Contracts Flashcards
1
Q
General Definition of Contract
A
A contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law, in some way, recognizes as a duty.
2
Q
Common Law vs. Article 2 Sale of Goods
A
Generally, the common law governs contracts. However, for contracts involving the sale of goods, Article 2 of the Uniform Commercial Code applies. Article 2 has adopted much of the common law of contracts, but when the common law and Article 2 differ, Article 2 prevails in a contract for the sale of goods.
3
Q
Goods Defined
A
Goods are all things movable at the time they are identified as the goods to be sold under the contract. Thus, Article 2 applies to sales of most tangible things, but does not apply to the sale of real estate, services, or intangibles.
4
Q
Merchants vs. Nonmerchants
A
Article 2 generally defines merchant as one who regularly deals in goods of the kind sold or who otherwise by his profession holds himself out as having special knowledge or skills as to the practices or good involved. For Article 2 provisions dealing with general business practices, almost anyone in business can be deemed a merchant. But remember that some Article 2 provisions are narrower and require a person to be a merchant with respect to goods of the kind involved in the subject transaction.
5
Q
Express Contract
A
Express contracts are formed by language, oral or written
6
Q
Implied in Fact Contract
A
Implied contracts are formed by manifestations of assent other than oral or written language, i.e., by conduct
7
Q
Quasi-Contract or Implied in Law Contract
A
Quasi-contracts are not contracts at all. They are constructed by courts to avoid unjust enrichment by permitting the plaintiff to bring an action in restitution to recover the amount of the benefit conferred on the defendant.
8
Q
Bilateral Contracts
A
Exchange of mutual promises. The traditional bilateral contract is one consisting of the exchange of mutual promises.
9
Q
Unilateral Contracts
A
Acceptance by performance. The traditional unilateral contract is one in which the offeror requests performance rather than a promise. Here, the offeror-promisor promises to pay upon the completion of the requested act by the promisee. Once the act is completed, a contract is formed. In such contracts, there is one promisor and one promisee.
10
Q
Modern View
A
Most contracts are bilateral. Under Article 2 and the Second Restatement, a traditional unilateral contract occurs only in two situations: (i) when the offeror clearly (unambiguously) indicates that completion of performance is the only manner of acceptance; and (ii) where there is an offer to the public, such as a reward offer.
11
Q
Void Contract
A
A void contract is one that is totally without any legal effect from the beginning. It cannot be enforced by either party.
12
Q
Voidable Contract
A
A voidable contract is one that one or both parties may elect to avoid.
13
Q
Unenforceable Contract
A
An unenforceable contract is an agreement that is otherwise valid but which may not be enforceable due to a defense extraneous to contract formation, such as the statute of limitations or Statute of Frauds.
14
Q
Contract Creation Generally
A
When a suit is brought in which one party seeks to enforce a contract or to obtain damages for breach of contract, a court must first decide whether there was in fact a contract. In making this determination, a court will ask the following three basic questions: (1) Was there mutual assent? (2) Was there consideration or some substitute for consideration? (3) Are there any defenses to creation of the contract?
15
Q
Mutual Assent Generally
A
For an agreement to be enforced as a contract, there must be mutual assent. In other words, one party must accept the other_s offer. Whether mutual assent is present will be determined by an objective standard; i.e., did words or conduct manifest a present intention to enter into a contract?
16
Q
The Offer
A
An offer creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror. For a communication to be an offer, it must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. In determining whether a reasonable expectation is created: (i) Was there an expression of a promise, undertaking, o commitment to enter into a contract? (ii) Were there certainty and definiteness in the essential terms? (iii) Was there communication of the above to the offeree?
17
Q
Promise, Undertaking, or Commitment
A
For a communication to be an offer, it must contain a promise, undertaking, or commitment to enter into a contract, rather than a mere initiation to begin preliminary negotiations; i.e., there must be an intent to enter into a contract.
18
Q
Advertisements
A
Advertisements, catalogs, circular letters, and the like containing price quotations are usually construed as mere invitations for offers.
19
Q
Definite and Certain Terms Generally
A
An offer must be definite and certain in its terms. The basic inquiry is whether enough of the essential terms have been provided so that a contract including them would be capable of being enforced.
20
Q
Identification of the Offeree
A
To be considered an offer, a statement must sufficiently identify the offeree or a class to which she belongs to justify the inference that the offeror intended to create a power of acceptance.
21
Q
Definiteness of Subject Matter
A
The subject matter of the deal must be certain, because a court can enforce a promise only if it can tell with reasonable accuracy what the promise is.
22
Q
Real Estate Transactions
A
An offer involving realty must identify the land and the price terms. The land must be identified with some particularity but a deed description is not required. Most courts will not supply a missing price term for realty.
23
Q
Sale of Goods
A
In a contract for the sale of goods, the quantity being offered must be certain or capable of being made certain.
24
Q
Requirements and Output Contracts
A
In a requirements contract, a buyer promises to buy from a certain seller all of the goods the buyer requires, and the seller agrees to sell that amount to the buyer. In an output contract, a seller promises to sell to a certain buyer all of the goods that the seller produces, and the buyer agrees to buy that amount from the seller. It is assumed that the parties will act in good faith; hence, there may not be a tender of or a demand for a quantity unreasonably disproportionate to (i) any stated estimate, or (ii) any normal or otherwise comparable prior output or requirements in the absence of a stated estimate.
25
Services
The nature of the work to be performed is required in an offer for services.
26
Missing Terms
The fact that one or more terms are left open does not prevent the formation of a contract if it appears that the parties intended to make a contract and there is a reasonably certain basis for giving a remedy. In such a case, the majority of jurisdictions and Article 2 hold that the court can supply reasonable terms for those that are missing. Note that if a contract for the sale of goods is missing a price term, Article 2 provides that the price will be a reasonable price at the time of delivery.
27
Vague Terms
The presumption that the parties_ intent was to include a reasonable term goes to supplying missing terms. The presumption cannot be made if the parties have included a term that makes the contract too vague to be enforced. However, uncertainty can be cured by part performance that clarifies the vague term or by acceptance of full performance.
28
Terms to Be Agreed on Later
Often an offer will state that some term is to be agreed on at a future date. If the term is a material term, the offer is too uncertain.
29
Communication to Offeree
To have the power to accept, the offeree must have knowledge of the offer.
30
Termination by Offeror _ Revocation
A revocation is the retraction of an offer by the offeror. An offeror may revoke by directly communicating the revocation to the offeree. An offer made by publication can be directly revoked only by publication through comparable means. An offer may also be revoked indirectly if the offeree receives: (i) correct information, (ii) from a reliable source, (iii) of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.
31
Effective Date of Revocation
A revocation is generally effective when received by the offeree. Where revocation is by publication, it is effective when published. [Remember that generally a written communication is _received_ when it is delivered do a place of business through which the contract was made or another location authorized to receive this type of communication. It does not matter whether the recipient actually reads the communication.]
32
Options
An option is a distinct contract in which the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer.
33
Merchant_s Firm Offer Under Article 2
Under Article 2: (i) if a merchant; (ii) offers to sell goods in a signed writing; and (iii) the writing gives assurances that it will be held open, the offer is not revocable for lack of consideration during the time stated, or if no time is stated, for a reasonable time (but in no event may such period exceed three months). [If a merchant-offeror states that an offer will stay open for a period beyond the UCC_s three-month limit on irrevocability, he will be bound only for three months. Remember that the three-month limitations applies only to offers not supported by consideration.]
34
Detrimental Reliance
When the offeror could reasonably expect that the offeree would rely on her detriment on the offer, and the offeree does so rely, the offer will be held irrevocable as an option contract for a reasonable length of time. At the very least, the offeree would be entitled to relief measured by the extent of any detrimental reliance.
35
Part Performance of a Unilateral Contract
(1) Implied Contract for Reasonable Time. An offer for a true unilateral contract becomes irrevocable once performance has begun. The offeror must give the offeree a reasonable time to complete performance. Note that the offeree is not bound to complete performance _ she may withdraw at any time prior to completion of performance, and there is no acceptance until performance is complete. (2) Distinguish. Substantial preparations to perform do not make the offer irrevocable but may constitute detrimental reliance sufficient to make the offeror_s promise binding to the extent of the detrimental reliance.
36
Express Rejection
An express rejection is a statement by the offeree that she does not intend to accept the offer. Such a rejection will terminate the offer.
37
Counteroffer as Rejection
A counteroffer is an offer made by the offeree to the offeror that contains the same subject matter as the original offer, but differs in its terms. [Remember that a counteroffer is both a rejection and a new offer. It terminates the original offer and reverses the roles of the parties: the offeree giving a counteroffer becomes the offeror of a new offer, which the other party may accept or reject.] However, an inquiry will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration. The test is whether a reasonable person would believe that the original offer had been rejected.
38
Effective Date of Rejection
A rejection is effective when received by the offeror.
39
Rejection of Option
Because an option is a contract to keep an offer open, a rejection of or a counteroffer to an option does not constitute a termination of the offer. The offeree is still free to accept the original offer within the option period unless the offeror has detrimentally relied on the offeree_s rejection.
40
Termination by Lapse of Time
An offer may be terminated by the offeree_s failure to accept within the time specified by the offer or, if no deadline was specified, within a reasonable period.
41
Termination by Operation of Law
The following events will terminate an offer by operation of law: (i) Death or insanity of either party (unless the offer is of a kind the offeror could not terminate). Death or insanity need not be communicated to the other party. (ii) Destruction of the proposed contract_s subject matter; or (iii) Supervening illegality.
42
Acceptance Generally
An acceptance is a manifestation of assent to the terms of an offer.
43
Who May Accept
Generally, only the person to whom an offer is addressed has the power of acceptance. One may also have the power of acceptance if she is a member of a class to which an offer has been directed. Generally, an offeree_s power of acceptance cannot be assigned. However, if the offeree has paid consideration to keep the offer open, the right to accept is transferable.
44
Offeree Must Know of Offer
The offeree must know of the offer in order to accept it, and this is true whether the offer is for a bilateral or unilateral contract.
45
Acceptance of Offer for Unilateral Contract
If an offer provides that it may be accepted only by performance, the notice requirement is mitigated and such contract must be performed before it is considered accepted.
46
Completion of Performance
Most courts hold that an offer to form a unilateral contract is not accepted until performance is completed. The beginning of performance may create an option so that the offer is irrevocable. However, the offeree is not obligated to complete performance merely because he has begun performance, as only complete performance constitutes acceptance.
47
Notice
Generally, the offeree is not required to give the offeror notice that he has begun the requested performance, but is required to notify the offeror within a reasonable time after performance has been completed. However, no notice is required if: (i) the offeror waived notice; or (ii) the offeree_s performance would normally come to the offeror_s attention within a reasonable time.
48
Generally Acceptance Must Be Communicated
Generally, acceptance of an offer to enter into a bilateral contract must be communicated to the offeror, unless the offer provides that acceptance need not be communicated.
49
Method of Acceptance
Unless otherwise provided, an offer is construed as inviting acceptance in any reasonable manner and by any medium reasonable under the circumstances. Any objective manifestation of the offeree_s counterpromise is usually sufficient.
50
Offers to Buy Goods for Current or Prompt Shipment
Under Article 2, an offer to buy goods for current or prompt shipment is construed as inviting acceptance either by a promise to ship or by current or prompt shipment of conforming or nonconforming goods.
51
Shipment of Nonconforming Goods
The shipment of nonconforming goods is an acceptance creating a bilateral contract as well as a breach of the contract unless the seller seasonably notifies the buyer that a shipment of nonconforming goods is offered only as an accommodation. The buyer is not required to accept the accommodation goods and may reject them. If he does, the shipper is not in breach and may reclaim the accommodation goods, because her tender does not constitute an acceptance of the buyer_s original offer.
52
Common Law Rule
At common law, any different or additional terms in the acceptance make the response a rejection and counteroffer.
53
Article 2 Rule _ Battle of the Forms Provision
Article 2 has abandoned the mirror image rule, providing instead that the proposal of additional or different terms by the offeree in a definite and timely acceptance does not constitute a rejection and counteroffer, but rather is effective as an acceptance, unless the acceptance is expressly made conditional on assent to the additional or different terms. Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants.
54
Conditional Acceptance
When an acceptance is made expressly conditional on the acceptance of new terms, it is a rejection of the offer. It can be considered a counteroffer only to the extent that the original offeror may expressly assent to the new terms and thus form a contract. It is not considered a counteroffer that may be accepted by performance. If the parties ship or accept goods after a conditional acceptance, a contract is formed by their conduct and the new terms are not included.
55
Bilateral Contracts Formed by Performance
If a contract is not formed by the parties_ communications, but they begin to perform as if they formed a contract, a contract is formed.
