Contracts 2 Flashcards
(20 cards)
Offer – Requirements; UCC approach
Termination of Offer
Termination of Offer: Act of Parties; Operation of Law
Contract formation generally requires mutual assent (i.e., offer and acceptance) and adequate consideration
Offer
An objective manifestation of intent to K
Requirements
* Intent
* Knowledge of the offer
* Essential terms (parties, subject matter, price, quantity)
* Words of promise
UCC approach — quantity must be certain
Termination of Offer
* Revocation
* Rejection
* Lapse of time
* Death of either party
* Destruction of proposed K’s subject matter
* Supervening illegality
Irrevocable Offers – UCC; Common Law
UCC
* UCC firm offers — 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 required
Common Law
* Option K — promise to keep K open; consideration required
* Unilateral Ks — start of performance makes the offer irrevocable for a reasonable time to complete performance
* Detrimental reliance — offeror could reasonably foresee reliance on offer, and offeree reasonably and detrimentally relies on it
Acceptance – UCC Acceptance
Acceptance by Performance – Unilateral Ks; Bilateral Ks
An objective manifestation by the offeree to be bound by the offer
* Offeror controls method
UCC Acceptance
* Acceptance by shipment — a merchant may accept an offer to buy goods by either a promise to ship or by prompt shipment of the goods
* Shipment of nonconforming goods — acts as an acceptance, but may give rise to breach
Acceptance by Performance
Unilateral Ks — complete performance required
* Failure to perform does not give rise to breach b/c no K is formed absent complete performance
* Revocability — offer may become irrevocable upon the start of performance until completion
* Notice only required upon completion
Bilateral Ks — partial performance gives rise to acceptance
* Offeree must make offeror aware of acceptance
Counteroffers
Mirror Image Rule (common law) — acceptmance must mirror the offeror’s terms
UCC (battle of the forms)
* ≥ 1 party is a nonmerchant
* Offer is accepted unless the reply expressly required asset to additional/different terms
* Additional/different terms are treated as proposed additions to the K
* All parties are merchants
* Offer is accepted unless the reply expressly required assent to the new/revised terms
* Additional terms become part of the K unless
* The offer expressly required assent to the new terms
* The new terms materially alter the K or
* The offer objects within a reasonable time
* Different terms cancel each other out under the knockout rule, and the court patches the holes in the K
Consideration
Invalid consideration
Promises Binding Without Consideration
Consideration exists where there is a legal detriment to the promisee that is bargained for by the promisor
* 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 is not consideration
Invalid consideration — the following do not constitute consideration:
* Illusory promises
* Settlement of a legal claim — a promise not to assert (or to release) a claim or defense that proves to be invalid does not qualify as consideration unless the claim or defense was doubtful
Promises Binding Without Consideration
* A new promise to pay a debt barred by the SoL
* When a part performs an unrequested service (e.g., emergency service), the modern trend is to apply the material-benefit rule
* Promissory estoppel — a promise is binding if:
* The promisor should reasonably expect it to induce action by the promisee (or a third person)
* The promise does induce the actionand
* Enforcing the promise is the only way to avoid injustice
Pre-existing duty rule: note that courts often find consideration if promisor gave something in addition to what was already owed or varied the preexisting duty in some way (e.g., accelerating performance, additional consideration, etc.)
Modification
Novation
Modification occurs when parties change terms of the original K; novation is a new K that substitutes a new party into the original K
Modification
* Under CL, a modification requires new consideration
* Modern trend allows for modification if there are unanticipated difficulties, and modification is fair and equitable .
