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Flashcards in Contracts and Sales Deck (36)
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1

[CONTRACTS] • 1 • Formation • Merchant's Firm Offer Rule •

When a merchant promises in writing to keep an offer open , the offer is irrevocable for the time stated, or a maximum of three months (no maximum if consideration is given). A merchant is one who deals in goods of the kind sold.

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[CONTRACTS] • 1 • Formation • Mailbox Rule •

Unless the offeror states otherwise, the mailbox rule provides that acceptance of an offer sent by mail is deemed accepted once the acceptance is placed in the mail . However, revocation of an offer is deemed effective when received by the offeree. Once a valid contract has been created by acceptance of the offer, revocation is no longer possible. For example, if the offeror mails a letter to the offeree revoking the offer but the offeree, before receiving the revocation letter, sends a letter to the offeror accepting the offer, a valid contract has been created because the contract is deemed to have arisen when the offeree mails his acceptance. The mailbox rule DOES NOT apply to option deadlines (when an offer is only open until a certain date).

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[CONTRACTS] • 1 • Formation • Mirror Image Rule and UCC Exception •

Acceptance is the communication of intent to be bound by the terms of the offer. The common law mirror image rule holds that an acceptance must exactly mirror the offer , with any additional terms or variations constituting a counter-offer, which revokes the initial offer. However, under Article 2 of the UCC (which governs contracts for the sale of goods) the mirror image rule does not apply. The UCC states that acceptance does not have to mirror the offer and the acceptance can include different or additional terms , without revocation of the offer and thus constituting a valid contract. However, the offerees different or additional term(s) are included in the contract ONLY IF: (1) both parties are merchants; (2) the term is not a material change; AND (3) no objection was made within a reasonable time. A material change is any change that is likely to cause hardship or surprise to the offeror (ex: a disclaimer of warranties or an arbitration clause).

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[CONTRACTS] • 1 • Formation • Consideration • Pre-Existing Duty Rule

One may not contract to perform something she is already legally obligated to do. However, a pre-existing duty owed may become sufficient consideration IF there is (1) an addition or change in performance; OR (2) an unforeseen difficulty arises that is so severe it excuses performance.

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[CONTRACTS] • 1 • Mutual Mistake and Unilateral Mistake • •

A contract may be rescinded or reformed when there is a mutual mistake , which occurs when both parties are mistaken as to a basic assumption on which the contract is made AND the mistake is material to the contract. A unilateral mistake is a mistake made by one party that is unknown to the other party. A unilateral mistake is generally not a valid defense to formation of a contract. However, if one party knew or had reason to believe that the other party was mistaken, the contract is voidable by the mistaken party. When the mistake involves price/value, the equitable remedy of rescission or reformation will not be allowed because price/value is NOT considered material .

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[CONTRACTS] • 1 • Parol Evidence Rule • Merger Clause •

A merger clause indicates that the contract is a final integration of the agreement between the parties. Although the clause is probative of the parties intent to integrate, it is NOT conclusive.

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[CONTRACTS] • 1 • Breach • Time is of the Essence Clause •

A time is of the essence clause requires performance by a specific date . Under the Common Law, failure to perform by the specified date is deemed a material breach. If the time for performance passes, and no party seeks enforcement, the clause may be considered waived.

Under the UCC, failure to meet a specified date may be considered a breach even WITHOUT a clause. However, failure to pay by a specific date will not be a breach.

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[CONTRACTS] • 1 • Third-Party Issues • Intended TPB vs Incidental Beneficiary •

Generally, a party who is not in privity of contract with another party cannot assert a claim for breach of contract against that party. However, when the party asserting the claim is an intended third-party beneficiary, the party has the same rights as those parties in privity of contract and can assert a claim for breach of contract. An intended third-party beneficiary is not a party to the contract, but has rights under the contract because the two contracting parties are aware that their respective performances are intended to benefit an identified third-party . An incidental beneficiary is a person that just happens to benefit from the contract, but has no legal rights because the purpose of the contract was not intended to benefit that person.

A third-party beneficiary of the original contract may claim rights under the contract and sue to enforce those rights ONLY IF the rights have vested . Rights vest when the third-party beneficiary has: (1) accepted the benefit under the contract; (2) detrimentally relied on the contract; OR (3) brings suit to enforce the contract. A suit may only be brought against the promisor. However, when the third-party is a creditor, a suit may be brought against the promisee. Once rights have vested, a contract may NOT be changed or modified without the third-partys consent.

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[CONTRACTS] • 1 • Third-Party Issues • Delegable Duties •

All contract duties are delegable UNLESS : (a) the contract prohibits delegations or assignments; OR (b) the contract is for personal services that call for very special skills . Generally, the delegating party remains liable for non-performance of the contract.