56
The Mailbox Rule
Acceptance by mail or similar means creates a contract at the moment of dispatch, provided that the mail is properly addressed and stamped, unless: (1) The offer stipulates that acceptance is not effective until received; or (2) An option contract is involved (an acceptance under an option contract is effective only upon receipt); (3) If the offeree sends a rejection and then sends an acceptance, whichever arrives first is effective; (4) If the offeree sends an acceptance and then a rejection, the acceptance is effective unless the rejection arrives first and the offeror detrimentally relies on it.
57
Acceptance by Unauthorized Means
An acceptance transmitted by unauthorized means or improperly transmitted by authorized means may still be effective if it is actually received by the offeror while the offer is still in existence.
58
Auction Contracts
A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner. An auction sale is with reserve unless the goods are explicitly put up without reserve. _With reserve_ means the auctioneer may withdraw the goods at any time until he announces completion of the sale.
59
Elements of Consideration
Basically, two elements are necessary to constitute consideration: (i) there must be a bargained-for exchange between the parties; and (ii) that which is bargained for must be considered of legal value or, as it is traditionally stated, it must constitute a benefit to the promisor or a detriment to the promisee.
60
Bargained-for Exchange
This element of consideration request that the promise induce the detriment and the detriment induce the promise. There is no bargain involved when one party gives a gift to another.
61
Act or Forbearance by Promisee Must Be of Benefit to Promisor
An act of forbearance by the promisee (or a promise to act or forbear) is sufficient consideration to form a contract if it benefits the promisor. The benefit, however, need not be economic (e.g., the gratification of influencing the mind of another is sufficient).
62
Past or Moral Consideration
A promise given in exchange for something already done does not satisfy the bargain requirement. Where a past obligation is unenforceable because of a technical defense, that obligation will be enforceable if a new promise is made in writing or is partially performed. Also, under the modern trend, if a past act benefited the promisor and was performed by the promisee at the promisor_s request or in response to an emergency, a subsequent promise to pay for that act will be enforceable.
63
Adequacy of Consideration
In general, courts do not inquire into the adequacy or fairness of consideration. However, if something is entirely devoid of value (token consideration), it is insufficient. Sham consideration (insignificant sum recited in the contract) is also insufficient if not paid. But note that if there is a possibility of value in the thing bargained for, consideration will be found even if the value never comes into existence.
64
Legal Benefit and Legal Detriment Theories
The majority of courts require that a party incur detriment (by doing something he is not legally obligated to do or by refraining from doing something he has a legal right to do) to satisfy the legal value element. Under the minority rule, conferring a benefit on the other party is also sufficient.
65
Preexisting Legal Duty Not Consideration
Traditionally, performing or promising to perform an existing legal duty is insufficient consideration. Exceptions: (i) New or different consideration is promised; (ii) The promise is to ratify a voidable obligation; (iii) The preexisting duty is owed to a third person rather than the promisor; (iv) There is an honest dispute as to the duty; or (v) There are unforeseen circumstances sufficient to discharge a party. Also, a good faith agreement modifying a contract subject to the UCC needs no consideration to be binding.
66
Forbearance to Sue
A promise to refrain from suing on a claim may constitute consideration if the claim is valid or the claimant in good faith believed the claim was valid.
67
Mutuality Required
Consideration must exist on both sides of a contract (although the benefit of consideration generally need not flow to all parties). If only one party is bound to perform, the promise is illusory and will not be enforced. Courts often supply implied promises (e.g. a party must use her best efforts) to infer mutuality.
68
Right to Choose Alternative Courses
A promise to choose one of several alternative means of performance is illusory unless every alternative involves legal detriment to the promisor. The promise will not be found illusory if: (i) at least one alternative involves legal detriment and the power to choose rests with the promisee or a third party, or (ii) a valuable alternative (i.e. one involving legal detriment) is actually selected.
69
Promissory Estoppel or Detrimental Reliance
Consideration is not necessary if the facts indicate the promisor should be estopped from not performing. Under section 90 of the First Restatement, a promise is enforceable if necessary to prevent injustice if: (i) The promisor should reasonably expect to induce action or forbearance; (ii) Of a definite or substantial character; and (iii) such action or forbearance is in fact induced. [A valid contract is better than an agreement that can be enforced only by promissory estoppel because some states limit recovery under promissory estoppel to that which _justice requires_].
70
Requirement Generally
Even if an agreement is supported by valuable consideration or a recognized substitute, contract rights may still be unenforceable because there is a defense to formation of the contract, because there is a defect in capacity (making the obligations voidable by one of the parties), or because a defense to enforcement of certain terms exists.
71
Mutual Mistake as to Existing Facts
If both parties entering into a contract are mistaken about existing facts (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party if: (i) The mistake concerns a basic assumption on which the contract is made; (ii) The mistake has a material effect on the agreed-upon exchange; and (iii) The party seeking avoidance did not assume the risk of the mistake.
72
Assumption of Risk
Mutual mistake is not a defense if the adversely affected party bore the risk that the assumption was mistaken. This commonly occurs when one party is in a position to better know the risks than the other party or where the parties knew that their assumption was doubtful. However, mistake in value is generally not a defense.
73
Unilateral Mistake
If only one of the parties is mistaken about facts relating to the agreement, the mistake will not prevent formation of a contract. However, if the nonmistaken party knew or had reason to know of the mistake made by the other party, the contract is voidable by the mistaken party.
74
Mistake by the Intermediary (Transmission)
When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake.
75
Ambiguous Contract Language
If the contract includes a term with at least two possible meanings, the result depends on the parties_ awareness of the ambiguity: (i) Neither party aware _ no contract unless both parties intended the same meaning; (ii) Both parties aware _ no contract unless both parties intended the same meaning; (iii) One party aware _ binding contract based on what the ignorant party reasonably believed to e the meaning of ambiguous words. Ambiguity is one area where subjective intent is taken into account.
76
Fraudulent Misrepresentation (Fraud in the Inducement)
If a party induces another to enter into a contract by using fraudulent misrepresentation (i.e. by asserting information she knows is untrue), the contract is voidable by the innocent party if she justifiably relied on the fraudulent misrepresentation. This is fraud in the inducement. [Keep in mind that a fraudulent misrepresentation need not be spoken or written; it can be inferred from conduct. Concealing a fact, frustrating investigation of a fact, or falsely denying knowledge of a fact is the same as asserting the fact does not exist. Nondisclosure of a fact is not misrepresentation unless it is material and fraudulent.]
77
Nonfraudulent Misrepresentation
Even if a misrepresentation is not fraudulent, the contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material. A misrepresentation is material if either: (i) the information asserted would induce a reasonable person to agree; or (ii) the maker of the misrepresentation knew the information asserted would cause a particular person to agree. [Remember that just because a misrepresentation could have been revealed by the exercise of reasonable care does not mean that reliance was unjustified. Failure to read a contract or use care in reading it does not necessarily preclude a party from avoiding a contract for misrepresentation.]
78
Innocent Party May Rescind Agreement and Recover Damages
Note that the innocent party need not wait until she is sued on the contract but may take affirmative action in equity to rescind the agreement. In addition, she may pursue all remedies available for breach of contract.
79
Absence of Consideration
If the promises exchanged at the formation stage lack the elements of bargain or legal detriment, no contract exists. In this situation, one of the promises is always illusory.
80
Public Policy Defenses to Contract Formation _ Illegality
If the consideration or subject matter of a contract is illegal, the contract is void. Exceptions: (i) the plaintiff is unaware of the illegality while the defendant knows of the illegality; (ii) the parties are not in pari delicto (i.e. one party is not as culpable as the other); or (iii) the illegality is the failure to obtain a license when the license is for revenue-raising purposes, rather than for protection of the public. If only the purpose behind the contract is illegal, the contract is voidable by a party who was (i) unaware of the purpose; or (ii) aware but did not facilitate the purpose and the purpose does not involve serious moral turpitude.
81
Contracts of Infants (Minors)
Infants generally lack capacity to enter into a contract binding on themselves. However, contractual promises of an adult made to an infant are binding on the adult. Disaffirmance. An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. If an infant chooses to disaffirm, she must return anything that she received under the contract that still remains at the time of disaffirmance. Affirmance upon attaining majority. An infant may affirm upon reaching majority. He affirms either expressly or by conduct (e.g. by failing to disaffirm the contract within a reasonable time after reaching majority).
82
Mental Incapacity
One whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative. He may likewise affirm during a lucid interval or upon complete recover, even without formal restoration by judicial action. In other words, the contract is voidable. As in the case of infants, mentally incompetent persons are liable in quasi-contract for necessities furnished to them.
83
Intoxicated Persons
One who is so intoxicated that he does not understand the nature and significance of his promise may be held to have made only a voidable promise if the other party had reason to know of the intoxication. The intoxicated person may affirm the contract upon recovery. Once again, there may be quasi-contractual recovery for necessities furnished during the period of incapacity.
84
Duress and Undue Influence
Contracts induced by duress or undue influence are voidable and may be rescinded as long as not affirmed. The common type of duress occurs when a party_s assent is procured by an improper threat. Generally, taking advantage of another person_s economic needs is not duress. Elements of undue influence are: (i) undue susceptibility to pressure by one party, and (ii) excessive pressure by the other party. Undue influence concerns often arise when the dominant party is in a confidential or caregiver relationship with the influenced party.
85
Statue of Frauds
In most instances, an oral contract is valid. However, in certain instances, a contract must be evidenced by a writing signed by the parties sought to be bound. Noncompliance with the Statute of Frauds renders the contract unenforceable at the option of the party to be charged. If the statute is not raised as a defense, it is waived.
86
Writing Requirements
The Statute of Frauds does not requires that the contract be in writing; it requires only that there be one or more writings signed by the person sought to be held liable on the contract that reflect the material terms of the contract. Thus, a letter (even to a nonparty) or receipt, or even a check indicating a quantity of goods on the memo line could be sufficient. [Remember, to be sufficient under the Statute of Frauds, the writing need not be a full-fledged contract, nor need it even be one piece of paper. Thus, several pieces of correspondence between the parties could be sufficient memoranda of the agreement; a fax or a memo written on a napkin also could suffice. The key is that there be something in writing evidencing the material terms.]
87
Signature Requirement
The signature requirement is liberally construed by most courts. It need not be handwritten; it can be printed or typed. A party_s initials or letterhead may also be sufficient. An electronic signature is also sufficient. [Note that the memorandum does not need to be signed by both parties to the contract. Only the party to be charged must sign.]
88
Executor or Administrator Promises Personally to Pay Estate Debts
A promise by an executor or administrator to pay the estate_s debts out of his own funds must be evidenced by a writing.
89
Promises to Pay Debt of Another (Suretyship Promises)
A promise to answer for the debt or default of another must be evidenced by a writing. However, if the main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is not within the Statue of Frauds even though the effect is still to pay the debt of another.
90
Promises in Consideration of Marriage
A promise the consideration of which is marriage must be evidenced by a writing. This applies to promises that induce marriage by offering something of value (other than a return promise to marry).
91
Interests in Land
A promise creating an interest in land must be evidence by a writing. This includes not only agreements for the sale of real property, but also: (i) leases for more than one year; (ii) easements of more than one year; (iii) fixtures; (iv) minerals (or the like) or structures if they are to be severed by the buyer; and (v) mortgages and most other security liens.
92
Interests in Land Not Within the Statute
Contracts to build a building or find a buyer for the seller do not come within the Statute.
93
Effect of Performance on Interests in Land
If the seller conveys to the purchaser, the seller can enforce buyer_s oral promise to pay. Similarly, the purchaser may be able to specifically enforce a land contract if the part performance doctrine is applicable.
94
Part Performance Doctrine
Under the part performance doctrine, conduct that unequivocally indicates that the parties have contracted for the sale of the land will take the contract out of the Statute of Frauds. What constitutes sufficient part performance varies among the jurisdictions. Most require at least two of the following: payment (in whole or in part), possession, and/or valuable improvements. [Watch for a fact pattern where the parties orally agree to an installment land contract. In the absence of other facts, such as a large down payment, possession plus payment does not unequivocally indicate a contract for the sale of land. Those facts are also consistent with a lease; thus the purchaser cannot enforce the contract].
95
Performance Not Within One Year
A promise that by its terms cannot be performed within one year is subject to the Statute of Frauds. Part performance does not satisfy the Statute of Frauds in this case. Effective Date. The date runs from the date of the agreement and not from the date of performance. Lifetime Contracts. A contract measured by a lifetime is not within the Statute because it is capable of performance within a year since a person can die at any time.