* UCC — no consideration required for good-faith modification
* Modification must be in writing if K falls within SoF as modified
Accord & Satisfaction
Parties to an existing K agree to accept different performance in satisfaction of the original, existing obligation
Void, voidable, & unenforceable Ks
Defenses to Contract Formation – Misunderstanding & Mistake
Void, voidable, & unenforceable Ks — if there is a 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., SoF)
Defenses to Formation
Mutual mistake — both parties are mistaken about an essential element of the K
* K is voidable by an adversely affected who did not bear the risk of the mistake
Unilateral mistake — one party makes a mistake about an essential element of the K
* Unilateral mistake will not prevent K formation
* Exception — voidable by mistaken party who did not bear the risk of mistake if non-mistaken party knew/should have known of mistake
Misunderstanding — happens when both parties believe that they are agreeing to the same material terms but actually agree to different terms. The outcome depends on who knows/has reason to know about misunderstanding:
* No party = No K formed
* One party = K formed based on unknowing party’s understanding of the material terms
* Both parties = No K formed unless both parties intended the same meaning
Defenses to Formation – Fraud, Undue Influence, Duress, Incapacity
The following are defenses to K formation:
Misrepresentation — false assertions, concealement, or miststatements about a material fact before K formation
* K is voidable if misrepresentation induced assent + justifiable reliance (+ material if nonfraudulent misrepresentation)
Undue influence — K entered into under excessive pressure by someone unduly susceptible to pressure is voidable
Duress — improper threat that deprives a party of meaningful choice
* Physical — Ks induced by physical duress are void
* Non-physical — voidable by the coerced or threatened party
Incapacity — parties to a K must be competent; incapacity can arise because of infancy, mental illness, guardianship, or intoxication
Defenses to Enforcement – Illegality, Unconscionability
Illegality — look for an illegal subject matter or purpose for the K
* If a K contemplates illegal conduct when it is formed, then it is void
* If a K becomes illegal after it is formed, then the duty to perform is discharged (i.e., K is not enforceable)
Exceptions:
* Legal subject matter but illegal purpose — party can recover if the party did not:
* Know about other party’s illegal purpose or
* Act to further the ohter party’s illegal purpose (despite knowing about it) and grave social harm is not involved)
* Ignorance of illegality — a promisee who was justifiably ignorant of the facts making the K illegal can recover from the promisor if the promisor knew about the illegality
* Availability of restitution — when the parties were not equally at fault, then the less guilty party may be entitled to restitution
Unconsionability — courts may refuse to enforce a K that is is so unfair to one party that no reasonable person would agree to it
Technically, illegality sometimes = defense to formation
Illegality confusion: If the illegality is incidental or regulatory, and the claimant is excusably ignorant, enforcement may still be allowed — including a claim for damages. That is what the “ignorance of illegality” is referring to; restitution is the sole remedy if the illegality amounts to something more than “incidental or regulatory”
Quasi-Contract
Elements
Quasi-contract — 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 had realized a benefit
* P has conferred a benefit to D;
* P reasonably expects to get paid;
* Allowing D to keep the benefit would be unfair
Warranties in Sale-of-Goods Contracts
Implied warranty of merchantability — warrants goods are fit for their ordinary purpose
Implied warranty of fitness for a particular purpose — seller (whether or not merchant) warrants that goods are fit for buyer’s purpose if:
* Buyer relies on seller to select suitable goods and
* Seller has reason to know of buyer’s purpose and reliance on seller
Limiting warranty liability
* Buyer’s inspection of the goods
* “As is” or “with all faults” language
* Course of dealing or performance
* Trade usage
Discharge – Impracticability, Frustration of Purpose, Release, Destruction or Injury to Identified Goods
The defense of impracticability is available if:
* Performance becomes illegal after the K is made
* The subject matter of the K is destroyed
* The performing party in a personal-services K dies or becomes incapacitated or
* Performance becomes impracticable:
* An unforeseeable event happened
* A basic assumption of the K was that the event would not happen, and
* The party seeking discharge was not at fault
* Note — this defense not available to a party who assumed the risk of the event happening
Frustration of purpose — K may be discharged if an unexpected event destroys one party’s purpose for entering into the K
Release — a writing that discharges another party from an existing duty
* For CL Ks, the release must be supported by consideration
* Under the UCC, a written waiver that is signed and delivered is effective without consideration
Destruction or injury to identified goods — when goods identified at the time the K is made are destroyed through fault of either party and before the risk of loss passes to the buyer, the K is avoided
Performance of Contractual Duty – Substantial Performance; Material Breach vs. Minor Breach; Perfect Tender under the UCC; Divisible or Installment Contracts
Substantial Performance
* Under a CL K, if one party has substantially performed, the other party must perform and complete performance
* A party who substantially performed can recover the K price minus any amount that it will cost the other party to obtain complete performance as promised
Material Breach vs. Minor Breach
Material breach — one that deprives the nonbreaching party of the substantial benefit of the bargain
* The nonbreaching party can withhold performance
Minor breach — arises after the breaching party has substantially performed
* Nonbreaching party cna puruse remedies but must still perform
Perfect Tender
Under UCC Ks, seller’s performance must be perfect with respect to the goods delivered and the manner of delivery
* The buyer has the right to inspect goods. And after a conforming tender, the buyer must accept and pay for the goods. Rejection amounts to breach
Divisible or Installment Contracts
* A divisible K is one in which the various units of performance are divisiblle into distinct parts. Recovery is limited to the amount promised for the part performed
* UCC installment Ks — the right to reject is determined by a “substantial conformity” standard, under which the buyer may:
