Contracts and Sales Flashcards Preview

1

What is a contract? General definition:

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

Common Law vs. Article 2 Sale of Goods: defined

Generally, the common law governs contracts. However, special rules have been developed for contracts involving the sale of GOODS, and those rules are contained in Article 2 of the UCC. Article 2 has adopted much of the common law of contracts, but where the common law and Article 2 differ, Article 2 prevails in a contract for the sale of goods.

3

"Sale" defined

A sale is a contract in which title to GOODS passes from the seller to the buyer for a price.

4

"Goods" defined

Article 2 defines "goods" as 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, or to construction contracts. Goods associated with real estate (e.g., growing crops and uncut timber, and fixture removed from the land) MAY fall under Article 2 under certain circumstances.

5

Contracts involving Goods and Nongoods

If a sale involves both goods and services (e.g., contract to paint a portrait), a court will determine which aspect is dominant and apply the law governing that aspect to the whole contract. However, if the contract divides payment between goods and services, then Article 2 will apply to the sale portion and the common law will apply to the services portion.

6

Merchants v. Nonmerchants

A number of the rules of Article 2 depend on whether the seller and/or buyer are merchants. 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 goods involved. For many of the ARticle 2 provisions dealing with general business practices (e.g., Statute of Frauds, confirmatory memos, firm offers, modification), almost anyone in business can be deemed a merchant. However, a few Article 2 provisions (e.g., the implied warranty of merchantability) are narrower and require a person to be a merchant with respect to goods of the kind being sold.

7

Types of Contracts: As to Formation

Contracts are frequently described as express, implied, or quasi. Only the first two are actually contracts, and they differ only in the manner in which they are formed.

8

Express contract:

formed by LANGUAGE, oral or written.

9

Implied in Fact Contract:

formed by manifestation of assent other than oral or written language, i.e., BY CONDUCT (e.g., if a person sits in a barber's chair and the barber cuts his hair, a contract has been formed by the parties' conduct).

10

Quasi-Contract or Implied in Law Contract:

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. Their only relationship to genuine contracts is historical.

11

Types of Contracts: As to Acceptance (list)

bilateral or unilateral

12

Bilateral Contracts:

EXCHANGE OF MUTUAL PROMISES
The traditional bilateral contract is one consisting of the exchange of mutual promises, i.e., a promise for a promise, in which each party is both a promisor and promisee.

13

Unilateral Contracts:

ACCEPTANCE BY PERFORMANCE
The traditional unilateral contract is one in which the offeror request 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.

14

Modern View: Most contracts are ____.

Bilateral.

Under A2 and R2, unless clearly indicated otherwise by the language or circumstances, ALL offers are "doubtful" or "indifferent" offers, which means they may be accepted by promising or beginning performance.

15

Modern View: Unilateral Contracts Limited to Two Circumstances

Under A2 and R2, a traditional unilateral contract (i.e., a contract that can only be formed by full performance) occurs in only two situations:
1. where the offeror clearly (unambiguously) indicates that COMPLETION OF PERFORMANCE IS THE ONLY MANNER OF ACCEPTANCE--the offeror is the master of the offer and may create the offer in this fashion; and
2. where there is an OFFER TO THE PUBLIC, such as a reward offer, which so clearly contemplates acceptance by performance rather than a promise that only the performance requested in the offer will manifest acceptance.

16

Types of Contracts: As to Validity

1. Void contract
2. Voidable contract
3. Unenforceable contract

17

Void contract:

A void contract is one that is totally WITHOUT ANY LEGAL EFFECT from the beginning (e.g., an agreement to commit a crime). It CANNOT BE ENFORCED BY EITHER PARTY.

18

Voidable contract:

A voidable contract is one that one or both parties may ELECT TO AVOID (e.g., by raising a defense that makes it voidable, such as infancy or mental illness.)

19

Unenforceable Contract:

An unenforceable contract is an agreement that is otherwise valid but which may not be enforceable due to VARIOUS DEFENSES extraneous to contract formation, such as the statute of limitations or Statute of Frauds.

20

Creation of a Contract: what three questions will a court ask to determine whether there was in fact a contract?

1. Was there mutual assent?
2. Was there consideration or some substitute for consideration?
3. Are there any defenses to creation of the contract?