96
Goods Priced at $500 or More
A contract for the sale of goods for a price of $500 or more is within the Statute of Frauds and generally must be evidenced by a signed writing to be enforceable. Note that a writing is sufficient even though it omits or incorrectly states a term, but the contract is not enforceable beyond the quantity of goods shown in the writing.
97
Specially Manufactured Goods
If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course of his business, the contract is enforceable if the seller has, under circumstances that reasonably indicate that the goods are for the buyer, mad substantial beginning in their manufacture or commitments for their purchase before notice of repudiation is received.
98
Admissions in Pleadings or Court
If the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in court that the contract for sale was made, the contract is enforceable without a writing (but in such a case the contract is not enforced beyond the quantity of goods admitted).
99
Payment or Delivery of Goods
If goods are either received and accepted or paid for, the contract is enforceable. However, the contract is not enforceable beyond the quantity of goods accepted or paid for. Thus, if only some of the goods called for in the oral contract are accepted or paid for, the contract is only partially enforceable. If an individual item is partially paid for, most courts hold that the Statute of Frauds is satsifed for the whole item.
100
Merchants _ Confirmatory Memo Rule
In contracts between merchants, if one party, within a reasonable time after an oral agreement has been made, sends to the other party a written confirmation of the understanding that is sufficient under the Statute of Frauds to bind the sender, it will also bind the recipient if: (i) he has reason to know of the confirmation_s contents; and (ii) he does not object to it in writing within 10 days of receipt.
101
Remedies If Contract if Within Statute
If a contract violates the Statute of Frauds, in almost all cases a party can sue for the reasonable value of the services or part performance rendered, or the restitution of any other benefit that has been conferred. If the part performance rendered takes the contract out of the Statute of Frauds, the performing party has the option of suing on the contract for expectation damages, rather than merely in restitution for the value of the benefit conferred.
102
Agreements Covered by the Statute of Frauds (MY LEGS)
Marriage (Within one) Year Land Executor (or Administrator) Goods (for $500 or more) Surety
103
Unconscionability
The concept of unconscionability allows a court to refuse to enforce a provision or an entire contract (or to modify the contact) to avoid _unfair_ terms, usually due to some unfairness in the bargaining process (i.e. procedural unconscionability). Unfair price alone is not ground for unconscionability.
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Inconspicuous Risk-Shifting Provisions
Standardized printed form contracts often contain a material provision that seeks to shift a risk normally borne by one party to the other party. Typically, such clauses are found in the fine print (_boilerplate_) in printed form contracts. Courts have invalidated these provisions because they are inconspicuous or incomprehensible to the average person, even if brought to his actual attention.
105
Contracts of Adhesion
Courts will deem a clause unconscionable and unenforceable if the signer is unable to procure necessary goods, such as an automobile, from any seller without agreeing to a similar provision.
106
Exculpatory Clauses
An exculpatory clause releasing a contracting party from liability for his own intentional wrongful acts is usually found to be unconscionable because such a clause is against public policy in most states. Exculpatory clauses for negligent acts may be found to be unconscionable if they are inconspicuous, but commonly are upheld if they are in contracts for activities that are known to be hazardous.
107
Limitations on Remedies
A contractual clause limiting liability for damages to property generally will not be found to be unconscionable unless it is inconspicuous. However, if a contract limits a party to a certain remedy and that remedy fails of its essential purpose, a court may find the limitation unconscionable and ignore it.
108
Timing
Unconscionability is determined by the circumstances as they existed at the time the contract was formed.
109
Effect if Court Finds Unconscionable Clause
If a court finds as a matter of law that a contract or any clause of the contract was unconscionable when made, the court may: (i) refuse to enforce the contract; (ii) enforce the remainder of the contract without the unconscionable clause, or (iii) limit the application of any clause so as to avoid an unconscionable result.
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General Rules of Contract Construction
(1) Contracts will be construed as a _whole_; specific clauses will be subordinated to the contract_s general intent; (2) The courts will construe words according to their ordinary meaning unless clearly shown otherwise; (3) If provisions appear to be inconsistent, written or typed provisions will prevail over printed provisions; (4) The courts will generally look to see what custom and usage is in a particular business and particular locale; (5) Courts will generally try to reach a determination that the contract is valid and enforceable; (6) Ambiguities in a contract are generally construed against the party preparing the contract.
111
Parol Evidence Rule
When the parties to a contract express their agreement in a writing with the intent that it embody the final expression of their bargain (i.e. the writing is an integration), any other expressions _ written or oral _ made prior to the writing, as well as any oral expressions contemporaneous with the writing, are inadmissible to vary the terms of the writing under the parol evidence rule.
112
Is the Writing an Integration?
(i) Is the writing intended as a final expression? The more complete the agreement appears to be on its face, the more likely it is that it was intended as an integration. (ii) Is the writing a complete or partial integration? If the agreement contains a merger clause reciting that the agreement is complete on its face, this clause strengthens the presumption that all negotiations were merged into the written document.
113
Tests to Determine Integration Status
There are two competing tests for determining whether the parties intended the writing to be a complete and final integration: the Corbin test and the Williston test. The Corbin test is followed by most courts. It takes into account the specific circumstances of the transaction and asks whether parties like these, situated as they are, would naturally and normally include in their writing the extrinsic matter that is sought to be introduced. If people like these under circumstances like this would normally include the extrinsic matter in their writing, it will be excluded under the parol evidence rule. Otherwise, the evidence is admissible.
114
Extrinsic Evidence Outside Scope of Rule
Because the rule prohibits admissibility only of extrinsic evidence that seeks to vary, contradict, or add to an integration, other forms of extrinsic evidence may be admitted if they will not bring about this result.
115
Attacking Validity
A party to a written contract can attack the agreement_s validity. The party acknowledges (concedes) that the writing reflects the agreement but asserts, most frequently, that the agreement never came into being because of any of the following: (1) Formation defects. Formation defects may be shown by extrinsic evidence. (2) Conditions precedent. If party asserts that there was an oral agreement that the written contract would not become effective until a condition occurred, all evidence of the understanding may be offered and received. This would be a condition precedent to effectiveness.
116
Interpretation
If there is uncertainty or ambiguity in the written agreement_s terms or a dispute as to the meaning of those terms, parol evidence can be received to aid the fact finder in reaching a correct interpretation of the agreement. However, if the meaning of the agreement is plain, parol evidence is inadmissible.
117
Showing of True Consideration
The parol evidence rule will not bar extrinsic evidence showing the true consideration paid.
118
Reformation
If a party to a written agreement alleges facts entitling him to reformation of the agreement, the parol evidence rule is inapplicable.
119
Collateral Agreements and Naturally Omitted Terms
Parol evidence is often said to be admissible if the alleged parol agreement is collateral to the written obligation and does not conflict with it. The Restatement of Contracts include a similar concept with a more definitive approach: the naturally omitted terms doctrine. The doctrine allows evidence of terms that would naturally be omitted form the written agreement. A term would naturally be omitted if: (i) it does not conflict with the written integration; and (ii) it concerns a subject that similarly situated parties would not ordinarily be expected to include in the written instrument.
120
Subsequent Modifications
Parol evidence can be offered to show subsequent modifications of a written contract.
121
Article 2 Parol Evidence Rule
A party cannot contradict a written contract but he may add consistent additional terms unless: (i) there is a merger clause, or (ii) the courts find from all of the circumstances that the writing was intended as a complete and exclusive statement of the terms of the agreement.
122
Parol Evidence for Ambiguous Terms Under Article 2
Article 2 provides that a written contract_s terms may be explained or supplemented by the following, whether or not the writing appears to be ambiguous: (a) The parties_ course of dealing (i.e. the sequence of conduct concerning previous transactions between the parties to a particular transaction that may be regarded as establishing a common basis of their understanding); (b) A usage of trade (i.e. a practice or method of dealing, regularly observed in a particular business setting); (c) The parties_ course of performance (i.e. if a contract involves repeated occasions for performance by either party and the other party has opportunity to object)
123
Battle of the Forms
Article 2 has specific rules for determining what terms are included in the contract and these rules are dependent on whether both parties to the transaction are merchants.
124
Contracts Involving a Nonmerchant
If any party to the contract is not a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do not become part of the contract unless the offeror expressly agrees.
125
Contracts Between Merchants
There is a split of authority over whether terms in the acceptance that are different from (as opposed to in addition to) the terms in the offer will become part of the contract. Some courts treat different terms like additional terms. Other courts follow the knockout rule, which states that conflicting terms in the offer and acceptance are knocked out of the contract, because each party is assumed to object to the inclusion f such terms in the contract. Under the knockout rule, gaps left by knocked out terms are filled by the UCC.
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Price
If: (i) nothing has been said as to price, (ii) the price is left open to be agreed upon by the parties and they fail to agree; or (iii) the price is to be fixed in terms of some standard that is set by a third person or agency and it is not set, then the price is a reasonable price at the time for delivery.
127
Place of Delivery
If the place of delivery is not specified, the place usually is the seller_s place of business, if he has one; otherwise, it is the seller_s home.
128
Time for Shipment or Delivery
If the time for shipment or delivery is not specified, shipment/delivery is due in a reasonable time.
129
Time for Payment
If the time for payment is not specified, payment is due at the time and place at which the buyer is to receive the goods.
130
Assortment
If a contract provides that an assortment of goods is to be delivered and does not specify which party is to choose, the assortment is at the buyer_s option. If the party who has the right to specify the assortment does not do so seasonably, the other party is excused from any resulting delay and may either proceed in any reasonable manner or treat the failure as a breach.
131
Noncarrier Case
A noncarrier case is a sale in which it appears that the parties did not intend that the goods would be moved by a common carrier. In such a case, if the seller is a merchant, risk of loss passes to the buyer only when she takes physical possession of the goods. If the seller is not a merchant, risk of loss passes to the buyer upon tender of delivery.
132
Carrier Case
A carrier case is a sale in which it appears that the parties intended the goods to be moved by a carrier. There are two types of carrier cases: shipment contracts and destination contracts.
133
Shipment Contract
If the contract authorizes or requires the seller to ship the goods by carrier but does not require him to deliver them 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 arrangement, Article 2 presumes a contract is a shipment contract.
134
Destination Contract
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.
135
C.I.F. and C. & F.
C.I.F. stands for cost, insurance, and freight and C. & F. stands for cost and freight. These terms mean that the price in the contract includes the price of the goods, the cost of shipping them to the buyer, and in CIF contracts, the cost of purchasing insurance for the benefit of the buyer in case the goods are destroyed in transit. These contracts are always shipment contracts.
136
F.A.S.
F.A.S. stands for free alongside. The term is generally used only when goods are to be shipped by boat. Risk of loss passes to the buyer once the goods are delivered to the dock.
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F.O.B.
F.O.B. stands for free on board. The letters FOB are always followed by a location, 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. [All contracts for goods require an address for delivery. Merely indicating an address for shipment does not make a contract a destination contract. A contract that does not contain an F.O.B. term or any other term explicitly allocating the risk of loss is a shipment contract.
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Defective Goods
If goods are so defective that the buyer has a right to reject them, the risk of loss does not pass to the buyer until the defects are cured or she accepts the goods in spite of their defects. Note that a buyer generally has the right to reject for any defect.
139
Revocation of Acceptance
If the buyer rightfully revokes acceptance, the risk of loss is treated as having rested on the seller from the beginning to the extent of any deficiency in the buyer_s insurance coverage.
140
Sale or Return
For the purpose of determining the risk of loss, a sale or return contract is treated as an ordinary sale and the standard rules apply. If the goods are returned to the sell, the risk remains on the buyer while the goods are in transit.
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Sale on Approval
In a sale on approval (i.e. the buyer takes goods for use but may return them even if they conform to the contract), the risk of loss does not pass to the buyer until she accepts.
142
Insurable Interest and Identification
Generally, a buyer often bears the risk of loss before receiving the goods purchased. In order to aid buyers in this situation, Article 2 gives buyers a special property interest in goods as soon as they are identified as the ones that will be used to satisfy the contract. This special property interest is insurable.
143
Bilateral Contracts Formed by Performance
Recall that a contract may be formed by the parties_ performance where the mirror image rule is not satisfied and under certain circumstances under Article2_s battle of the forms provision. In such cases, under Article 2, the contract includes all the terms on which the writing of both parties agree. Any necessary missing terms are filled in by the supplemental terms provided for in Article 2. The rule is different in common law contracts. At common law, the contract will include the terms of the last communication sent to the party who performed.
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Warranty of Title
Any seller of goods warrants that the title transferred is good, that the transfer is rightful, and that there are no liens or encumbrances against the title of which the buyer is unaware at the time of contracting. This warranty arises automatically and need not be mentioned in the contract.