* Reject the shipment if the nonconformity substantially impairs the value of that shipment to the buyer and cannot be cured or
* Cancel the K fi the nonconfomrity substantially impairs the value of the entire K
Material breach rules don’t apply to UCC unless installment K
Statute of Frauds
UCC memo requirement and exceptions
Contracts that fall within the SoF are unenforceable unless they are evidenced by a writing that is signed by the party to be charged and contains the essential elements of the deal
Marriage
Suretyship — promises to pay the debt of anohter
One year — service Ks incapable of being performed within 1 year
UCC — sales of goods of $500 or more
* The UCC requires a memo that (1) indicates that a K has been made, (2) identifies the parties, (3) containts a quantity term, and (4) is signed by the party to be charged
* Exceptions: No writing required for (1) specially manufactured goods, (2) partial payment made (to the extent paid for), (3) receipt and acceptance of goods (to the extent accepted), or (4) failure to object to a emmo within 10 days (when both parties are merchants)
Real property
* But part performance satisfies SoF if buyer has done two of the following three: full or part payment; possession of property; valuable improvements to property
Mr. SOUR
Specially manufactured goods - i.e., custom made goods + substantial start + not suitable for sale in OCB
Note: payment
Parol Evidence Rule
Evidence that is extrinsic to a written K is inadmissible to supplement or contradict the written LK
* For this rule to apply, the writing must be integrated — meaning that the parties intended it to be their final agreement (in full or in part)
The writing is a final expression of the parties’ agreement as to:
* Some terms (partial integration) — PE is inadmissible to contradict writing
* All terms (complete integration) — PE is inadmissible to supplement or contradict writing
UCC — assumes that a K is a partial integration
PER allows evidence of
* A defense to K formation or enforcement
* Proving a condition precedent to the existence of the K
* Intepreting or clarifying an ambiguity in the K or
* UCC — a written K’s terms may be explained or supplement by evidence of a course of dealing, performance, or trade usage
Anticipatory Repudation
Prospective Inability to Perform
Anticipatory Repudiation
Arises when one party to a K makes it clear that he will not perform under the K
Effect — a nonbreaching promisee may then:
* Treat the repudiation as a breach
* Cancelled the K in response to the repudiation
* Treat repudiation as an offer to rescind and treat K as discharged or
* Suspend performance until performance date is due and wait to sue (note: promisee must wait if date of performance has not passed and only performance left is promisor’s payment)
Withdrawal — repudiation can be withdrawn unless the other party has either:
* Indicated they consider the repudiation to be final or
* Materially changed his position in reliance on the repudiation
Prospective Inability to Perform
* A party can demand assurances of performance if there are reasonable grounds for insecurity about the other party’s ability or willingness to perform
* Under such circumstances, performance may be suspended until assurances are provided. Failure to give assurances within a reasonable time can be treated as a repudiation
* UCC — the demand for assurances must be in writing, and a reasonable time for giving assurance is limited to 30 days
Standard Money Damages
Expectation damages—standard measure of money damages
* Puts the parties in the economic positiotn they would be in if the K had been performed (i.e., if the breach never occured)
Reliance damages—alternative measure used when expectation damages are too speculative
* Designed to compensate P based on the value of his performance and put P in the position he would have been in had the K never been formed
Consequential damages—foreseeable losses indirectly resulting from a breach; recoverable if:
* The natural and probably consequences of breach
* Contemplayed by the parties at K formation or
* Otherwise foreseeable
Incidental damages—commercially reaonably expenses incurred by the non-breaching party in UCC Ks (e.g., costs of inspecting, returning, storing, reselling goods)
Restitution, Liquidated Damages, & Duty to Mitigate
Restitution damages — arise when a party has been unjustly enriched
* Awarded based on value of the benfit conferred
* Party cannot recover both expectation damages and restitution damages
Liquidated Damages — agreed-upon K provisions that stipulate specified damages upon the occurrence of a breach
* Requirements — liquidated damages provisions are valid only if:
* Damages are difficult to predict at time of K formation and
* The provision is a reasonably estimate of actual damages
Duty to mitigate — nonbreaching party must avoid or mitigate damages to the extent possible by taking steps that do not involve undue risk, expense, or inconvenience (reasonable conduct standard)
Remedies Under the UCC
Buyer’s Remedies Under the UCC: No tender; Nonconforming tender
Seller’s Remedies: Breach by buyer & buyer has goods; Breach by buyer & seller has goods
✦Buyer’s Remedies✦
No tender (breach by seller)
* Cancel an installment K if the breach goes to the entire K
* Damages
* FMV of goods at the time of breach minus K price, or
* Buyer’s cost of covering/replacing goods minus K price
* Demand specific performance for unique goods
Nonconforming tender (breach by seller)
* Inspect and then accept or reject all or part of the goods
* Buyer must pay for accepted goods minus any damages (i.e., FMV of the goods actually delivered)
* Seller can cure breach by tendering goods if time remains to perform
* A rightful rejection entitles buyer to the remedies listed above
✦Seller’s Remedies✦
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)
Breach by buyer & seller has goods—either:
* K price minus market price at the time of deliver, or
* K price minus resale price plus provable lost profits
Conversion — FMV of goods at the time of the conversion
Risk of Loss
Shipment by carrier—K type determines ROL:
* Shipment Ks—seller only obligated to ship goods to buyer
* ROL passes to buyer when seller delivers goods to carrier
* Destination Ks—seller obligated to ensure goods reach buyer
* ROL passes to buyer only when buyer takes delivery
Non-carrier delivery—goods not shipped by common carrier
* Merchant seller—ROL passes to buyer when he takes physical possession
* Non-merchant seller—ROL passe to buyer upon tender of delivery
Goods destroyed before ROL passes—K is avoided when goods identified at the time the K is made are destroyed through no fault of either party and before ROL passes to buyer
“FOB [location]”—seller bears risk of getting goods to named location, at which point ROL passes to buyer
