UCC Art. 2 versus Common Law Contracts
- Article 2: contracts for the sale of goods (moveable, personal property)
- Common law: all other contracts, except:
- In New York, Article 2-a: leases of goods
Varieties of Contract
- Express: created by parties' words
- Implied-in-fact: created by parties' conduct
- Restitution (quasi contract): protects against unjust enrichment whenever contract law yields an unfair reult. Restitution is the remedy of last resort.
An offer is a manifestation of intent to be bound.
- Advertisements are usually not offers unless there is a quantity and specific terms
- Indefinite offers may be problematic, but courts will read a reasonable price term except in contract for sale of property (needs specific price term).
- Requirements contracts are permissible under Art. II (but if agreed to, offer can't take seller by surprise).
Rejection of Offer
An offer terminates when the offeree rejects it. Rejection can be express, or by:
- Counter-offer. Operates as a rejection (but mere bargaining does not).
- Conditional acceptance. I accept on the condition that = rejection, counter-offer.
Acceptance varying offer.
- Common Law Mirror Image Rule: acceptance must mirror offer exactly.
Article 2: acceptance does not have to minor offer, but offeree's terms are only included if:
- Both parties are merchants;
- There is no material change; and
- There is no objection within a reasonable time.
- Note that a term that is customary in the industry is not material.
Termination of Offer
(Other than by rejection)
- LAPSE (after stated term or reasonable time)
- REVOCATION (either directly or indirectly, by engaging in conduct indicating that he changed his mind and offeree is aware of the conduct. Revocation effective when received.
- DEATH (of either party, unless the offer was irrevocable).
- OPTION (promise to keep offer open that is paid for) (NY: if in writing, no need for consideration to create option).
- MERCHANT'S FIRM OFFER (signed writing by merchant to keep offer open becomes irrevocable. The terms "signed" and "merchant" are interpreted broadly for this purpose. Three month maximum, offer can state less but no more time, "reasonable" if not explicit).
- FORESEEABLE RELIANCE before acceptance (very rare). Ex: subcontractor submits bid knowing contractor will rely; cannot revoke.
- BEGINNING PERFORMANCE in unilateral contract (New York: offer revocable until performance completed).
- The language of the offer controls what constitutes an acceptance. Unless otherwise specified, a bilateral offer can be accepted in any reasonable way.
- Starting performance (bilateral) is acceptance/implied promise to finish the job. Note: in a unilateral contract, offer not accepted until performance complete.
- Improper performance: at common law, acceptance & breach; Article 2: accept & breach unless sent as an accomodation.
- Silence: generally cannot create acceptance (in NY, the receipt of unsolicited merchandise in the mail operates as a gift).
- Acceptance: the mailbox rule
- Offer is EFFECTIVE WHEN MAILED (properly addressed offer lost in the mail, burden on offeror), UNLESS:
- Offer states otherwise;
- Irrevocable offer (lapses if not received by date)
- Rejection sent first. If a party rejects an offer then changes his mind and accepts, it's a race; which ever gets there first controls.
Lack of capacity
- Minors, intoxicated persons, and the mentally incompetent lack the capacity for contract formation.
- Such contracts are voidable. A defendant who is the incapacitated party may disaffirm a contract on this ground, unless there has been:
- An implied affirmation (retaining benefit after regaining capacity/coming of age).
- Exception for necessities (contracts for food/shelter/clothing/medical care --> liable but only for the contract's reasonable value).
NEW YORK RULES
- Minors cannot void – life insurance contract if >14.5 years old; student loans, if 16+; realty contracts for marital home; or contract for artistic and athletic services.
- Adjudicated incompetents – contract is VOID, not VOIDABLE.
- The defense of economic duress is rarely successful, but may be permitted where a contract is formed, with a seller who is the only source for the goods, who then refuses delivery unless the buyer agrees to buy additional products, and the buyer needs the contract for goods right away.
Misrepresentation / non-disclosure of a material fact
- A misrepresentation, or non-disclosure, whether or not intentional, of a material fact makes the contract voidable.
Ambiguity / Misunderstanding
- If the parties to a contract failed to actually meet minds due to some fundamental misunderstanding, there is only a valid contract if one of the parties knew or had reason to know of the other party's meaning, then the contract is enforceable, but construed against the opposing party.