145
Warranty Against Infringement
A merchant seller regularly dealing in goods of the kind sold also automatically warrants that the goods are delivered free of any patent, trademark, copyright or similar claims. But a buyer who furnishes specifications for the goods to the seller must hold the seller harmless against such claims.
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Implied Warranty of Merchantability
Implied in every contract for sale by a merchant who deals in goods of the kind sold, there is a warranty that the goods are merchantable. Note that the serving of food or drink for consumption on the premises is a sale of goods subject to the warranty of merchantability. To be merchantable, goods must at least be fit for the ordinary purposes for which such goods are used. It makes no difference that the seller himself did not know of the defect oft that he could not have discovered it. Implied warranties are not based on negligence but rather on absolute liability that is imposed on certain sellers.
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Implied Warranty of Fitness for a Particular Purpose
A warranty will also be implied in a contract for the sale of goods whenever (i) any seller, merchant or not, has reason to know the particular purpose for which the goods are to be used and that the buyer is relying on the seller_s skill and judgment to select suitable goods; and (ii) the buyer in fact relies on the seller_s skill or judgment.
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Express Warranties
Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model creates an express warranty if the statement, description, sample, or model is part of the basis of the bargain. For a statement, description, sample, or model to be part of the basis of the bargain, it need only come at such time that the buyer could have relied on it when she entered into the contract. The buyer does not need to prove that she actually did rely, although the seller may negate the warranty by proving that the buyer as a matter of fact did not rely. It is not necessary that the seller intended the affirmation of fact, description, model or sample to create a warranty.
149
Warranty of Title
The title warranty can be disclaimed or modified only by specific language or by circumstances that give the buyer notice that the seller does not claim title or that he is selling only such rights as he or a third party may have.
150
Implied Warranties
The implied warranties of merchantability and fitness for a particular purpose can be disclaimed by either specific disclaimers or general methods of disclaimer.
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Specific Disclaimers
(1) Disclaimer of Warranty of Merchantability. The warranty of merchantability can be specifically disclaimed or modified only by mentioning merchantability. If the sales contract is in writing, the disclaimer must be conspicuous. (2) Disclaimer of Warranty of Fitness. The warranty of fitness for a particular purpose can be specifically disclaimed only by a conspicuous writing. (3) Conspicuous defined. A term is conspicuous when it is _so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it._
152
General Disclaimer Language
Unelss the circumstances indicate otherwise, the implied warranties of merchantability and fitness can be disclaimed by expressions such as _as is_, _with all faults_, or other expressions that in common understanding call the buyer_s attention to the fact that there are no implied warranties.
153
General Disclaimer by Examination or Refusal to Examine
If the buyer, before entering into the contract, has examined the goods or a sample or model as fully as she desires or has refused to examine, there is no warranty as to defects that a reasonable examination would have revealed to her.
154
General Disclaimer by Course of Dealing
Implied warranties may also be disclaimed by the course of dealing, course of performance, or usage of trade.
155
Express Warranties
The UCC provides that words or conduct relevant to the creation of express warranties and words or conduct tending to negate such warranties shall wherever possible be construed as consistent with each other, but negation or limitation is inoperative to the extent that such construction is unreasonable. In other words, once an express warranty is made, it is very difficult to disclaim.
156
Limitations on Damages
Parties may include in their contract a clause limiting the damages available in the case of breach of warranty. Such a limitation generally will be upheld unless the limitation is unconscionable.
157
Timing _ Disclaimers and Limitations in the Box
To be effective, a disclaimer of warranty or limitation on remedies must be agreed to during the bargaining process. Thus, although a few courts hold otherwise, most hold that a warranty disclaimer or limitation on remedy included inside the packaging of goods is not effective against the buyer. Clickwrap. Computer software often comes with terms that appear on the user_s computer screen during the installation process, and the purchaser must click to agree to the terms before installing. Such limitations and disclaimers typically are upheld on the rationale that the purchaser can return the software if he disagrees with the conditions.
158
Unconscionability and Warranty Disclaimers
Some courts will, in addition to determining whether disclaimers have met the formal requirements discussed above, test warranty disclaimers by the unconscionability standards. Moreover, warranty disclaimers that limit damages for personal injury caused by a breach of warranty on consumer goods are prima facie unconscionable.
159
Difference Between Goods Tendered and as Warranted
Generally, the measure of damages for breach of any warranty is the difference between the value of the goods accepted and the value of the goods as warranted, measured at the time and place of acceptance. If there are special circumstances, damages may be measured differently to account for those circumstances.
160
Breach of Warranty of Title
If the warranty of title is breached, the goods are reclaimed by the true owner or lien holder, thus dispossessing the buyer. The buyer may then rescind the contract, revoke acceptance of the goods, or sue for damages. The value of the goods accepted is deemed to be nothing; so damages are the value of the goods as warranted. Often, but not always, that is the same as the purchase price.
161
Special Circumstances _ Appreciation and Depreciation
If there are special circumstances, the value of the goods is measured at the time of the dispossession rather than at the time of acceptance. A great appreciation or depreciation in the value of the goods form the time of delivery until dispossession is usually considered a special circumstance.
162
To Whom Do Warranties Extend
UCC provides alternative provisions for determining to whom warranty liability extends. Most states have adopted the narrowest provision, Alternative A, which provides that the seller_s warranty liability extends to any natural person who is in the family or household of the buyer or who is a guest in the buyer_s home if it is reasonable to expect that person may use, consume, or be affected by the goods and that person suffers personal injury because of a breach of warranty.
163
Consideration
Under general contract law, a contract cannot be modified unless the modification is supported by new consideration, but under the UCC promises of new and different terms by parties to a sales contract are valid without consideration.
164
Writing
A written contract can be modified orally. For sales of goods contracts, however, the modification must be in writing if the contract as modified falls within the Statute of Frauds. Thus, if the contract as modified is for $500 or more, it must be evidenced by a writing; if the contract as modified is for less than $500, no writing is necessary.
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Provisions Prohibiting Oral Modification _ Common Law
The common law rule is that even if a written contract expressly provides that it may be modified only by a writing, the parties can orally modify the contract.
166
Provisions Prohibiting Oral Modification _ UCC
Under the UCC, if a contract explicitly provides that it may not be modified or rescinded except by a signed writing, that provision is given effect. If the contract is between a merchant and nonmerchant, however, this provision requires the nonmerchant_s separate signature.
167
Waiver
If the parties attempt to orally modify a contract that requires written modification, it is technically ineffective as a modification, but it can operate as a waiver. Such a waiver will be found whenever the other party has changed position in reliance on the oral modification. However, a party who makes a waiver affecting an executor portion of the contract may retract the waiver if she notifies the other party that strict performance of the waived terms is required. The waiver may not be retracted if the other party detrimentally relied on it.
168
Performance at Common Law
A party_s basic duty at common law is to substantially perform all that is called for in the contract.
169
Performance under Article 2
Article 2 generally requires a perfect tender _ the delivery and condition of the goods must be exactly as promised in the contract.
170
Obligation of Good Faith
Article 2 requires all parties to act in good faith, which is defined as _honesty in fact and the observance of reasonable commercial standards of fair dealing._
171
Noncarrier Cases
(1) Tender of Delivery. In a proper tender of delivery, the seller must put and hold conforming goods at the buyer_s disposition for a time sufficient for the buyer to take possession. The seller must give the buyer notice reasonably necessary to enable her to take possession of the goods. The tender must be at a reasonable hour. (2) Place of Delivery. In the absence of an agreement otherwise, the place of delivery generally is the seller_s place of business, or if he has none, his residence.
172
Carrier Cases
(1) Shipment Contracts. In the absence of an agreement otherwise, the seller need not see the goods reach the buyer, but need only: (a) put the goods into the hands of a reasonable carrier and make a reasonable contract for their transportation to buyer; (b) obtain and promptly tender any documents required by the contract or usage of trade or otherwise necessary to enable the buyer to take possession; and (c) promptly notify the buyer of this shipment. (2) Destination Contracts. If the contract requires the seller to tender delivery of the goods at a particular destination, the seller must, at the destination, put and hold conforming goods at the buyer_s disposition.
173
Delivery and Payment Concurrent Conditions
In noncarrier cases, unless the contract provides otherwise, a sale is for cash and the price is due concurrently with tender of delivery. However, unless otherwise agreed, when goods are shipped by carrier, the price is due only at the time and place at which the buyer receives the goods. Therefore, in a shipment case the price is due when the goods are put in the hands of the carrier, and in a destination contract the price is due when the goods reach the named destination.
174
Payment by Check
Tender of payment by check is sufficient unless the seller demands cash and gives the buyer time to get it. If a check is given, the buyer_s duty to pay is suspended until the check is either paid or dishonored. If the check is paid, the buyer_s duty to pay is discharged. If the check is dishonored, the seller may sue for the price or recover the goods.
175
Installment Contracts
In an installment contract, the seller may demand payment for each installment if theprice can be so apportioned, unless a contrary intent appears.
176
Buyer_s Right of Inspection
The buyer has a right to inspect the goods before she pays unless the contract provides for payment C.O.D. or otherwise indicates that the buyer has promised to pay without inspecting the goods.
177
Distinction Between Promise and Condition
It is important to understand that there is a difference between whether a party is bound under a contract and whether a party who is bound has come under a duty to perform. A person is bound if there has been an offer, an acceptance, and an exchange of consideration. However, the contract may provide (impliedly or explicitly) that a party who is bound does not come under a duty to perform unless or until some specified condition occurs. In looking at the terms of a contract, a distinction has to be drawn between an absolute promise on the one hand and a condition on the other.
178
Promise
A promise is a commitment to do or refrain from doing something. If a promise is unconditional, the failure to perform according to its terms is a breach of contract.
179
Condition
_Condition_ normally means either: (i) an event or state of the world that must occur or fail to occur before a party has a duty to perform; or (ii) an event or state of the world the occurrence of which releases a party from his duty to perform. A condition is a promise modifier. There can be no breach of promise until the promisor is under an immediate duty to perform.
180
Failure of Condition vs. Breach of Contract
The failure of a contractual provision that is only a condition is not a breach of contract, but it discharges the liability of the promisor whose obligations on the conditional promise never mature. [The distinction between a promise and a condition is important, because the failure of a promise is a breach and gives rise to liability, whereas the failure of a condition relieves a party of the obligation to perform.]
181
Interpretation of Provision as Promise or Condition
What determines whether a contract provision is a promise or a conditions is the intent of the parties. Courts will look at the words and phrases used by the parties, their prior practices, the custom in the business community with respect to the provision, and whether performance is needed from a third party (if performance is to be rendered by a third party, it is more likely to be a condition than an absolute promise). In doubtful situations, most courts will hold that the provision in question is a promise.
182
Classification of Conditions
Condition Precedent. A condition precedent is one that must occur before an absolute duty of immediate performance arises in the other party. Conditions Concurrent. Conditions concurrent are those that are capable of occurring together, and that the parties are bound to perform at the same time. Thus, in effect, each is a condition precedent to the other. Condition Subsequent. A condition subsequent is one the occurrence of which cuts off an already existing absolute duty of performance.
183
Express Conditions
Express condition normally refers to an explicit contractual provision. It is an express statement in the contract providing that either (i) a party does not have a duty to perform unless some event occurs or fails to occur; or (ii) if some event occurs or fails to occur, the obligation of a party to perform one or more of his duties under the contract is suspended or terminated. Conditions of satisfaction are common express conditions.
184
Mechanical Fitness, Utility, or Marketability
In contracts involving mechanical fitness, utility, or marketability, a condition of satisfaction is fulfilled by a performance that would satisfy a reasonable person. It is therefore immaterial that the promisor was not personally satisfied if a reasonable person would have accepted and approved the performance tendered.
185
Personal Taste or Judgment
If the contract involves personal taste or personal judgment, a condition of satisfaction is fulfilled only if the promisor is personally satisfied. But note: Even if a condition requires personal satisfaction, a promisor_s lack of satisfaction must be honest and in good faith. Thus, if the promisor refused to examine the promisee_s performance, or otherwise rejects the performance in bad faith, the condition of satisfaction will be excused.
186
Satisfaction of Third Person as Condition
Construction contracts often include a condition requiring the satisfaction of the owner_s architect or engineer. When the satisfaction of a third person is a condition, most courts require the actual personal satisfaction of the person. However, the condition will be excused if the person_s dissatisfaction is not honest and in good faith.
187
Constructive Conditions of Performance
The most important and common implied condition is that the duty of each party to render performance is conditioned on the other party either rendering his performance or making a tender of his performance.
188
Constructive Conditions of Cooperation and Notice
Constructive conditions of cooperation and notice are common. Under a constructive condition of cooperation, the obligation of one party to render performance is impliedly conditioned on the other party_s cooperation in that performance. Also, it is often a condition to one party_s performance that the other party give him notice that the performance is due. A condition of notice is most commonly applied where a party could not reasonably be expected to know a fact that triggered the duty to perform unless such notice was given.
