CONTRACTS AND SALES

Question 1

Applicable Law Determination

Answer 1

The Uniform Commercial Code governs contracts for the sale of goods. Goods are defined as tangible, moveable items at the time of contract.

Common law applies to contracts for the provision of services or sale of real property.

When the contract deals with both, courts will employ the predominant purpose test, where the predominant purpose of the contract (good v. service) will determine the law to be applied.

Question 2

Requirements of a Valid Contract

Answer 2

1) Mutual Assent (Offer + Acceptance);

2) Consideration; AND

3) Absence of Defenses.

Question 3

Offer

Answer 3

An objective manifestation of an willingness to enter into a bargained-for exchange.

Question 4

Methods of Terminating an Offer

Answer 4

1) Lapse in time (an offer lapses after a reasonable time);

2) Rejection (including a counteroffer);

3) Revocation (an offer can be revoked before acceptance unless it falls into one of FOUR categories:
Firm offer by a merchant in a signed writing, open for a max. of 3 mos.;

Option contracts (must have consideration to keep offer open);

Unilateral Contract (if performance begins, cannot be revoked);

Reasonably foreseeable substantial reliance on the offer.

4) Death.

Question 5

Acceptance

Answer 5

An objective manifestation of a willingness to be bound to the term of the offer.

Question 6

Bilateral Contract

Answer 6

Accepted by a promise to perform or the beginning of performance.

Question 7

Unilateral Contract

Answer 7

Can only be accepted by full performance.

Question 8

Accepting an offer for the sale of goods.

Answer 8

An offer for the sale of goods is accepted by promising to ship or shipping the goods.

*If the seller ships defective goods with an accommodation letter, that constitutes a counter offer. If there is no letter, it is an acceptance and a breach.

Question 9

Mailbox Rule

Answer 9

An acceptance is effective when dispatched.

Exception:
Option Contracts: acceptance is effective upon receipt;

If a rejection is sent first, then an acceptance, whatever is received first controls.

Question 10

Mirror Image Rule

Answer 10

The acceptance must be the “mirror image” of the offer. THIS ONLY APPLIES TO COMMON LAW CONTRACTS

Question 11

Does the Mirror Image Rule Apply to UCC Contracts?

Answer 11

NO!

Question 12

Additional Terms under the UCC

Answer 12

If the parties are both merchants, additional terms will be part of the contract unless it materially alters it, the offeror objects within a reasonable time, or the offer limits acceptance to the terms of the offer.

Question 13

Different Terms under the UCC

Answer 13

Under the majority rule, a different term is knocked out and replaced with gap fillers.

Question 14

Consideration

Answer 14

A bargained for exchange of something of legal value or where one party suffers a legal detriment (i.e., money, a promise not to sue, etc.).

Question 15

What will not be considered consideration?

Answer 15

A promise to make a gift, a moral obligation, past consideration, or an illusory promise.

Question 16

Promissory Estoppel

Answer 16

If there is a promise that was intended to induce reliance, did in fact induce foreseeable reliance by the promisee, a contract will remain enforceable notwithstanding a lack of consideration.

Question 17

Contract Modification (Common Law v. UCC)

Answer 17

Common Law: Consideration is needed to modify a contract. The performance of a preexisting legal duty is not consideration unless it falls into an exception (e.g., unforeseen difficulty, a good faith settlement of a lawsuit, a good faith payment in full of a due and disputed debt, a written promise to pay a time-barred debt, or if the duty was owed to a third person).

UCC: only good faith is needed to modify a contract.

Question 18

Performance Requirement (Common Law v. UCC)

Answer 18

Common Law: One has to substantially perform one’s duties in order for the other party’s duty to arise.

Exception: Express condition (e.g., “I will buy it if I like it” or “I will buy it if I can get a 10% interest rate”). These must be complied with exactly. Tip: courts find that most conditions are “constructive” and substantial performance is enough.

UCC: The seller must provide perfect tender of the goods (or the buyer can reject the goods).

If the seller does not provide perfect tender and the buyer rejects the goods, the seller only has an automatic right to cure if (1) there is time left to perform under the contract, or (2) the seller reasonably believed that the buyer would accept the nonconforming goods with or without a money allowance such as a discount (e.g., the seller sent better goods than contracted for).

Exception: Installment contract. The buyer may reject an installment if there is a “substantial impairment” and the seller cannot cure the installment.

• Note on revocation: If the buyer accepts goods, he may not reject them. However, he may later revoke his acceptance. Revocation is a higher standard than rejection as it requires showing that the defect substantially impairs the value of the goods to him, among other things.

Question 19

Delivery Obligations - Shipment Contracts

Answer 19

The seller bears the risk of loss until the goods are provided to the carrier.