Mutual mistake versus unilateral mistake
- Mutual mistake as to a material aspect of the contract is a defense against formation. Since this is a defense against formation, the defense is valid long after the contract is performed.
- Unilateral mistake on the part of one party is generally not a defense, unless the other (non-mistaken) party knew or had reason to know about it.
- A contract must include a valid consideration, a bargained-for legal detriment, such as a promise, performance, or forbearance.
Past Consideration is not Consideration.
- But in NY, past consideration OK if proven, expressly stated in a signed writing.
- Illusory Promise is not Consideraton. "All I want" is illusory; must involve some detriment on both sides. A right to terminate at any time is illusory, but if the right is restricted in any way (e.g., 30 days notice) then it is not illusory even if held only by one party.
- AT COMMON LAW – modifications without consideration make the modification illusory b/c of pre-existing duty rule.
- New York – modification without consideration is valid if promise is signed in writing.
- Article 2 – modification without consideration is okay if made in good faith.
- Time-Barred Debt: a promise in writing to pa where collection is barred by SOL is enforceable.
- Partial Payment of Debt: for debt that is due and undisputed, there is no valid consideration for a promise to partially pay the debt for discount.
- Foreseeable reliance on a promise may make a promise without consideration enforceable, such as where a party relies to its detriment on the contract.
Public Policy Restrictions
- Covenant Not to Compete. A court will invalidate or narrow a covenant not to compete that operates as a restraint of trade. The limits must be reasonable in duration and geography, and reasonably necessary considering the uniqueness of the services. However, such limits are permissible if reasonable; signing as a requirement to work or continue working at a place does constitute sufficient consideration.
- Exculpatory Clause. An exculpatory clause may eliminate liability for negligence, but not for gross negligence or intentional torts.
- Unconscionability. Generally not a valid defense against enforcement, unless terms are unfair (e.g., indentured servitude); and the agreement process was unfair.
Statute of Frauds
- MARRIAGE: Contracts in consideration of marriage.
YEAR OR LONGER: For contracts that cannot be completed within one year. Does not apply if there's even a theoretical possibility that it could be completed in one year (need not ACTUALLY happen). MBE: lifetime contract N/A; NY: lifetime contract in SOF
- Full performance exception (if contract fully performed, enforceable).
LAND: Transfer of interest in real property, including lease/mortgage, etc., as well as authorizing agent to sell real property.
- Does not apply to leases of 1 year or less
- Part performance will excuse SOF requirement (1 of 3: buyer in possession, buyer made some payment, buyer made improvements).
- NY: SOF N/A to part performance of lease agreement.
- EXECUTOR/ESTATE. Contracts by the executor of an estate to pay a debt of the estate with his own money.
GOODS $500 OR MORE. (Or modification to more than $500).
- Except: goods accepted/paid for (only that portion); custom goods (substantial start/can't resell); judicial admission (testimony); or
- Merchant's Confirmatory Memo: Both parties are merchants, one party sends a writing with the QUANTITY, and the other party does not object within 10 days.
- SURETY. When party serves as guarantor, must be inwriting unless the guarantor's main purpose is for his own benefit.
NY ONLY: LEASE OF GOODS FOR $1000 OR MORE (ADD UP TOTAL CONTRACT OF INCREMENTAL PAYMENTS)
Miscellaneous NY Statute of Frauds Provisions
SOF also applies to:
- Assignment of an insurance policy;
- Promise to pay a discharged debt;
- Agreement to pay a finder's fee or broker's commission, ecept to atty, auctioneer, or licensed real estate agent.
Satisfactory Writing for Statute of Frauds
- Sale of Goods: Quantity term and signed by party charged with breach of contract.
- Lease of Goods (NY Only): Must state it's a lease, include quantity, duration, and rental paments, signed by D.
- Any Other Contract: Must contain all material terms, and signed by defendant.
Parol Evidence Rule
- Keeps out evidence of a prior or contemporaneous agreement (either oral or written) that contradicts a later writing, where agreement is fully integrated (e.g., contract limited to the terms herein).
Does not apply to subsequent developments/modifications.
- To correct clerical error;
- To establish a defense against formation;
- To interpret vague/ambiguous term (plain meaning rule);
- To add to a partially integrated writing (not complete statement);
- To show a condition precedent to existence of contract.