189
Order of Performance
The courts will sometimes imply constructive conditions relating to the time for performing under the contract. (1) Simultaneous Performance Possible _ Conditions Concurrent. If both performances can be rendered at the same time, they are constructively concurrent; thus, each is a condition precedent to the other. Hence, absent excuse, each party must first tender his own performance if he wishes to put the other under a duty of immediate performance resulting in breach if he fails to perform. (2) One Performance Takes Time _ Conditions Precedent. If one performance will take a period of time to complete while the other can be rendered in an instant, completion of the longer performance is a constr. cond. prec.
190
Effect of Condition _ Equitable Remedy
If a contract is not enforceable due to the failure or occurrence of a condition, and one of the parties has fully or partially performed, he can usually recover under unjust enrichment theories, although the measure of damages in that case may be less advantageous than the contract price.
191
Have the Conditions Been Excused?
A duty of immediate performance with respect to a conditional promise does not become absolute until the conditions (i) have been performed, or (ii) have been legally excused. Thus, in analyzing a question, if the facts do not reveal performance of the applicable condition precedent or concurrent, look to see whether the condition has been excused. Excuse of conditions can arise in a variety of ways.
192
Excuse of Condition by Hindrance or Failure to Cooperate
If a party having a duty of performance that is subject to a condition prevents the condition from occurring, the condition will be excused if the prevention is wrongful.
193
Excuse of Condition by Actual Breach
An actual breach of the contract when performance is due will excuse the duty of counterperformance. Note, however, that counterperformance will be excused at common law only if the breach is material. A minor breach may suspend this duty, but it will not excuse it.
194
Excuse of Condition by Anticipatory Repudiation
Anticipatory repudiation occurs if a promisor, prior to the time set for performance of his promise, indicates that he will not perform when the time comes. If the requirements set forth below are met, this anticipatory repudiation will serve to excuse conditions.
195
Executory Bilateral Contract Requirement
Anticipatory repudiation applies only if there is a bilateral contract with executor (unperformed) duties on both sides.
196
Requirement that Anticipatory Repudiation be Unequivocal
An anticipatory repudiation stems from the words or conduct of the promisor unequivocally indicating that he cannot or will not perform when the time comes.
197
Effect of Anticipatory Repudiation
In the case of an anticipatory repudiation, the nonrepudiating party has four alternatives: (1) treat the anticipatory repudiation as a total repudiation and sue immediately; (2) suspend his own performance and wait to sue until the performance date; (3) treat the repudiation as an offer to rescind and treat the contract as discharged; or (4) ignore the repudiation and urge the promisor to perform (but note by urging the promisor to perform, the nonrepudiating party is not waiving the repudiation _ she can still sue for breach and is excused from performing)
198
Retraction of Repudiation
A repudiating party may at any time before his next performance is due withdraw his repudiation unless the other party has canceled, materially changed her position in reliance on the repudiation, or otherwise indicated that she considers the repudiation final Withdrawal of the repudiation may be in any manner that clearly indicates the intention to perform, but must include any assurances justifiably demanded.
199
Excuse of Condition by Prospective Inability or Unwillingness to Perform
Prospective failure of condition occurs when a party has reasonable grounds to believe that the other party will be unable of unwilling to perform when performance is due.
200
Distinguish from Actual and Anticipatory Repudiation
Prospective inability of unwillingness to perform is not an anticipatory repudiation because such a repudiation must be unequivocal, whereas prospective failure to perform involves conduct or words that merely raise doubts that the party will perform.
201
Effect of Prospective Failure
The effect of prospective failure is to allow the innocent party to suspend further performance on her side until she receives adequate assurances that performance will forthcoming. If the other party fails to provide adequate assurances, the innocent party may be excused form her own performance and may treat the failure to provide assurances as repudiation.
202
Retraction of Repudiation
As with anticipatory repudiation, retraction is possible if the defaulting party regains his ability or willingness to perform. However, this fact must be communicated to the innocent party in order to be effective.
203
Excuse of Condition by Substantial Performance
Generally, the condition of complete performance may be excused if the party has rendered substantial performance. In this case, the other party_s duty of counterperformance becomes absolute. It should be noted, however, that courts generally apply this doctrine only if a constructive (implied in law) condition is involved. They will not apply it when there is an express condition for fear this would efeat the express intent of the parties.
204
Substantial Performance Arises if Breach is Minor
The rules for determining substantiality of performance are the same as those for determining materiality of breach.
205
Inapplicable Where Breach Willful
Most courts will not apply the substantial performance doctrine if the breach was willful.
206
Damages Offset
Even though the party who has substantially performed is able to enforce the contract, the other party will be able to mitigate by deducting damages suffered due to the first party_s incomplete performance.
207
Generally Inapplicable to Contracts for the Sale of Goods
The doctrine of substantial performance generally is not applicable to contracts for the sale of goods.
208
Excuse of Condition by _Divisibility_ of Contract
If a contract is divisible and a party performs one of the units of the contract, he is entitled to the agreed-on equivalent for that unit even if he fails to perform the other units. It is not a condition precedent to the other party_s liability that the whole contract be performed. However, the other party has a cause of action for failure to perform the other units and may withhold his counterperformance for those units.
209
What is a Divisible Contract?
Three tests must be concurrently satisfied to make a contract divisible: (1) The performance of each party is divided into two or more parts under the contract; (2) The number of parts due from each party is the same, and (3) The performance of each part by one party is agreed on as the equivalent of the corresponding party from the other party.
210
Excuse of Condition by Waiver or Estoppel
One having the benefit of a condition under a contract may indicate by words or conduct that she will not insist on that condition_s being met. Consideration is not required for a valid waiver of condition.
211
Estoppel Waiver
Whenever a party indicates that she is _waiving_ a condition before it is to happen or she is _waiving_ some performance before it is to be rendered, and the person addressed detrimentally relies on the waiver, the courts will hold this to be a binding (estoppel) waiver. Note, however, that the promise to waive a condition may be retracted at any time before the other party has changed his position to his detriment.
212
Election Waiver
When a condition or a duty of performance is broken, the beneficiary of the condition or duty must make an election, she may: (i) terminate her liability, or (ii) continue under the contract. If she chooses to continue, she will be deemed to have waived the condition or duty. This election waiver requires neither consideration nor estoppel (although estoppel elements are often present).
213
Conditions that May be Waived
If no consideration is given for the waiver, the condition must be ancillary or collateral to the main subject and purpose of the contract for the waiver to be effective. In other words, one cannot _waive_ entitlement to the entire or substantially entire return performance.
214
Waiver in Installment Contracts
In an installment contract, if a waiver is not supported by consideration, the beneficiary of the waived condition can insist on strict compliance with the terms of the contract for future installments (so long as there has been no detrimental reliance on the waiver) by giving notice that he is revoking the waiver.
215
Right to Damages for Failure of Condition
It is important to note that a waiver severs only the right to treat the failure of the condition as a total breach excusing counterperformance. However, the waiving party does not thereby waive her right to damages.
216
Excuse of Condition by Impossibility, Impracticability, or Frustration
Conditions may be excused by impossibility, impracticability, or frustration of purpose.
217
Discharge by Performance or Tender of Performance
The most obvious way to discharge a contractual duty is, of course, by full and complete performance. Good faith tender of performance made in accordance with contractual terms will also discharge contractual duties.
218
Discharge by Occurrence of Condition Subsequent
The occurrence of a condition subsequent will serve to discharge contractual duties.
219
Discharge by Illegality
If the subject matter of the contract has become illegal due to a subsequently enacted law or other governmental act, performance will be discharged. This is often referred to as supervening illegality.
220
Discharge by Impossibility, Impracticability, or Frustration
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.
221
Impossibility Must be Objective
For this rule to operate, the impossibility must be objective, i.e. the duties could not be performed by anyone. Subjective impossibility will not suffice, i.e. where the duties could be performed by someone but not the promisor.
222
Timing of Impossibility
The impossibility must arise after the contract has been entered into.
223
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.
224
Partial Impossibility
If the performance to be rendered under the contract becomes only partially impossible, the duty may be discharged only to that extent. The remainder of the performance may be required according to the contractual terms. This is so even though this remaining performance might involve added expense or difficulty.
225
Temporary Impossibility
Temporary impossibility suspends contractual duties; it does not discharge them. When performance once more becomes possible, the duty springs back into existence unless the burden on either party to the contract would be substantially increased or different from the original contemplated.
226
Part Performance Prior to Impossibility
If a party partially performed before the impossibility arose, that party will have a right to recover in quasi-contract at the contract rate or for the reasonable value of his performance if that is a more convenient mode of valuation.
227
Death or Physical Incapacity
Death or the physical incapacity of a person necessary to effectuate the contract serves to discharge it.
228
Supervening Illegality
Supervening illegality may serve to discharge a contract. Many courts treat such supervening illegality as a form of impossibility.
229
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. [A contractor_s duty to construct a building is not discharged by destruction of the work in progress. Rationale: Construction is not rendered impossible; the contractor can still rebuild. However, if the destruction was not caused by the contractor, most courts will excuse the contractor from meeting the original deadline.]
230
Specificity Required
Subject Matter. Note that destruction of the subject matter will render a contract impossible only if the very thing destroyed is necessary to fulfill the contract. If the thing destroyed is not actually necessary, impossibility is not a defense. Specificity of Source. As with the destruction of the subject matter, destruction of a source for fulfilling the contract will render the contract impossible only if the source is the one source specified by the parties.
231
If Risk of Loss has Already Passed to Buyer
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.
232
Test for Impracticability
Modern courts will also discharge contractual duties where performance has become impracticable. The test for a finding of impracticability is that the party to perform has encountered: (a) extreme and unreasonable difficulty and/or expenses; and (b) its nonoccurrence was a basic assumption of the parties.
233
Contracts for the Sale of Goods
Article 2 generally follows the common law rules for impossibility and impracticability. If performance has become impossible or commercially impracticable, the seller will be discharged to the extent of the impossibility or impracticability.
234
Allocation of Risk
Generally, the seller assumes the risk of the occurrence of such unforeseen events and must continue to perform. However, if it is fair to say that the parties would not have placed on the seller the risk of the extraordinary occurrence, the seller will be discharged.
235
Events Sufficient for Discharge
Events sufficient to excuse performance include a shortage of raw materials or the inability to convert them into the seller_s produce because of contingencies such as war, strike, embargo, or unforeseen shutdown of a major supplier. Catastrophic local crop failure (as opposed to a mere shortage) also is sufficient for discharge. However, mere increases in costs are rarely sufficient for discharge unless they change the nature of the contract. [Note: there is no bright line test for determining when a rise in price changes the nature of the contract, but an increase in costs of more than 50% has been held to be insufficient].
236
Seller_s Partial Inability to Perform
If the seller_s inability to perform as a result of the unforeseen circumstances is only partial, he must allocate deliveries among his customers and, at his option, may include in the allocation regular customers not then under contract.
237
Discharge by Frustration
Frustration will exist if the purpose of the contract has become valueless by virtue of some supervening event not the fault of the party seeking discharge. If the purpose has been frustrated, a number of courts will discharge contractual duties even though performance of these duties is still possible. The elements necessary to establish frustration are as follows: (1) There is some supervening act or event; (2) The parties did not reasonably foresee the act or event at the time of entering the contract; (3) The purpose of the contract has been completely or almost completely destroyed; and (4) the purpose of the contract was realized by both parties at the time of making the contract.
238
Distinguish Uses of Defenses of Impossibility/Impracticability and Frustration
A seller of land, goods, or services will raise impossibility or impracticability as a defense that discharges performance. By contrast, the party who is supposed to pay (usually the buyer) will raise frustration of purpose as a defense discharging performance. Paying money is never impracticable.
239
Mutual Rescission
The contract may be discharged an express agreement between the parties to rescind. The agreement to rescind is itself a binding contract supported by consideration, namely, the giving up by each party of her right to counterperformance from the other. [Although mutual rescission generally discharges the parties to a contract, watch out for a third-party beneficiary case. If the rights of a third party beneficiary have already vested, the contract cannot be discharged by mutual rescission by the promisor and promisee.]
240
Unilateral Contracts
If the contract is unilateral, a contract to mutually rescind where one party still has a duty to perform will be ineffective. For an effective rescission in a unilateral contract situation where the offeree has already performed, the rescission promise must be supported by one of the following: (1) an offer of new consideration by the nonperforming party; (2) elements of promissory estoppel, or (3) manifestation of an intent by the original offeree to make a gift of the obligation owed to her.