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[CONTRACTS] • 1 • Third-Party Issues • Novation •

A novation occurs when ALL parties to a contract agree to discharge an original party to a contract and substitute a third-party in the original partys place.

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[CONTRACTS] • 2 • Defenses to Formation • Misrepresentation •

A contract is NOT valid if misrepresentation induced the contract . A misrepresentation occurs when there is (1) a statement of material fact , (2) by a party or agent , (3) that is false (no requirement of wrongdoing), AND (4) induces the contract. Although there is no duty to disclose information, a party may not conceal material information.

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[CONTRACTS] • 2 • Promissory Estoppel and Detrimental Relian • •

Courts will find a valid contract if one party (1) reasonably and foreseeably (2) relied to his detriment (3) on the oral promise of the other party, AND (4) enforcement of the promise is necessary to avoid injustice .

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[CONTRACTS] • 2 • Warranties • Implied Warranty of Merchantability •

Under Article 2 of the UCC, the Implied Warranty of Merchantability is implied in all sales of goods contracts and requires that all goods sold by a merchant (a person dealing in goods of the kind) must be fit for their ordinary purpose . Once a buyer discovers the breach of a warranty, he can sue for breach of contract.

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[CONTRACTS] • 2 • Breach • UCC Perfect Tender Rule and Exceptions •

Under Article 2 of the UCC, a seller must deliver conforming goods. The smallest non-conformity is a breach and the buyer may reject all or a portion of the goods. However, two exceptions to this rule exist under the UCC: (1) if the seller has the right to cure and (2) in the Installment contract context .

A seller has a right to cure in 2 situations: (i) If the time for performance has NOT yet expired, the seller can cure within the contract time period remaining; OR (ii) The Seller may have further reasonable time to substitute tender if the seller had reasonable grounds that the goods would be accepted. One instance where the seller would have reasonable grounds that the substitute goods would be accepted is when the same type of non-conforming goods were accepted by the buyer in the past.

Special rules apply when a seller provides non-conforming goods under an installment contract. Installment contracts may only be cancelled where an installment is so defective that it substantially impairs the value of the entire contract . Similarly, a Buyer can reject an installment only if the non-conformity substantially impairs that installment and the time to cure has past.

Under Article 2 of the UCC, a rejection of non-conforming goods must be within a reasonable time after their delivery or tender.

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[CONTRACTS] • 2 • Third-Party Issues • Assignment •

Rights and benefits under a contract may be transferred to a third party IF the assignor (1) intends to transfer the rights; AND (2) clearly describes the rights being assigned. Consideration is NOT required for an assignment, BUT if consideration is provided , the assignment becomes irrevocable . Gratuitous assignments may be revoked.

Limitations: An assignment is valid UNLESS (a) it materially alters what is expected under the contract; OR (b) it is prohibited by law . Parties may attempt to prevent assignments in the original contract through either:

(1) Prohibitions : Terms in a contract that prohibit the transfer of rights. If the rights are assigned, the assignor is liable for damages, BUT the assignment is still valid and enforceable by the assignee.

(2) Invalidations : Terms in a contract that void all assignments. If the rights are assigned in this case, the assignment is void .

Rights of Assignee and Assignor : An assignee may sue the obligor for non-performance. Any defense to enforcement that could be used against the assignor, may also be used against the assignee. An assignee may also sue the assignor for wrongful revocation of an assignment or for breach of an implied warranty. An assignor may sue an obligor ONLY IF the assignor did not receive consideration for the assignment.

Multiple Assignments: Where there are multiple gratuitous assignments , the last assignee prevails over the others. Where there are multiple assignments for consideration , the first assignment prevails UNLESS the later assignment (1) has no notice of the earlier assignment; AND (2) is the first to obtain payment or indicia of ownership.

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[CONTRACTS] • 3 • Formation • Offers •

An offer is (1) a manifestation of intent to contract , (2) with definite and specific terms, (3) that is communicated to an identified offeree .

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[CONTRACTS] • 3 • Formation • Advertisements •

Advertisements are generally NOT considered offers, but instead are deemed invitations for offers . However, an advertisement MAY be an offer if it includes sufficiently clear and definite terms so that the reasonable person would understand how performance or acceptance might be made.

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[CONTRACTS] • 3 • Formation • Revocation of Offer •

Most offers may be revoked at any time before acceptance through unambiguous words or conduct by the offeror to the offeree indicating an unwillingness or inability to contract. Some offers are irrevocable including: (1) Option contracts (when consideration is given for a promise to keep an offer open); (2) Merchants firm offers; AND (3) Offers that were relied on to the offerees detriment.