New York -
Discharge of a Contract Obligation
- Permitted for any claim by a written instrument without consideration
- An offer can be accepted in any reasonable way.
- An offer can be accepted only by performance.
- An award for some kind of performance --> cannot accepted if you did not know of the offer.
Gap-Fillers / Explanatory Terms
Parties' conduct can explain terms or fill in gaps:
- Course of Performance: parties' conduct under THIS contract, trumps
- Course of Dealing: parties' conduct in prior contracts with each other, trumps
- Usage of Trade: what others in trade do in similar contracts.
- A seller is liable for any breach or express warranty, including:
- Statements of fact;
- Promises; (e.g., to replace/repair/refund/or take other remedial action)
- Description of the goods; or
- Use of a sample/model
- OPINION is not an express warranty (e.g., "top quality," "the best", any general or subjective statements.
- Must be the basis of the bargain: if the buyer could have relied on the statements in purchasing.
- A SELLER CANNOT DISCLAIM AN EXPRESS WARRANTY.
- Magnuson-Moss act doesn't apply to lessees.
1. Implied Warranty of Merchantability
- Warranty that goods are fit for their ordinary purpose
- Can disclaim with language such as "as is" or "with all faults"
- Can disclaim with other language, conspicuously disclaiming the warranty and using the word "merchantibility"
- Seller must be merchant who deals in goods of kind sold
2. Implied Warranty of Fitness for a Particular Purpose
- Warranty that goods are fit for the buyer's particular needs
- Seller must know the buyer has a special use and is relying on seller to pick out goods suitable for that use (no merchant requirement).
- Can disclaim with language such as "as is," "with all faults"
Lessor's Warranties for the Lease of Goods
Article 2-A: Generally same warranties as under Article 2
- Finance leases. Where buyer leases a good from a bank, the warranty cannot be by the bank, only the party who sold the good to the bank.
Limitations of Buyer's Remedies
- General Rule: Seller CAN limit a buyer's remedies for breach of any warranty, express or implied, as long as the warranty limitation is not unconscionable.
- Limitation of buyer's remedies for personal injury is presumed unconscionable (rebuttable, but hard to rebut).
- If a limited remedy fails of its essential purpose, the remedy provisions of Article 2 apply.
Risk of Loss
- Who bears the risk of loss? If buyer, must pay; if seller, no goods at no cost.
- The agreement of the parties as to ROL controls. If there is no agreement, the breaching party (if there is one) bears the ROL, even if unrelated to the breach. Otherwise, when the ROL passes depends on the type of contract.
Delivery by Common Carrier (ROL passes when delivery obligations are complete).
- shipment contract: ROL passes when seller passes goods to common carrier, makes delivery arrangements, and notifies buyer. "FOB (seller's location)".
destination contract: ROL passes when seller gets goods to a specific location, usually where buyer is located. "FOB (anywhere else besides seller's location)".
- But if goods destroyed through no part of seller on the way, the contract is void for impossibility. The REVERSE is not true: if ROL has already passed to buyer when goods are destroyed, then buyer still has duty to pay.
Non-Carrier Cases: Merchant seller bears ROL until buyer is IN POSSESSION of the goods; non-merchant seller bears ROL until s/he makes the goods available for pickup.
Lease of Goods Cases: ROL on lessor, except in finance lease, where ROL is on the lessee.
Perfect Tender Rule
If tender is not perfect, buyer may reject the goods.
Option to cure depends on when in the contract the non-conforming goods were tendered:
- If time for performance has not expired: seller has option to cure by contract date.
- If time for performance has expired: no option to cure unless buyer has accepted non-conforming goods in the past.
(special rules for installment contracts).
- An installment contract is one that requires or authorizes delivery in separate installments.
- The perfect tender rule does not apply to installment contracts.
- Buyer may reject installment only for substantial impairment, and may not reject the whole contract.
Effect of Buyer's Acceptance of the Goods
- Implied acceptance when the buyer keeps the goods after inspecting them. A lengthy delay before rejection may operate as an implied acceptance.
- BUT if it's too late to reject, the buyer can still get damages.
Revocation of Acceptance of Goods by Buyer
- Generally cannot revoke acceptance of goods, except that revocation may be available if a non-conformity that substantially impairs the value of the goods was difficult to discover.