21

Mutual Assent--Offer and Acceptance: in general

Mutual assent is often said to be an agreement on the "same bargain at the same time"--"a meeting of the minds." The process by which parties reach this meeting of the minds generally is some form of negotiation, during which, at some point, one party makes a proposal (an offer) and the other agrees to it (an acceptance). An actual subjective meeting of the minds is not necessary. Rather, courts use an OBJECTIVE MEASURE, by which each party is bound to the APPARENT INTENTION that he manifested to the other(s).

22

The Offer:

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 deciding whether a communication creates this reasonable expectation, you should ask the following 3 questions:

1. Was there an expression of a PROMISE, UNDERTAKING, OR COMMITMENT to enter into a contract?

2. Were there CERTAINTY AND DEFINITENESS in the essential terms?

3. Was there COMMUNICATION of the above to the offeree.

23

The Offer: Promise, Undertaking, or Commitment

For a communication to be an offer, it must contain a promise, undertaking, or commitment to enter into a contract, rather than a mere invitation to begin preliminary negotiations; i.e., there must be an INTENT to enter into a contract. The criteria used to determine whether communication is an offer include the following:
1. language
2. surrounding circumstances
3. prior practice and relationship of the parties
4. method of communication
5. industry custom

24

The Offer: Promise, Undertaking, or Commitment--LANGUAGE

The language used may show an offer was or was not intended. Technical language such as "I offer" or "I promise" is useful to show that an offer was made, but it is not necessary. Also, certain language is generally construed as merely contemplating an invitation to deal, preliminary negotiations, or "feelers," rather than being an offer. This includes phrases such as "I quote," "I am asking $30 for," and "I would consider selling for." No mechanical formula is available.

25

The Offer: Promise, Undertaking, or Commitment--SURROUNDING CIRCUMSTANCES

The circumstances surrounding the language will be considered by courts in determining whether an officer exists. For example, where the statement is made in jest, anger, or by way of bragging, and the statement is reasonably understood in this context, it will have no legal effect. However, where the statement is subjectively intended to be in jest but reasonably understood by the hearer to have been made seriously, the statement is an offer because it is interpreted objectively (i.e., according to a reasonable person's expectations).

26

The Offer: Promise, Undertaking, or Commitment--PRIOR PRACTICE AND RELATIONSHIP OF THE PARTIES

In determining whether certain remarks constitute an offer rather than preliminary negotiations, a court will look to the prior relationship and practice of the parties involved.

27

The Offer: Promise, Undertaking, or Commitment--METHOD OF COMMUNICATION

1. Use of Broad Communications Media: the broader the communications media, the more likely it is that the courts will view the communication as merely a SOLICITATION OF AN OFFER. (except reward offers)

2. Advertisements, Etc: Advertisements, catalogs, circular letters, and the like containing price quotations are USUALLY construed as mere INVITATIONS FOR OFFERS. They are announcements of prices at which the seller is willing to receive offers. However, in certain situations, courts have treated advertisements as OFFERS where the language of the advertisement can be constructed as containing a promise, the terms are certain and definite, and the offeree(s) is clearly identified. (defendant store advertised a particular coat worth $140 for $1 on a "first come, first served" basis)

28

The Offer: Promise, Undertaking, or Commitment--INDUSTRY CUSTOM

The courts will also look to generally accepted custom in the industry in determining whether the proposal qualifies as an offer.

29

The Offer: Definite and Certain Terms: defined

An offer must be definite and certain in 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. The principle is that the parties make their own contract; the courts do not make it for them. What is essential for the requisite certainty in an offer depends on the kind of contract contemplated. Typically, the following are important:
1. the IDENTITY OF THE OFFEREE;
2. the SUBJECT MATTER; and
3. the PRICE to be paid.

However, a promise generally will be enforceable even if it does not spell out every material term, as long as it contains some OBJECTIVE STANDARD for the court to use to supply the missing terms.

30

The Offer: Definite and Certain Terms: IDENTIFICATION OF THE OFFEREE

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.

31

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER

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.

32

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: real estate transactions

LAND AND PRICE TERMS REQUIRED
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.

33

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods

QUANTITY TERM REQUIRED
In a contract for sale of goods, the QUANTITY being offered must be certain or capable of being made certain.

34

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods--"Requirements" and "Output" Contracts

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 the seller produces, and the buyer agrees to buy that amount from the seller. Although no specific quantity is mentioned in offers to make these contracts, the offers are sufficiently definite because the quantity is CAPABLE of being made certain by reference to objective, extrinsic facts (i.e., the buyer's actual requirements or the seller's actual output).

