligation between them
d) Donee beneficiary may only sue promisee if detrimental reliance exists
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Third Party Issues - Assignment
An assignment is a transfer of rights under a K to a third party after the K is formed
A party (assignor) can assign rights under a K to a third party (assignee), who is now in a K with remaining party (obligor)
Consideration—not required, but assignment without consideration is considered gratuitous
Assignor can only transfer the rights they have in a K at the time of assignment
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CL Limitations on Assignment
common law bars any assignment that substantially changes the duties of the obligor
Assignment of payment is not a substantial change
Assignment of rights fails if the obligor’s risk is substantially altered
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K Limitations on Assignment
Ks may contain non-assignment clauses:
1) Non-assignment of K—bars delegation of assignor’s duties only (i.e., does not prohibit assignment of rights)
2) Non-assignment of rights—bars right to assign, but not the power to assign (i.e., upon assignment, obligor may sue assignor for breach)
3) Assignment as void—assignment will be ineffective (i.e., assignor has neither power nor right to assign)
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Third Party Issues - Revocability
gratuitous assignments may be revocable, however assignments made for consideration are irrevocable
Assignments for consideration—irrevocable
Gratuitous assignments—revocable
Exception—gratuitous assignment is irrevocable if either:
a) Obligor has already performed,
b) Assignee has received a written claim or tangible object signifying a right to collect (e.g., stock certificate), or
c) Detrimental reliance by assignee (i.e., estoppel)
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Enforcement of Assignments
Assignee right to sue—assignee can sue:
1) Obligor—for non-performance; and
Obligor can raise any defense to the K that he could have raised against the assignor
2) Assignor—for breach of any of the following Assignor’s implied warranties
no prior assignment of the same right
the right to assign was not subject to defenses
no interference with the assigned right
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Delegation
A delegation occurs when one party to a K (delegator) delegates the duties she owes to another party to the K (the obligee) to a third party (the delegatee or delegate)
Obligee must generally accept performance from delegatee
Only duties may be delegated, whereas rights may be transferred to a third-party via assignment
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Delegation - Liability
delegator remains liable for delegatee’s performance
Obligee may sue delegator for non-performance by delegatee
Obligee may only sue delegatee if the delegatee has assumed duties of the entire K
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Non-Delegable Duties
a) Duties involve personal judgment and skill,
b) Delegation materially changes the obligee’s expectancy under the K,
c) The K prohibits delegation, or
d) Prohibited by statute or public policy
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Delegation vs. novation
novation arises when three parties agree that a substitute person will take over duties under the K, whereas a delegation occurs when one party independently decides to delegate duties to a third party
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Standard Money Damages - Expectation Damages
standard measure of money damages
Puts the parties in the economic position they would be in if the K had been performed (i.e., if the breach never occurred)
Note—when in doubt, look for the answer that most closely gives damaged party what she would have received absent the breach
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Standard Money Damages - Reliance Damages
alternative measure used when expectation damages are too speculative
Designed to compensate P based on the value of her performance and put P in the position they would have been in had the contract never been formed
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Standard Money Damages - Consequential Damages
Foreseeable losses indirectly resulting from a breach (e.g., lost profits); recoverable if:
1) Damages are a foreseeable result of the breach; and
2) When K was formed, D had reason to know P would suffer special, unpreventable, or unexpected damages in the event of a breach
UCC Ks—only buyers can recover
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Standard Money Damages - Incidental Damages
commercially reasonable expenses incurred by the non-breaching party in UCC Ks (e.g., costs of inspecting, returning, storing, reselling goods)
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Standard Money Damages - Duty to Mitigate
P cannot recover reasonably avoidable damages, but can recover for costs of avoiding further damages
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Non-Monetary Remedies - Specific Performance
usually only available for Ks involving real estate or unique goods (e.g., antiques, art)
For service Ks, injunctions preventing breach may be available (e.g., injunction enforcing non-compete clause)
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Non-Monetary Remedies - Rescission
cancellation of a K
Purpose is to restore parties to their positions before K was made
Often arises where there is mistake, misrepresentation, duress, or some other defense to K enforcement or formation
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Non-Monetary Remedies - Reformation
remedy whereby a K is changed so that it reflects parties’ original intent
Can arise where there is a mistake in K formation such that the final K varies from a prior written agreement of parties
Can also arise where K is inaccurate due to some misrepresentation
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Non-Monetary Remedies - Reclamation
in UCC Ks, unpaid sellers may stop delivery or reclaim goods from an insolvent buyer
Unpaid seller generally cannot reclaim goods from subsequent buyers
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Restitution damages
arise where a party has been unjustly enriched
Awarded based on value of the benefit wrongfully conferred
Party cannot recover both expectation damages and restitution damages
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Liquidated damages
agreed-upon K provisions that stipulate specified damages upon the occurrence of a breach
Requirements—liquidated damages provisions are valid only if:
1) Damages are difficult to predict at time of K formation; and
2) The provision is a reasonable estimate of actual damages
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Duty to mitigate
P cannot recover reasonably avoidable damages
I.e., P must refrain from incurring additional losses after receiving notice of breach
P may recover for the cost of mitigation (i.e., cost to avoid incurring further damages)
Employment—P’s damages can be reduced if D can show a comparable job in the same locale was available to P
D bears the burden of showing P’s failure to mitigate
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Damages for UCC Ks - Breach by seller & buyer keeps goods
depends on if buyer accepts:
Non-acceptance—damages = fair market value (FMV) of perfectly-delivered goods minus FMV of the goods actually delivered
Acceptance—damages = difference in value between the goods as delivered and the goods as ordered
Note—if seller delivers non-conforming but superior goods, buyer is not responsible for increased value of superior goods
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Damages for UCC Ks - Breach by seller & seller keeps or buyer returns goods
Damages = whichever of the following is higher:
FMV of goods at the time of breach minus K price, or
Buyer’s costs of covering/replacing goods minus K price
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Damages for UCC Ks - Breach by buyer & buyer has goods
Damages = K price (arises if goods are: kept by buyer, destroyed after ROL passes to buyer, or returned and seller is unable to resell
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Damages for UCC Ks - Breach by buyer & seller has goods
Either:
a) K price minus market price at the time of delivery, or
b) K price minus resale price plus provable lost profits
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Conversion
FMV of goods at the time of the conversion
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Losses
buyers and sellers can also recover lost profits or damages for losses resulting from a breach/nonconformance
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Subcontractor - Bid Situation
a bid is treated as irrevocable for a reasonable amount of time because of detrimental reliance (i.e., the general contractor will rely on the mistaken bid in preparing his bid)