241
Partially Performed Bilateral Contracts
A mutual agreement to rescind will usually be enforced when a bilateral contract has been partially performed. Whether the party who has partially performed will be entitled to compensation depends on the terms of the rescission agreement.
242
Formalities
Mutual rescission may be made orally. This is so even though the contract to be rescinded expressly states that it can be rescinded only by a written document, unless the subject matter of the contract to be rescinded falls within the Statute of Frauds or the contract is for the sale of goods (Article 2 requires a written rescission or modification if the original contract to be rescinded or modified expressly requires a written rescission).
243
Contracts Involving Third-Party Beneficiary Rights
If the rights of third-party beneficiaries have already vested, the contract may not be discharged by mutual rescission.
244
Unilateral Rescission
Unilateral rescission results when one of the parties to the contract desires to rescind it but the other party desires that the contract be performed according to its terms. For unilateral rescission to be granted, the party desiring rescission must have adequate legal grounds. Most common among these are mistake, misrepresentation, duress, and failure of consideration. If the nonassenting party refuses to voluntarily grant rescission, the other party may file an action in equity to obtain it.
245
Partial Discharge by Modification of Contract
If a contract is subsequently modified by the parties, this will serve to discharge those terms of the original contract that are the subject of the modification. It will not serve to discharge the entire contract. To have such a partial discharge, the following requirements must usually be met: (1) mutual assent and (2) consideration.
246
Mutual Assent
The modifying agreement must have been mutually assented to. Note, however, that under the doctrine of reformation, either of the parties to the contract may bring an equity action to have a contract_s terms modified if the writing, through mistake or misrepresentation, does not incorporate the terms orally agreed on.
247
Consideration
Generally, consideration is necessary to modify a contract. However, the courts usually find consideration to be present because each party has limited his right to enforce the original contract as is. No consideration is necessary if the effect of the modification is merely to correct an error in the original contract. [No consideration is needed for the modification of a contract for the sale of goods under Article 2, as long as the modification is sought in good faith.]
248
Discharge by Novation
A novation occurs when 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 will served to discharge the old contract. The elements for a valid novation are: (i) a previous valid contract; (ii) an agreement among all parties, including the new party (or parties) to the new contract; (iii) the immediate extinguishment of contractual duties as between the original contracting parties, and (iv) a valid and enforceable new contract.
249
Discharge by Cancellation
The destruction or surrender of a written contract will not usually, by itself, discharge the contract. If, however, the parties manifest their intent to have these acts serves as a discharge, it will usually have this effect if consideration or one of its alternatives is present.
250
Discharge by Release
A release and/or contract not to sue will serve to discharge contractual duties. The release or contract not to sue usually must be in writing and supported by new consideration or promissory estoppel elements.
251
Discharge by Substituted Contract
A contract may be discharged by a substituted contract. This occurs when the parties to a contract enter into a second contract that immediately revokes the first contract expressly or impliedly. Whether a second contract will constitute a substituted contract depends on whether the parties intend an immediate discharge or a discharge only after performance of the second contract. If an immediate discharge is intended, there is a substituted contract. If the parties intend the first contract to be discharged only after performance of the second contract, there is an executory accord rather than a substituted contract.
252
Accord
An accord is an agreement in which one party to an existing contract agrees to accept, in lieu of the performance that she is supposed to receive from the other party to the existing contract, some other, different performance.
253
Requirement of Consideration
In general, an accord must be supported by consideration. When the consideration is of a lesser value than the originally bargained-for consideration in the prior contract, it will be sufficient if the new consideration is of a different type or if the claim is to be paid to a third party.
254
Partial Payment of Original Debt
One often-encountered problem involves the offer of a smaller amount than the amount due under an existing obligation in satisfaction of the claim, i.e., partial payment of an original debt. The majority view is that this will suffice for an accord and satisfaction if there is a bona fide dispute as to the claim or there is otherwise some alteration, even if slight, in the debtor_s consideration.
255
Effect of Accord
The accord, taken alone, will not discharge the prior contract. It merely suspends the right to enforce it in accordance with the terms of the accord contract.
256
Satisfaction
Satisfaction is the performance of the accord agreement. Its effect is to discharge not only the original contract, but also the accord contract as well.
257
Breach of Accord Agreement by Debtor
If the debtor breached an accord agreement, the creditor may sue either on the original undischarged contract or for breach of the accord agreement.
258
Breach of Accord Agreement by Creditor
If a creditor breaches an accord agreement (i.e. he sues on the original contract), the debtor has two courses of action available: (i) raise the accord agreement as an equitable defense and ask that the contract action be dismissed; or (ii) wait until she is damaged (i.e. the creditor is successful in his action on the original contract) and then bring an action at law for damages for breach of the accord contract.
259
Checks Tendered as _Payment in Full_
If a monetary claim is uncertain or is subject to a bona fide dispute, an accord and satisfaction may be accomplished by a good faith tender and acceptance of a check when that check (or an accompanying document) conspicuously states that the check is tendered in full satisfaction of the debt.
260
Discharge by Account Stated
An account stated is a contract between parties whereby they agree to an amount as a final balance due from one to the other. This final balance encompasses a number of transactions between the parties and serves to merge all of these transactions by discharging all claims owed.
261
Discharge by Lapse
If the duty of each party is a condition concurrent to the other_s duty, it is possible that on the day set for performance, neither party is in breach and their contractual obligations lapse. If the contract states that time is of the essence, the lapse will occur immediately; otherwise the contract will lapse after a reasonable time.
262
Effect of Running of Statute of Limitations
If the statute of limitations on an action has run, it is generally held that an action for breach of contract may be barred. Note, however, that only judicial remedies are barred; the running of the statue does not discharge the duties. (Hence, if the party who has the advantage of the statute of limitations subsequently agrees to perform, new consideration will not be required.) [Note the difference between a discharge by lapse and the effect of a statute of limitations. Although both have to do with time and the end result may be similar, technically, lapse discharges a contract while the statute of limitations merely makes it unenforceable in court.]
263
When Does a Breach Occur?
If it is found that (i) the promisor is under an absolute duty to perform, an d(ii) this absolute duty of performance has not been discharged, then this failure to perform in accordance with contractual terms will amount to a breach of contract. The nonbreaching party who sues for breach of contract must show that she is willing and able to perform but for the breaching party_s failure to perform.
264
Minor Breach
A breach of contract is minor if the obligee gains the substantial benefit of her bargain despite the obligor_s defective performance. A minor breach does not relieve the aggrieved party of her duty of performance under the contract; it merely gives her a right to damages (setoff) for the minor breach. [The distinction between a material and minor breach is important. A minor breach may allow the aggrieved party to recover damages, but she still must perform under the contract. If the breach is a material one, the aggrieved party need not perform.]
265
Material Breach
If the oblige does not receive the substantial benefit of her bargain, the breach is considered material. If the breach is material, the nonbreaching party (i) may treat the contract as at an end, i.e. any duty of counterperformance owed by her will be discharged, and (ii) will have an immediate right to all remedies for breach of the entire contract, including total damages.
266
Minor Breach Coupled with Anticipatory Repudiation
If a minor breach is coupled with an anticipatory repudiation, the nonbreaching party may treat it as a material breach; i.e. she may sue immediately for total damages and is permanently discharged from any duty of further performance. Indeed, the courts hold that the aggrieved party must not continue on, because to do so would be a failure to mitigate damages. The UCC modifies this to permit a party to complete the manufacture of goods to avoid having to sell unfinished goods at the lower salvage value.
267
Material Breach of Divisible Contract
In a divisible contract, recovery is available for substantial performance of a divisible part even though there has been a material breach of the entire contract.
268
Determining Materiality of Breach
In determining whether a breach is material or minor, courts look at: (i) the amount of benefit received by the nonbreaching party; (ii) the adequacy of compensation for damages to the injured party; (iii) the extent of part performance by the breaching party; (iv) hardship to the breaching party; (v) negligent or willful behavior of the breaching party; and (vi) the likelihood that the breaching party will perform the remainder of the contract. The nonbreaching party must show that he was both willing and able to perform.
269
Timeliness of Performance
Failure to perform by the time stated in the contract is generally not a material breach if performance is rendered within a reasonable time. However, if the nature of the contract makes timely performance essential, or if the contract expressly provides that time is of the essence, then failure to perform on time is a material breach.
270
Perfect Ender Rule
Article 2 generally does not follow the common law substantial performance doctrine. Instead, it follows the perfect ender rule _ if goods or their delivery fail to conform to the contract in any way, the buyer generally may reject all, accept all, or accept any commercial units and reject the rest.
271
Right to Reject Cut Off by Acceptance
A buyer_s right to reject under the perfect tender doctrine generally is cut off by acceptance. Under Article 2, a buyer accepts when: (i) after reasonable opportunity to inspect the goods, she indicates to the seller that they conform to requirements or that she will keep them even though they fail to conform; (ii) She fails to reject within a reasonable time after tender or delivery of the goods or fails to seasonably notify the seller of her rejection; or (iii) She does any act inconsistent with the seller_s ownership.
272
Buyer_s Responsibility for Goods After Rejection
After rejecting goods in her physical possession, the buyer has an obligation to hold them with reasonable care at the seller_s disposition and to obey any reasonable instructions as to the rejected goods. If the seller gives no instructions within a reasonable time, the buyer may reship the goods to the seller, store them for the seller_s account, or resell them for the seller_s account. If the buyer resells, she is entitled to recover her expenses and a reasonable commission.
273
Buyer_s Right to Revoke Acceptance
Once goods are accepted, the buyer_s power to reject the goods generally is terminated and the buyer is obligated to pay the price less any damages resulting from the seller_s breach. However, under limited situations, a buyer may revoke an acceptance already made. A proper revocation of acceptance has the effect of a rejection.
274
When Acceptance May be Revoked
The buyer may revoke her acceptance if the goods have a defect that substantially impairs their value to her and: (i) she accepted them on the reasonable belief that the defect would be cured and has not been; or (ii) she accepted them because of the difficulty of discovering defects or because of the seller_s assurance that the goods conformed to the contract. Revocation of acceptance must occur: (i) within a reasonable time after the buyer discovers or should have discovered the defects and (ii) before any substantial change in the goods occurs that is not caused by a defect present at the time the seller relinquished possession.
275
Installment Contracts
The right to reject when a contract is an installment contract is much more limited than in a single delivery contract situation. Installment contracts follow a rule akin to the common law substantial performance doctrine. In an installment contract situation, an installment can be rejected only if the nonconformity substantially impairs the value of the installment and cannot be cured. In addition, the whole contract is breached only if the nonconformity substantially impairs the value of the entire contract.
276
Seller Can Cure by Notice and New Tender Within Time for Performance
If the buyer has rejected goods because of defects, the seller may within the time originally provided for performance _cure_ by giving reasonable notice of her intention to do so and making a new tender of conforming goods that the buyer must then accept.
277
Seller_s Right to Cure Beyond Original Contract Time
Ordinarily the seller has no right to cure beyond the original contract time. However, if the buyer rejects a tender of nonconforming goods that the seller reasonably believed would be acceptable _with or without money allowance_, the seller upon 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 if the seller can show: (i) trade practices or prior dealings with the buyer led the seller to believe that the goods would be acceptable, or (ii) the seller could not have known of the defect despite proper business conduct.
278
Installment Contracts
Article 2 provides that a defective shipment in an installment contract cannot e rejected if the defect can be cured.
279
Anticipatory Repudiation
Recall that an anticipatory repudiation can be treated as an immediate breach of contract.
280
Breach of Warranty
Sellers give warranties as to the condition of the goods that apply even after acceptance. Failure to live up to these warranties constitutes a breach of warranty for which a remedy is available.
281
Specific Performance
If the legal remedy is inadequate, the nonbreaching party may seek specific performance, which is an order from the court to the breaching party to perform or face contempt of court charges.
282
Available for Land and Rare or Unique Goods
Specific performance is always available for land sale contracts. It is also available for goods that are rare or unique at the time performance is due. It is not available for breach of a contract to provide services, even if the services are rare or unique. This is because of problems of enforcement and because the courts feel it is tantamount to involuntary servitude, which is prohibited by the constitution.
283
Injunction as Alternate Remedy
In contrast, a court may enjoin a breaching employee from working for a competitor throughout the duration of the contract if the services contracted for are rare or unique.
284
Covenant Not to Compete
Most courts will grant an order of specific performance to enforce a contract not to compete if: (i) the services to be performed are unique (thus rendering money damages inadequate); and (ii) the covenant is reasonable.
285
Reasonableness of a Covenant not to Compete
To be reasonable: (1) The covenant must be reasonably necessary to protect a legitimate interest of the person benefited by the covenant; (2) The covenant must be reasonable as to its geographic scope and duration; and (3) The covenant must not harm the public.