Question 20

Delivery obligations - Destination Contracts

Answer 20

The seller bears the risk of loss until the goods reach the buyer (i.e., the buyer’s place of business).

Question 21

Anticipatory Repudiation

Answer 21

An anticipatory repudiation occurs when a party unequivocally breaches.

Question 22

Remedies for Anticipatory Repudiation

Answer 22

The other party can sue immediately, suspend performance and wait to sue, treat the contract as discharged, or urge the other party to perform.

Question 23

Adequate Assurances

Answer 23

A prospective inability to perform is when a party has reasonable grounds for insecurity that the other will not perform. The insecure party can demand adequate assurances that performance will take place.

Question 24

Discharging Duties

Answer 24

A duty to perform may be discharge by:
Occurrence of a condition subsequent: This is a condition that cuts off a duty. (E.g., “I will paint the house until it starts to rain.” The rain is a condition subsequent that cuts off the duty to paint the house.);

Agreement: examples include novation (a new party steps into the shoes of an existing party), modification, release, accord and satisfaction (the parties agree to new or different consideration), and rescission (the contract is undone);

Frustration of purpose: the primary purpose of the contract known by both parties at the time of contracting is substantially frustrated by an unforeseeable event that occurred after the contract was entered into; OR

Impossibility: an event that renders performance impossible occurs after the contract was made, it was not reasonably foreseeable at the time of the contract, the nonoccurrence was a basic assumption of the parties, neither party is at fault, and neither party bears the risk.

Question 25

Express Warranties

Answer 25

Affirmations of fact about the goods or a sample of the goods. These cannot be disclaimed. Mere “puffery” does not create an express warranty.

Question 26

Implied Warranty of Merchantability

Answer 26

Made by a merchant and warrants that goods are fit for their ordinary purpose. This warranty can be disclaimed (e.g., by express language such as a conspicuous “as is” clause or through conduct).

Question 27

Implied Warranty of Fitness for a Particular Purpose

Answer 27

Made by any seller who knows of the buyer’s specific purpose and the buyer relies on the seller. It can be disclaimed. Tip: the seller does not have to be a merchant.

Question 28

Hierarchy of how contract terms are interpreted?

Answer 28

Express terms control. Then courts look to course of performance, course of dealing, and trade usage.

Question 29

The Parol Evidence Rule

Answer 29

The PER applies when a party wants to add a term from preliminary negotiations to a final written agreement. If there is a complete integration, no terms will be admitted into evidence. Tip: look for a merger or integration clause in the contract; e.g., one that states, “this is the full and final agreement.” If there is a partial integration, consistent additional terms are admitted. The PER does not apply to (FICCL) Formation defenses, Interpretation of a term, failure of a Condition precedent, a Clerical error, or a Later modification.

Question 30

Intended Third-Party Beneficiary

Answer 30

A party intended to benefit from a contract between two other parties. ITPBs have rights under a contract once their rights vest. Rights vest when there is assent, reliance, or when the third party brings a lawsuit. Factors used: 1) Is the TPB expressly designated in the contract? 2) Is performance directly to the TPB? 3) Does the TPB have any rights? 4) What is the relationship between the TPB and the promisee?

Question 31

Incidental Third-Party Beneficiary

Answer 31

Does not have rights under the contract.

Question 32

Delegation

Answer 32

Generally, one may delegate duties under a contract unless the contract prohibits it or if the contract involves special skill, judgment, or trust. Neither consent, nor consideration, nor a writing is needed to delegate a duty. The delegator remains liable on the contract after delegation. The delegatee is liable if he receives consideration from the delegator.

Question 33

Assignment

Answer 33

Generally, rights can be assigned unless the assignment substantially changes the obligor’s duties or the contract prohibits it. An assignment may not be revoked if there was consideration given or if it is payment for a preexisting debt. An assignment is revoked if the assignor takes performance directly or makes a subsequent assignment to a different party.

Question 34

Statute of Frauds

Answer 34

The SOF requires a 1) writing, 2) signed by the party to be charged that evidences a contract.

Question 35

Which contracts fall under the SoF?

Answer 35

(MYLEGS) contracts made in consideration of Marriage; contracts that cannot be performed within a Year; contracts for the sale of Land; promises made by an Executor to pay a debt from his own estate; contracts for the sale of Goods for $500 or more; AND Surety contracts.

Question 36

Exceptions to the SoF with regard to land-sale contracts?

Answer 36

Part performance (when one’s actions evidence a contract; e.g., the buyer does TWO of the following three things: 1) takes possession of the property; 2) improves the land significantly; OR 3) pays a substantial amount of the purchase price).

Question 37

Exception to the SoF with regard to the sale of goods?