Consequences of Rejection / Revocation
- Return the goods at the seler's expense
- Refund from seller;get back $ paid for goods
- Damages for breach
Buyer's Obligation to Pay
- Check is OK, but seller can refuse (must give buyer reasonable time to get cash)
Common Law Contract Performance
- Performance does not have to be perfect; substantial performance is all that's required.
- Material breach is NOT the same as substantial performance.
- But party may get damages for the portion of performance incomplete.
Other Party's Breach -
Excuse of Performance?
Depending on the nature of the contract, the other party's breach may provide an excuse for performance.
- Sale of Goods (Art. 2): If performance isn't perfect, buyer has free reign to reject all or some of the goods and get damages for the breach. You can get a refund for the goods rejected.
- Common law contracts: Injured party can recover damages for any breach of contract, but only a material breach can provide an excuse for performance (unless a divisible contract, e.g., $100/day).
- Late finishing usually not material unless the contract or circumstances indicate that time is of the essence.
- If material breach excuses payment, breaching party can get restitution for reasonable value of the work performed.
- A party's clear repudiation of a contract before the time for performance is due gives the other party the right to stop performance and sue for damages, as long as she is "ready, willing, and able" to perform.
- The repudiating party can "take back" her repudiation before the other party has relied on such repudiation, but the non-breaching party has no duty to notify the breaching party of such reliance.
Failure to give adequate assurance
Under Article 2
- A party with reasonable grounds for being insecure about the other party's performance may request, in writing, adequate assurance that the other party will perform in accordance with the contract.
- Failure to do so allows requesting party to treat it as an anticipatory repudiation.
- You cannot use this provision to re-write the contract or demand a particular kind of assurance, such as cash instead of credit; assurance is only what is reasonable.
Later Agreement Excusing Performance on Contract
- Rescission. An agreement to cancel the contract between two parties is valid so long as at least some performance remains on both sides (the consideration being the giving up the right to performance by the other party. If one party has performed fully, then there is no consideration for this agreement and therefore rescission is invalid).
- Modification. An agreement to replace an existing contract with a new one. A modification takes place immediately.
- Accord & Satisfaction. Accord = agreement to accept performance in future satisfaction of an existing duty; satisfaction = performance of the accord. Existing duty is extinguished only when the accord is satisfied. If the accord is not completed, can sue on either deal.
- Novation. An agreement by contracting parties and third party to substitute the third party for one of the contracting parties. You need consent of all the parties for effect.
Impossibility as Excuse for Performance:
Destruction of Something Necessary for Performance
- Common Law: Destruction provides excuse for performance
Sale of Goods (Art. 2): Same general rule, but:
- Only a seller who bore the ROL when goods were damaged/destroyed by impossibility/impracticability is excused from performance. Party from whom ROL has passed doesn't need excuse b/c no longer bore risk of loss. Once ROL passes to buyer, buyer must perform payment under the contract if the goods were destroyed.
- Unidentified Goods. A seller is excused only if the goods that were damaged or destroyed had been identified to the contract (e.g., labeled for a party).
Impossibility as Excuse for Performance:
Death/Incapacity of an Essential Purpose
- If a party to a contract is essential (unique skills, irreplaceable), performance is excused for impossibility. Not just any party may be excused; only those whose skills are unique and irreplaceable. Others can delegate.
- PAYING PARTIES are not excused by death (estate can pay).
Impossibility as Excuse for Performance:
Supervening Government Regulation
A law making performance under a contract illegal excuses performance under the contract
Impossibility as Excuse for Performance:
Increase in Cost of Seller's Performance
- MBE: Almost never excuses seller
- NY: Seller may be excused depending on degree of rise in dollar amount / percentage increase.
Frustration of Buyer's Primary Purpose
(Excuse for Performance)
- Frustration of purpose making contract valueless for buying party can excuse performance if other parties knew that purpose at the time of entering into the contract.
Failure of an Express Condition
as Excuse for Performance
Express conditions in a contract limit obligations under the contract. They do not create independent obligations.
- Condition precedent (condition must happen before performance is due); condition subsequent (cuts off existing duty).
- Strict compliance with the condition is required. E.g., if a condition requires that a house be sold for $1.9m, that condition is not met by sale for $1,800,999.