286
Equitable Defenses Available
In addition to standard contract defenses, an action for specific performance is subject to the equitable defenses of: (1) Laches _ a claim that the plaintiff has delayed bringing the action and that the delay has prejudiced the defendant; (2) Unclean hands _ a claim that the party seeking specific performance is guilty of wrongdoing in the transaction being sued upon; and (3) Sale to a bona fide purchaser _ a claim that the subject matter has been sold to a person who purchased for value and in good faith.
287
Cancellation
If a buyer rightfully rejects goods because they do not conform to the contract, one of her options is simply to cancel the contract.
288
Buyer_s Right to Replevy Identified Goods on Buyer_s Prepayment
If a buyer has made at least part payment of the purchase price of goods that have been identified under a contract and the seller has not delivered the goods, the buyer may Replevy the goods from the seller in two circumstances: (i) The seller becomes insolvent within 10 days after receiving the buyer_s first payment; or (ii) The goods were purchased for personal, family, or household purposes. In either case, the buyer must tender any unpaid portion of the purchase price to the seller.
289
Buyer_s Right to Replevy Identified Goods on Buyer_s Inability to Cover
In addition, the buyer may replevy undelivered, identified goods from the seller if the buyer, after reasonable effort, is unable to secure adequate substitute goods.
290
Buyer_s Right to Specific Performance
A right closely related to the buyer_s right to replevy is her right to specific performance _where the goods are unique or in other proper circumstances._ The court may order specific performance even where the goods have not yet been identified to the contract by the seller.
291
Seller_s Right to Withhold Goods
If the buyer fails to make a payment due on or before delivery, the seller may withhold delivery of the goods. The seller may also withhold goods when the goods are sold on credit and, before the goods are delivered, the seller discovers that the buyer is insolvent. However, in such a case, the seller must deliver the goods if the buyer tenders cash for their payment.
292
Seller_s Right to Recover Goods from Buyer on Buyer_s Insolvency
If a seller learns that a buyer has received delivery of goods on credit while insolvent, the seller may reclaim the goods upon demand made within 10 days after the buyer_s receipt of the goods. However, the 10-day limitation does not apply if a misrepresentation of solvency has been made in writing to the particular seller within three months before delivery.
293
Seller_s Right to Recover Goods Shipped or Stored Goods from Bailee on Buyer_s Insolvency
The seller may stop delivery of goods in the possession of a carrier or other bailee if he discovers that the buyer is insolvent. Of course, the seller must deliver the goods if the buyer tenders cash for their payment.
294
Seller_s Right to Recover Goods Shipped or Stored Goods from Bailee on Buyer_s Breach
The seller may stop delivery of carload, truckload, planeload, or larger shipments of goods if the buyer breaches the contract or the seller has a right to withhold performance pending receipt of assurances.
295
Seller_s Ability to Force Goods on Buyer Limited
The seller_s ability to force goods on a buyer is limited to an action for price when the seller is unable to resell the goods to others at a reasonable price.
296
Right to Demand Assurances
Under Article 2, actions or circumstances that increase the risk of nonperformance by the other party to the contract, but that do not clearly indicate that performance will not be forthcoming, may not be treated immediately as an anticipatory repudiation. Instead, if the party reasonably fears that the other party will not perform, he may demand assurances that the performance will be forthcoming at the proper time. Until he receives adequate assurances, he may suspend his own performance. If the proper assurances are not given within a reasonable time, he may then treat the contract as repudiated.
297
Compensatory Damages
The usual goal of damages for breach of contract is to put the nonbreaching party where she would have been had the promise been performed, so far as money can do this.
298
Standard Measure of Damages _ Expectation Damages
In most cases, the plaintiff_s standard measure of damages will be based on an expectation measure, i.e. sufficient damages for her to buy a substitute performance. This is also known as benefit of the bargain damages.
299
Reliance Damage Measure
If the plaintiff_s expectation damages are too speculative to measure, the plaintiff may elect to recover damages based on a reliance measure, rather than an expectation measure. Reliance damages award the plaintiff the cost of her performance; i.e., they are designed to put the plaintiff in the position she would have been in had the contract never been formed.
300
Consequential Damages
Consequential damages consist of losses resulting from the breach that any reasonable person would have foreseen would occur from a breach at the time of entry into the contract. Note that in contracts for the sale of goods, only a buyer may recover consequential damages.
301
Incidental Damages _ Contracts for the Sale of Goods
In contracts for the sale of goods, compensatory damages may also include incidental damages. Incidental damages include expenses reasonably incurred by the buyer in inspection, receipt, transportation, care, and custody of goods rightfully rejected and other expenses reasonably incident to the seller_s breach, and by the seller in storing, shipping, returning, and reselling the goods as a result of the buyer_s breach.
302
Certainty
The plaintiff must prove that the losses suffered were certain in their nature and not speculative. Traditionally, if the breaching party prevented the nonbreaching party from setting up a new business, courts would not award lost profits from the prospective business as damages, because they were too speculative. However, modern courts may allow lost profits as damages if they can be made more certain by observing similar businesses in the area or other businesses previously owned by the same party.
303
Punitive Damages
Punitive damages are generally not awarded in contract cases.
304
Nominal Damages
Nominal (token) damages may be awarded when a breach is shown but no actual loss is proven.
305
Liquidated Damages
The parties to a contract may stipulate what damages are to be paid in the event of a breach. These liquidated damages must be in an amount that is reasonable in view of the actual or anticipated harm caused by the breach.
306
Requirements for Enforcement
Liquidated damage clauses will be enforceable if the following two requirements are met: (1) damages for contractual breach must have been difficult to estimate or ascertain at the time the contract was formed; and (2) The amount agreed on must have been a reasonable forecast of compensatory damages in the case of breach. The test for reasonableness is a comparison between the amount of damages prospectively probable at the time of contract formation and the liquidated damages figure. If the liquidated damages amount is unreasonable, the courts will construe this as a penalty and will not enforce the provision.
307
Recoverable Even If No Actual Damages
If the requirements are met, the plaintiff will receive the liquidated damages amount. Most courts hold this is so even if no actual money or pecuniary damages have been suffered.
308
Seller Does not Deliver or Buyer Rejects Goods or Revokes Acceptance
The buyer_s basic damages where the seller does not deliver, or the buyer properly rejects or revokes her acceptance of tendered goods, consist of the difference between the contract price and either: (i) the market price (i.e. benefit of the bargain damages) or (ii) the cost of buying replacement goods (cover), plus incidental and consequential damages, if any, less expenses saved as a result of the seller_s breach.
309
Market Price
If a buyer measures damages by the difference between contract price and market price, market price usually is determined as of the time the buyer learns of the breach and at the place of tender. [Note that the buyer_s damages are measured as of the time she learns of the breach, while the seller_s damages are measured as of the time for delivery.]
310
Cost of Cover
If the buyer chooses the cover measure, the buyer must make a reasonable contract for substitute goods in good faith and without unreasonable delay.
311
Warranty Damages
If the buyer accepts goods that breach one of the seller_s warranties, the buyer may recover as damages _loss resulting in the normal course of events from the breach._ The basic measure of damages in such a case is the difference between the value of the goods as delivered and the value they would have had if they had been according to contract, plus incidental and consequential damages.
312
Notice Requirement
To recover damages for any defect as to accepted goods, the buyer must, within a reasonable time after she discovers or should have discovered the defect, notify the seller of the defect. If she does not notify the seller within a reasonable time, she loses her right to sue. Reasonable time is, of course, a flexible standard.
313
Seller Anticipatorily Breaches Contract
The measure of damages when the seller anticipatorily breaches the contract is the difference between the market price at the time the buyer learned of the breach and the contract price.
314
Consequential Damages
A seller is liable for consequential damages arising from his breach if: (i) he had reason to know of the buyer_s general or particular requirements, and (ii) the subsequent loss resulting from those needs could not reasonably be prevented by cover. Particular needs must be made known to the seller, but general requirements usually need not be. Goods for Resale. If the buyer is in the business of reselling the goods, the seller is deemed to have knowledge off resale. Goods Necessary for Manufacturing. If a seller knows that the goods he provides are to be used in the manufacturing process, he should know that his breach would cause a disruption in production leading to a loss of profits.
315
Where Buyer Repudiates or Refuses to Accept Conforming Goods
The Code provides three measrues of damages for when the buyer wrongfully repudiates or refuses to accept conforming goods. The seller can: (i) recover the difference between the market price (measured as of the time and at the place of delivery) and the contract price; (ii) Resell the goods and recover the difference between the contract price and the resale price; or (iii) If applicable, recover under a lost profits measure the difference between the contract price and the cost to the seller. [Lost Volume Seller]. The seller may also recover incidental damages.
316
Lost Volume Seller
[Other damages measures will never be adequate if the seller is a lost volume seller. To determine whether the lost profits measure is appropriate, look at the seller_s supply. If the seller_s supply of goods is unlimited (i.e. he can obtain all the goods he can sell), then he is a lost volume seller, and the lost profits measure can be used. If the sellers supply is limited, the lost profits measure cannot be used, and one of the other two measures must be used instead.
317
Where Buyer Accepted Goods
If the buyer has accepted the goods and has not paid, or has not accepted the goods ant the seller is unable to resell them at any reasonable price, or if the goods have been lost or damaged at a time the risk of loss was on the buyer, the seller may maintain an action against the buyer for the full contract price.
318
Contracts for the Sale of Land
The standard measure of damages for breach of land sale contracts is the difference between the contract price and the fair market value of the land.
319
Breach by Employer
Irrespective of when the breach occurs _ i.e. before performance, after part performance, or after full performance, the standard measure of the employee_s damages is the full contract price (although such damages may be reduced if the employee fails to mitigate).
320
Breach by Employee
If the employee is the breaching party, the employer is entitled to a standard measure of damages computed according to what it costs to replace the employee, i.e. the difference between the cost incurred to get a second employee to do the work and the cost to the employer had the first breaching employee done the work. If the breach was unintentional, the employee may have the right to quasi-contractual recovery for the work done to date. The modern view allows employees to offset such amount whether the breach was intentional or unintentional.
321
Construction Contracts
If a construction contract is breached by the owner, the builder will be entitled to profits that would have resulted from the contract plus any costs expended. (If the contract is breached after construction is completed, the measure is the full contract price plus interest.) If the contract is breached by the builder, the owner is entitled to the cost of completion plus reasonable compensation for the delay. Most courts allow the builder to offset or recover for work performed to date to avoid unjust enrichment of the owner. (If the breach is only late performance, the owner is entitled to damages incurred because of late performance.)
322
Contracts Calling for Installment Payments
If a contract calls for payments in installments and a payment is not made, there is only a partial breach. The aggrieved party is limited to recovering only the missed payment, not the entire contract price. However, the contract may include an acceleration clause making the entire amount due on any late payment, in which case the aggrieved party may recover the entire amount.
323
Avoidable Damages
The nonbreaching party cannot recover avoidable damages. Thus, she must refrain from piling up losses after she receives notice of the breach; she must not incur further expenditures or costs, and she must make reasonable efforts to cut down her losses by procuring a substitute performance at a fair price. Should she not do so, she will not be allowed to recover those damages that might have been avoided by such mitigation after the breach. Generally, a party may recover the expenses of mitigation.
324
Employment Contracts
If the employer breaches, the employee is under a duty to use reasonable care in finding a position of the same kind, rank, and grade in the same locale (although it does not necessarily have to be at the same exact pay level). However, note that the burden is on the employer to show that such jobs were available.
325
Contracts for the Sale of Goods
If the buyer is in breach, recall that the seller generally cannot bring an action against the buyer for the full contract price unless the goods cannot be resold at a reasonable price or were damaged or lost when the risk of loss was on the buyer.
326
Manufacturing Contracts
Generally, in a contract to manufacture goods, if the person for whom the goods are being manufactured breaches, the manufacturer is under a duty to mitigate by not continuing work after the breach. However, if the facts are such that completion of the manufacturing project will decrease rather than increase damages, the manufacturer has a right to continue.
327
Construction Contracts
A builder does not owe a duty to avoid the consequences of an owner_s breach, e.g., by securing other work, but does have a duty to mitigate by not continuing work after the breach. Again, however, if completion will decrease damages, it will be allowed.
328
Restitution Generally
As an alternative to the contract damages, restitution may be available in a contract-type situation. Restitution is not really part of contract law, but rather is a distinct concept. Restitution is based on preventing unjust enrichment when one has conferred a benefit on another without gratuitous intent. Restitution can provide a remedy not only when a contract exists and has been breached, but also when a contract is unenforceable and in some cases when no contractual relationship exists at all between the parties.