Answer 37

The four exceptions are: 1) merchants confirmatory memo exception; 2) when the seller has made a substantial beginning in manufacture or commitments for specially manufactured goods not suitable for sale to others in the seller’s ordinary course of business; 3) judicial admissions (one admits in his pleadings, testimony, or in court that there is a contract—it is enforceable up to the quantity admitted); OR 4) part performance (one pays for or accepts a part of a contract).

Question 38

Exception to the SoF for surety contracts?

Answer 38

A promise to pay the debt of another if the other does not pay falls within the SOF unless the main purpose of the surety promise is to serve a pecuniary interest of the person making the promise.

Question 39

Full Performance exception to SoF?

Answer 39

Full performance on one side will serve as a substitute for a signed writing.

Question 40

Incapacity

Answer 40

For minors, mentally incompetent, or intoxicated persons. However, they may be liable for “necessities.”

Question 41

Duress

Answer 41

When a party threatens to commit a wrongful act that would threaten the other party’s finances, property, well-being, or life.

Question 42

Undue Influence

Answer 42

Unfair persuasion where a person in a position of trust, confidence, or dominance uses that position to convince another to enter into a contract that is not in that party’s best interest.

Question 43

Lack of Formation Defenses - Mutual Mistake

Answer 43

If both parties are mistaken about a basic assumption of fact that materially affects the agreed upon exchange and neither bears the risk, the contract is voidable.

Question 44

Lack of Formation Defenses - Unilateral Mistake

Answer 44

If a party knew or had reason to know of the other party’s mistake, the contract is voidable.

Question 45

Lack of Formation Defenses - Lack of Mutual Assent

Answer 45

There is no contract if both parties have a different understanding of a material term that is open to at least two reasonable interpretations and neither party has any reason to know of the meaning attached by the other.

Question 46

Lack of Formation Defenses - Illegal Subject-Matter

Answer 46

The contract is void. If it is for an illegal purpose (e.g., leasing a car to transport drugs), it is voidable by the party who didn’t have the illegal purpose (e.g., the car owner) if he didn’t know the purpose or he knew of the purpose but didn’t facilitate it and it doesn’t involve “serious moral turpitude.”

Question 47

Lack of Formation Defenses - Unconscionability

Answer 47

There are two necessary elements: procedural unconscionability (an unfair bargaining process—e.g., hidden or incomprehensible terms) and substantive unconscionability (grossly unfair terms). This is voidable.

Question 48

Expectation Damages

Answer 48

General rule: The damaged party recovers expectation damages. This is the loss of value of the breaching party’s performance plus incidental damages plus consequential damages minus any expenses saved as a result of the breach. Mitigation of damages is required.

Question 49

Incidental Damages

Answer 49

Those related to avoiding the loss from the breach (e.g., storing goods after a breach).

Question 50

Consequential Damages

Answer 50

Those that are foreseen at the time the contract is entered into.

Question 51

UCC Formulas for Damages - Seller breaches and buyer has goods.

Answer 51

Seller breaches and buyer has goods: buyer gets the value of the goods as contracted for minus the value of the goods as delivered plus incidental and consequential damages.

Question 52

UCC Formulas for Damages - Seller breaches and seller has goods

Answer 52

Buyer gets the difference between the market price (or replacement price) and contract price plus incidental and consequential damages minus expenses saved.

Question 53

UCC Formulas for Damages - Buyer breaches and buyer has goods.

Answer 53

Seller gets the contract price.

Question 54

UCC Formulas for Damages - Buyer breaches and seller has goods.

Answer 54

Seller gets the difference between the contract price and market price (or resale price) plus incidental damages minus expenses saved.

Question 55

UCC Formulas for Damages - Lost Volume Seller

Answer 55

The seller gets lost profits plus incidentals. Tip: A seller is a lost volume seller when there is an unlimited amount of the product available.

Question 56

Specific Performance

Answer 56

Available when money damages are inadequate; usually reserved for goods that are unique or a land-sale contract.

Question 57

Injunction

Answer 57

An equitable remedy that tells a party to do or not do something. An injunction for a noncompete clause will be granted so long as the covenant is reasonable in time, scope, and geography.

Question 58

Recission

Answer 58

Undoing the contract when the contract is void or voidable or because it is impossible to perform.

Question 59

Reformation

Answer 59

A remedy either party may seek when the contract does not reflect the terms that the parties agreed to.

Question 60

Liquidated Damages

Answer 60

Enforced if the damages are difficult to estimate at the time the contract was made and a reasonable forecast of damages. *Penalties are not permitted under contract law.

Question 61

Restitution

Answer 61

The plaintiff recovers the value of the benefit conferred. This remedy may be sought when the contract is breached, when it is unenforceable, or when there is no contract. Restitution is granted in contracts that are implied in law (i.e., quasi-contracts), which arises when the plaintiff has conferred a benefit on the defendant, the plaintiff reasonably expected to be paid, and the defendant would be unjustly enriched otherwise.