1. Quantity Cannot be Unreasonable Disproportionate: 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 1. any stated estimate, or in the absence of a stated estimate 2. any normal or otherwise comparable prior output or requirements.

Established Business v. New Business: A number of courts have sometime refused to enforce such agreements if the promisor did not have an established business. The courts in these cases reason that,due to lack of any basis for estimating quantity, the agreement is illusory or the damages too speculative. A2 avoids this problem by reading a "good faith" agreement into the contract; i.e., the promisor must operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure.

35

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: sale of goods--Reasonable Range of Choices

An offer allowing a person to specify an item within a reasonable range of choices may be sufficiently definite to result in a contract if accepted.

36

The Offer: Definite and Certain Terms: DEFINITENESS OF SUBJECT MATTER: Services

NATURE OF WORK REQUIRED
The nature of the work to be performed is required in an offer for services.

37

The Offer: Definite and Certain Terms: MISSING TERMS:

The fact that one or more terms are left open DOES NOT PREVENT THE FORMATION of a contract if it appears 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 A2 hold that the COURT CAN SUPPLY REASONABLE TERMS for those that are missing. These terms will be supplied, however, only where they are consistent with the parties' intent as otherwise expressed. Note that the more terms the parties leave open, the less likely it is that they intended to enter into a binding agreement.

38

The Offer: Definite and Certain Terms: MISSING TERMS: price

Except in contracts for real property, the failure to state the price does not prevent the formation of a contract if the parties intended to form a contract without the price being settled. For example, if parties enter into a contract for services and the price is not included in the offer, a court might imply the service provider's usual price for the services, the normal price for such services in the area, etc.

1. A2 Gap Filler
A2 includes some very specific "gap fillers" for situation where certain terms are not included in a contract for the sale of goods. Under A2, the price will be a REASONABLE PRICE AT THE TIME OF DELIVERY if:
1. Nothing is said as to price;
2. The price is left to be agreed to by the parties and they fail to agree; or
3. The price is to be fixed by some external factor or third party and it is not so set.

2. Price Fixed by Party Under Article 2
Under Article 2, a contract will be formed even if the parties agree that one of the parties will fix the price in the future (e.g., price to be set by seller at the time of delivery). However, the party to whom the contract gives the right to fix the price must act in GOOD FAITH. If that party does not fix the price in good faith, the other party may either cancel the contract or fix a reasonable price herself.

39

The Offer: Definite and Certain Terms: DISTINGUISH--VAGUE TERMS:

The presumption that the parties' intent was to include a reasonable term goes to supplying MISSING terms. However, the presumption CANNOT be made if the parties have INCLUDED a term that makes the contract too vague to be enforced. The problem then is that the parties have manifested an intent that cannot be determined.

Examples:
1. An agreement to divide profits "on a liberal basis" is too vague to be enforced.
2. An agreement to purchase a parcel of land for $8,000 or less is also too vague.

40

The Offer: Definite and Certain Terms: DISTINGUISH--VAGUE TERMS: vagueness can be cured by

PART PERFORMANCE
Where part performance supplies the needed clarification of the terms, it can be used to cure vagueness.

41

The Offer: Definite and Certain Terms: DISTINGUISH--VAGUE TERMS: uncertainty can be cured by

If uncertainty results because of the offeree is given a choice of alternative performances, the offer becomes definite when the offeree communicates her choice.

42

The Offer: Definite and Certain Terms: DISTINGUISH--VAGUE TERMS: focus on the contract

The CONTRACT, as distinguished from the offer) must be definite and certain in its terms--hence, even if the offer lacks certainty, the problem can be cured if there is some way the offer is capable of being made certain, e.g., by part performance of acceptance.

43

The Offer: Definite and Certain Terms: 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. The courts will not supply a reasonable term, as the parties have provided otherwise. However, A2 permits a reasonable PRICE term to be supplied by the court under these circumstances if the other evidence indicates that the parties intended to form a contract.

44

The Offer: Communication to the Offeree

To have the power to accept, the offeree must have knowledge of the offer. Therefore, the proposal must be communicated to her.

45

Termination of the Offer:

The power of acceptance created by an offer ends when the offer is terminated. The mutual assent requirement obviously cannot be met where the termination occurs before acceptance is effective. Thus you must establish whether the offer has been terminated, and if so, in what fashion.