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[CONTRACTS] • 3 • Defenses to Formation • Unconscionability •

Even if a contract contains all of the essential terms and is signed by both parties, a contract will not be enforced by the court if its terms are unconscionable. This occurs when a contract shocks the conscience of the court. An unconscionable contract is one that is both substantively AND procedurally unconscionable. Procedural unconscionability occurs when one party to the contract (usually the party who wrote the contract) has a superior bargaining position than the other party and uses that power to their advantage. A party can do this by engaging in unfair pressuring or bargaining practices to force the other party to enter into the contract. Substantive unconscionability occurs when the contract contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power.

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[CONTRACTS] • 3 • Statute of Frauds • Overcoming the Statute of Frauds •

A contract that violates the statute of frauds may still be found valid through (a) performance (partial or full performance); (b) judicial acknowledgement (the party admits to the agreement in pleadings or testimony); (c) estoppel (reasonable and foreseeable detrimental reliance on a promise); OR (d) a merchants confirmation memo (when a contract is between merchants, the statute of frauds is satisfied when one party receives a writing confirming the contract).

Partial performance in a contract for the sale of land will satisfy the statute of frauds ONLY IF the party has done at least two of the following : (1) Made payment for the land; (2) Took possession of the land; OR (3) Made valuable improvements to the land. Partial performance in a contract for the sale of goods will satisfy the statute of frauds, but only to the extent of performance.

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[CONTRACTS] • 3 • Modifications • Common Law •

Under Common Law , contract modifications must be supported by consideration . Only modifications that fall within the Statute of Frauds need to be in writing. Any language in the original contract requiring modifications to be in writing is NOT effective.

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[CONTRACTS] • 3 • Modifications • UCC •

Under the UCC , there is no consideration requirement and modifications are valid if made in good faith . Modifications must be in writing IF (1) they fall within the Statute of Frauds; OR (2) the original contract states that modifications must be made in writing.

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[CONTRACTS] • 3 • Breach • Material Breach vs. Minor Breach •

Under the Common Law, any breach of a contract may give rise to damages, but ONLY a material breach of the contract will relieve the non-breaching party of performance . A material breach occurs when a party does NOT render substantial performance . To determine whether a breach is material, courts will consider (1) the extent of performance by the breaching party; (2) the hardship to the breaching party if the contract is terminated; (3) the adequacy of compensation for loss to the non-breaching party; AND (4) whether the breach was intentional .

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[CONTRACTS] • 3 • Excuse for Non-Performance • Condition Precedent •

A condition precedent is a condition that must be satisfied in order for a partys performance to be due. A party is excused from performance if the condition never occurs. If the condition precedent is based on performance by one party, substantial performance by that party will satisfy the condition.

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[CONTRACTS] • 3 • Excuse for Non-Performance • Frustration of Purpose •

Frustration of Purpose excuses performance under a contract IF the purpose of the contract no longer exists . A party is excused from performance IF (1) the plaintiff knew the purpose of the contract at the time of formation; (2) there was an unforeseeable event outside of the defendants control; AND (3) the unforeseeable event destroyed the purpose or value of the contract.

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[CONTRACTS] • 3 • Excuse for Non-Performance • Waiver •

A waiver is a voluntary and intentional relinquishment of a contract right through words or conduct. Performance is excused when it is waived. Conditions are waived when (1) a party indicates through words or conduct that a condition does not need to be satisfied AND (2) the other party detrimentally relies on that waiver.

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[CONTRACTS] • 4 • Formation • Acceptance •

Acceptance is a manifestation of assent to the terms of the offer . Although silence generally does not manifest assent, performance may. For bilateral contracts , the start of performance manifests acceptance. For unilateral contracts , the start of performance only makes an offer irrevocable. In unilateral contracts, an offer is accepted only when performance is complete .

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[CONTRACTS] • 4 • Excuse for Non-Performance • Impossibility •

Performance is excused when it is objectively impossible to perform a contract because of (1) death or physical incapacity of the person necessary to effectuate the contract (if the person can easily be replaced, performance is NOT excused); (2) illegality (a new law or regulation may affect the legality of performance or the purpose of the contract); OR (3) destruction of the subject matter necessary to fulfill the contract.

Under Common Law, if the risk of loss is on the buyer, then destruction of the subject matter does NOT excuse performance.

Under the UCC, performance is excused ONLY IF the destroyed goods were special AND were destroyed before the risk of loss shifted to the buyer.

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[CONTRACTS] • 4 • Excuse for Non-Performance • Impracticability •

Performance is impractical and excused when an event that is unanticipated by both parties makes performance extremely and unreasonably difficult or expensive.

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[CONTRACTS] • 5 • Formation • Consideration •

Contracts under Common Law are NOT enforceable without consideration. Consideration is a bargained for exchange of any act or forbearance that benefits the promisor or causes detriment to the promisee. Past consideration is NOT sufficient to form a contract UNLESS the promisor expressly requested the past consideration AND the promisee expected payment. Partial payment of a due and undisputed debt is NOT sufficient consideration.