- Satisfaction clause is measured by the reasonable person standard, unless contract deals with matters of personal taste/art (in which case it's a subjective standard).
- Conditions my be excused by failure to cooperate or voluntary waiver.
- This is the usual remedy for real property breaches b/c real property is unique.
- Specific performance is only available for Art. 2 Sale of Goods if goods are unique or there are other "proper" circumstances (such as inability to buy substitute goods in the market).
- Service Contracts: specific performance is not available for servic contracts b/c it amounts to involuntary servitude (but injunctive relief may be.
Unpaid Seller's Right to Reclaim Goods
Not available under Art. 2 unless:
- Buyer was insolvent when it received the goods; and
- Seller makes demand within 10 days after buyer received the goods.
If buyer misrepresented insolvency, in writing, within three months of delivery, then seller can reclaim at anytime.
BUT, there is no right to reclaim from innocent third parties.
- Not available under Art. 2 unless:
- Punitive damages not available
- Liquidated damages clauses will be upheld if the damages are hard to estimate at the time of the contract, and are a reasonable forecast of probable damages (not penalty) (per diem usually better than lump sum).
- *NY: In real estate contract, seller can keep buyer's down payment even if it operates as a penalty.
- Common law expectation damages: puts injured party in as good a position as full performance. General rule:
- Incidental damages (Art. 2 and common law - moving/storing/making new transaction);
- Consequential damages (common law only, special damages but only due if reasonably foreseeable); and
- Avoidable damages (Art. 2 and common law - injured party cannot recover damages he could have avoided/mitigated).
Article 2 Damages
- Cover damages (if goods are not delivered) = cover price – contract price, as long as buyer coers in good faith.
- Market damages (if buyer doesn't cover or doesn't cover in good faith) = market price – contract price.
- Loss in value (buyer keeps non-conforming goods) = value as promised – value delivered.
- Resale damages (no payment) = contract price – resale price, if seller re-sells in good faith (usual measure).
- Market damages (seller does not resell / does not resell in good faith) = contract price – market price.
- LOST PROFIT FOR LOST VOLUME DEALER (seller has unlimited resources to sell, and so loses profits)
- Entire contract price (if seller cannot resell the goods)
PLUS ANY INCIDENTAL AND AVOIDABLE DAMAGES
- Article 2: An owner who entrusts goods to a merchant who deals in goods of the kind sold has no rights against a bona fide purchaser. The only right is against the merchant for conversion.
Third Party Beneficiary
- A third party beneficiary is a person who is not a party to a contract but has rights b/c the contract was intended to benefit her. Parties to the contract are promisor/promisee. Doesn't apply to incidental beneficiaries.
- Creditor beneficiary: benefit as repayment of debt (rare);
- Donee beneficiary: benefit as a gift (more common)
- Rescission and Modification: Promisor/promisee can rescind/modify contract until rights of TPB have "vested" (learns & relies). Contrary language in contract controls.
- Liability: Promisor liable to TPB & promisee; promisee liable to creditor TPB only.
Delegation of Duties
- General Rule: contractual duties may be delegated, without consent of person to whom duty is owed, unless:
- Contract prohibits delegation/assignment (if contract prohibits assignment, it prohibits delegation as well).
- Special skill/reputation (no delegation).
- Rights of Obligee:
- Delegating party remains liable w/o novation
- A delegate who gets consideration is liable too
Assignment of Rights
- Assignor transfers right to receive a benefit from OBLIGOR to a third-party ASSIGNEE.
- Restrictions on assignment: "not assignable" (valid assignment)
- "Assignments void" --> void assignment.
- Must have language of present transfer (not "I promise to assign...")
- Consideration is NOT required (but gratuitous assignments are easily revoked)
- Cannot substantially change duties of obligor
- Obligor liable for/to assignee
- Multiple assignments: gratuitous assignments are easily revoked; last gratuitous assignment has rights. First assignee for consideration wins over substantive assignees for consideration & prev. gratuitous ones, unless subsequent assignee for consideration didn't know and first to get judgment.
Subject to statutory rights (particularly the discrimination prohibitions under theCivil Rights Act), most states adhere to the general principle that employer and employee may contract for the dismissal protection they choose, with at-will employment being the default (can fire/quit for any or no reason at all).