329
Terminology
When a contract is unenforceable or no contract between the parties exists, an action to recover restitutionary damages often is referred to as an action for an implied in law contract or an action in quasi-contract.
330
Measure of Damages
Generally, the measure of restitution is the value of the benefit conferred. Although this is usually based on the benefit received by the defendant, recovery may also be measured by the detriment suffered by the plaintiff if the benefits are difficult to measure or the benefit measure would achieve an unfair result.
331
When a Contract Has Been Breached
When a contract has been breached and the nonbreaching party has not fully performed, he may choose to rescind the contract and sue for restitution to prevent unjust enrichment. Note that if the plaintiff has fully performed, he is limited to his damages under the contract. This may be less than he would have received in a restitutionary action, because a restitutionary remedy is not limited to the contract price.
332
_Losing_ Contracts
A restitutionary remedy is often desirable in the case of a losing contract (i.e. a contract in which the actual value of the services or goods to be provided under the contract is higher than the contract price), because normal contract expectation damages or reliance damages would be for a lesser amount.
333
Breach by Plaintiff
Under some circumstances, a plaintiff may seek restitution even though the plaintiff is the party who breached. If the breach was intentional, some courts will not grant the breaching party restitution; modern courts, however, will permit restitutionary recovery but limit it to the contract price less damages incurred as a result of the breach.
334
Restitution of Advance Payments or Deposit If Buyer of Goods Breaches
If the buyer has paid part of the purchase price in advance and then breaches the contract, he can usually recover some of the payments. Unless the seller can prove greater damages, he may keep advance payments totaling 20% of the purchase price or $500, whichever is less. The balance must be returned to the buyer. If there is a valid liquidated damages clause, the seller need refund only the excess of the buyer_s payments over the amount of liquidated damages.
335
When Contract is Unenforceable
Restitution may be available in a quasi-contract action when a contract was made but is unenforceable and unjust enrichment otherwise would result.
336
When No Contract is Involved
Restitution may also be available in a quasi-contract action when there is no contractual relationship between the parites if: (1) The plaintiff has conferred a benefit on the defendant by rendering services or expending properties; (2) The plaintiff conferred the benefit with the reasonable expectation of being compensated for its value; (3) The defendant knew or had reason to know of the plaintiff_s expectation; and (4) The defendant would be unjustly enriched if he were allowed to retain the benefit without compensating the plaintiff.
337
Rescission
Remedy whereby the original contract is considered voidable and rescinded. The parties are left as though a contract had never been made. The grounds for rescission (listed below) must have occurred either before or at the time the contract was entered into. (i) Mutual mistake of a material fact; (ii) Unilateral mistake if the other party knew or should have known of the mistake; (iii) Unilateral mistake if hardship by the mistaken party is so extreme it outweighs the other party_s expectations; (iv) Misrepresentation of fact or law by either party as to a material factor in the negotiations that was relied upon; (v) Other grounds, such as duress, undue influence, illegality, lack of capacity, and failure of consideration.
338
Defenses
Generally all equitable defenses (e.g laches, unclean hands) are available in a rescission action. Note that the plaintiff_s negligence is not a defense.
339
Reformation
Reformation is the remedy whereby the writing setting forth the agreement between the parties is changed so that it conforms to the original intent of the parties. A reformation action is usually based on mutual mistake; i.e., the parties agree to a set of terms and the written contract fails to reflect those terms. Reformation is also possible if there is a unilateral mistake and the party who knows of the mistake does not disclose it and when the writing is incorrect because of misrepresentation.
340
Clear and Convincing Evidence Standard
The variance between the antecedent agreement and the writing must be established by clear and convincing evidence.
341
Parol Evidence Rule and Statute of Frauds Do Not Apply
The parol evidence rule is not applied in reformation actions. Likewise, the majority rule is that the Statute of Frauds does not apply _ but many courts will deny reformation if it would add land to the contract without complying with the Statute of Frauds.
342
Defenses
In addition to the general equitable defenses, the existence of a bona fide purchaser for value is also a defense to reformation. Similarly, reformation is not permitted if the rights of third parties will be unfairly affected.
343
Statute of Limitations Under the UCC
For sales contracts, the UCC provides for a four year statute of limitations. The parties may shorten the period by agreement to no less than one year, but they may not lengthen the period.
344
Accrual of Action
The statutory period begins to run when a party can bring suit _ i.e., when breach occurs. The period begins to run regardless of whether the aggrieved party knows about the breach.
345
Breach of Warranty Actions
For a breach of warranty action, the breach occurs and the limitations period begins to run upon delivery of the good. This is true even if the buyer does not discover the breach until much later.
346
Warranty Extends to Future Performance
If there is an express warranty that explicitly extends to future performance of the goods, the four-year period does not begin to run until the buyer should have discovered the breach.
347
Implied Warranties Breached on Delivery
Because implied warranties cannot explicitly extend to future performance, they are breached, if at all, upon delivery.
348
Intended vs. Incidental Beneficiary
Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining if a beneficiary is intended, consider whether the beneficiary (i) is identified in the contract, (ii) receives performance directly from the promisor, or (iii) has some relationship with the promisee to indicate intent to benefit.
349
Creditor vs. Donee Beneficiary
There are two types of intended beneficiaries: (i) a creditor beneficiary _ a person to whom a debt is owed by the promisee, and (ii) a donee beneficiary _ a person whom the promisee intends to benefit gratuitously.
350
When Do the Rights of the Beneficiary Vest?
A third party can enforce a contract only if his rights have vested. This occurs when he: (i) manifests assent to promise in the manner requested by the parties; (ii) brings a suit to enforce the promise; or (iii) materially changes position in justifiable reliance on the promise. Prior to vesting, the promisee and promisor are free to modify or rescind the beneficiary_s rights under the contract.
351
Significance of Vesting
Before the intended third-party beneficiary_s rights best, the promisor and promisee are free to modify their contract _ including removing the third-party beneficiary altogether _ without consulting the third party. Once the third party_s rights vest, the promisor and promisee cannot vary his rights without his consent. [On the exam, look at the call of the question to see who is bringing the suit. If the third-party beneficiary is bringing suit to enforce the contract, the act of bringing the suit vests his rights. No other act is required. Accordingly, if the third-party beneficiary is suing, any answer choice that states the third-party beneficiary_s rights have not vested is incorrect.]
352
Third-Party Beneficiary vs. Promisor
A beneficiary may sue the promisor on the contract. The promisor may raise against the third-party beneficiary any defense that the promisor has against the promisee. Whether the promisor may use the defenses the promisee would have against the third-party beneficiary depends on whether the promisor made an absolute promise to pay or only a promise to pay what the promisee owes the beneficiary. If the promise is absolute, the promisor cannot assert the promisee_s defenses; if the promise is not absolute, the promisor can assert the promisee_s defenses.
353
Third-Party Beneficiary vs. Promisee
A creditor beneficiary can sue the promisee on the existing obligation between them. She may also sue the promisor, but may obtain only one satisfaction. A donee beneficiary has no right to sue the promisee unless grounds for a detrimental reliance remedy exist.
354
Promisee vs. Promisor
A promisee may sue the promisor both at law and in equity for specific performance if the promisor is not performing for the third person.
355
Assignment
Generally, all contractual rights may be assigned. Exceptions: (i) an assignment that would substantially change the obligor_s duty or risk; (ii) an assignment of future rights to arise from future contracts (not future rights in already existing contracts); and (iii) an assignment prohibited by law.
356
Express Contractual Provision Against Assignment
A clause prohibiting assignment of the contract will be construed as barring only delegation of the assignor_s duties. A clause prohibiting assignment of contractual rights generally does not bar assignment, but rather merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign will be void, the parties can bar assignment. Also, if the assignee has notice of the nonassignment clause, an assignment will be ineffective.
357
Effect of Assignment
The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor.
358
What is Necessary for an Effective Assignment?
For an assignment to be effective, the assignor must manifest an intent to immediately and completely transfer her rights. A writing is usually not required to have an effective assignment. The right being assigned must be adequately described. It is not necessary to use the word _assign_; any accepted words of transfer will suffice. A gratuitous assignment is effective, consideration is not required.
359
Assignment for Value
An assignment is for value if it is: (i) done for consideration, or (ii) taken as security for or payment of a preexisting debt. Assignments for value cannot be revoked.
360
Gratuitous Assignments
An assignment not for value generally is revocable. A gratuitous assignment is irrevocable if: (i) the obligor has already performed; (ii) a token chose is delivered (i.e. a tangible claim, such as a stock certificate); (iii) an assignment of a simple chose is put in writing (i.e an intangible claim, such as a contract right); or (iv) the assignee can show detrimental reliance on the gratuitous assignment.
361
Methods of Revocation
A revocable gratuitous assignment may be terminated by: (i) the death or bankruptcy of the assignor; (ii) notice of revocation by the assignor to the assignee or the obligor; (iii) the assignor taking performance directly from the obligor; or (iv) subsequent assignment of the same right by the assignor to another.
362
Effect of Revocation
Once an assignment is revoked, the privity between the assignor and the obligor is restored, and the assignor is once again the real party in interest.
363
Assignee vs. Obligor
The assignee can sue the obligor, as the assignee is the real party in interest; i.e. the assignee _ not the assignor _ is entitled to performance under the contract. (The obligor has a defense against the assignee any defense inherent in the contract). The obligor cannot raise by way of defense any defenses the assignor might have against the assignee.
364
Assignee vs. Assignor
In every assignment for value, the assignor warrants that: (i) he has not made a prior assignment of the same right; (ii) the right exists and is not subject to any undisclosed defenses; and (iii) he will do nothing to interfere with the assigned right. The assignee may sue the assignor for breach of any of these warranties. However, the assignor will not be liable to the assignee if the obligor is incapable of performing.
365
Successive Assignments of Same Rights
If the first assignment is revocable, a subsequent assignment revokes it. If it is irrevocable, the first assignment will usually prevail over a subsequent assignment. Several exceptions exist (if the second assignee has paid value and taken without notice of the first assignment): (i) the subsequent assignee gets the first judgment against the obligor; (ii) the subsequent assignee gets the first payment of a claim from the obligor; (iii) the subsequent assignee gets delivery of a token chose; (iv) the subsequent assignee is the party to a novation releasing the assignor; or (v) the subsequent assignee can proceed against the first assignee on an estoppel theory.
366
Delegation of Duties
Generally, all duties may be delegated. Exceptions: (i) the duties involve personal judgment and skill; (ii) delegation would change the obligee_s expectancy; (iii) a special trust was reposed in the delegator by the other party to the contract; and (iv) there is a contractual restriction on delegation.
367
What is Necessary for Effective Delegation
The delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral. [Although assignment and delegation have precise meanings (rights are assigned and duties are delegated), on the MBE the terms are often used loosely. Thus, a question might state initially that _Y assigned his rights in the contract to X_ but the facts later show that duties were also delegated.
368
What Are the Rights and Liabilities of the Parties to a Delegation
The oblige must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract; thus, the obligee may sue the delegator for nonperformance by the delegate. The obligee may sue the delegate for nonperformance, but can require the delegate to perform only if there has been an assumption (i.e. the delegate promisese he will perform the duty delegated and this promise is supported by consideration or its equivalent). This promise creates a contract between the delegator and the delegate in which the obligee is a third-party beneficiary.
369
Delegation Terminology
Today, words assigning _the contract_ or _all of my rights under the contract_ are usually construed as including an assumption of the duties by the assignee, unless a contrary intention appears.
370
Novation Distinguished
Novation substitutes a new party for an original party to the contract. It requires assent of all parties and completely releases the original party.
371
Entrusting
Entrusting goods to a merchant who deals in goods of that kind gives him the power (but not the right) to transfer all rights of the entruster to a buyer in the ordinary course of business. Entrusting includes both delivering goods to the merchant and leaving purchased goods with the merchant for later pick-up or delivery. Buying in the ordinary course means buying in good faith from a person who deals in goods of the kind without knowledge that the sale is in violation of the ownership rights of third parties.
372
Voidable Title Concept
Generally, if a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer (i.e. it is voidable title). However, the defrauded seller may not recover the goods from a good faith purchaser for value who bought from the fraudulent buyer. The rights of a defrauded seller are cut off both by a buyer and a person who takes a security interest in the goods.
373
Thief Generally Cannot Pass Title
If a thief steals goods from the true owner and then sells them to a buyer, the thief is unable to pass title to the buyer (because his title is void). Rationale: A seller can transfer only the title he has or has power to transfer. Therefore, even a good faith purchaser for value generally cannot cut off the right of the true owner if the seller_s title was void. An exception to this rule may apply, however, if the buyer has made accessions to the goods or the true owner is estopped from asserting title (e.g., if the true owner expressly or impliedly represented that the thief had title).