46

Termination of the Offer: Termination by Offeror--Revocation

A revocation is the retraction of an offer by the offeror. A revocation terminates the offeree's power of acceptance if it is communicated to her BEFORE SHE ACCEPTS.

47

Revocation by Direct Communication

Revocation directly communicated to the offeree by the offeror terminates the offer.

Revocation by publication: offers made by publication can be terminated by publication of revocation THROUGH COMPARABLE MEANS.

48

Revocation by Indirect Communication

The offer may be effectively terminated if the offeree INDIRECTLY receives:
1. correct information
2. from a reliable source
3. of acts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.

49

Revocation effective when ____.

RECEIVED
A revocation is generally effective when RECEIVED by the offeree. Where revocation if by publication, it is effective when PUBLISHED.

50

When a communication is received:

At common law, a written communication is considered to have been "received" when it comes into the possession of the person addressed (or of someone authorized by him to receive it) or when it is deposited in some place authorized as the place for this or similar communication to be deposited. The communication NEED NOT BE READ by the recipient to be effective. Similarly, under the UCC, a person receives notice when 1. it comes to his attention, or 2. it is delivered at a place of business through which the contract was made or another location held out by that person as the place for receipt of such communications. An organization receives a communication at the time it is brought (or should have been brought) to the attention of the individual conducting the transaction.

51

Limitations on Offeror's Power to Revoke

Offers can be revoked at will by the offeror, even if he has promised not to revoke for a certain period, except under certain situations where the offeror's power to terminate the offer is limited:
1. options
2. merchant's firm offer under a2
3. detrimental reliance
4. part performance--true unilateral contract offers
5. part performance--offer indifferent as to manner of acceptance

52

Limitations on Offeror's Power to Revoke: 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.

53

Limitations on Offeror's Power to Revoke: Merchant's Firm Offer Under Article 2

Under Article 2, there are circumstances in which a promise to keep an offer open is enforceable even if no consideration has been paid to keep the offer open. Under A2:

1. If a MERCHANT
2. Offers to sell goods in a SIGNED WRITING; and
3. The writing GIVES ASSURANCES THAT IT WILL BE HELD OPEN (e.g., "this offer will be held open for 10 days," "this offer is firm for 10 days")
4. 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 even may such period exceed THREE MONTHS).

NOTE: As with the Statute of Frauds requirements, the signed writing requirement for a merchant's firm offer may be satisfied by an electronic record and an electronic signature.

54

Limitations on Offeror's Power to Revoke: Detrimental Reliance

Where the offeror could reasonably expect that the offeree would rely to 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. The case law indicates that this may be limited to those situations in which the offeror would REASONABLY CONTEMPLATE RELIANCE by the offeree in USING THE OFFER BEFORE IT IS ACCEPTED.

55

Limitations on Offeror's Power to Revoke: Part Performance--True Unilateral Contract Offers--IMPLIED CONTRACT FOR A REASONABLE TIME

Under R1 and R2, as well as A2, an offer for a true unilateral contract becomes IRREVOCABLE ONCE PERFORMANCE HAS BEGUN. Note that the unilateral contract will not be formed until the total act is complete. However, once the offeree begins to perform, she is given a REASONABLE TIME TO COMPLETE PERFORMANCE, during which time the offer is irrevocable. Note also that the offeree is NOT BOUND to complete performance--she may withdraw at any time prior to completion.

R2 says an option contract is formed upon the start of the performance by the offeree, making the offer irrevocable for a reasonable period. It is as if the offeree had paid consideration to keep it open.

56

Part Performance: preparation to perform

The rules limiting the offeror's power to revoke an offer for a unilateral contract apply only if the offeree has EMBARKED on performance. They do not apply when the offeree is only preparing to perform. Note, however, that substantial preparations to perform MAY CONSTITUTE DETRIMENTAL RELIANCE sufficient to make the offeror's promise binding to the extent of the detrimental reliance.

57

Part Performance: Offeror Refuses to Accept Performance

What happens if performance is tendered by the offeree but refused by the offeror? If the offeror's cooperation is necessary for performance, his withholding of it upon the tender of part performance is the equivalent of part performance.

58

Part Performance--Offer Indifferent as to Manner of Acceptance

As noted above, most offers are indifferent as to the manner of acceptance, and, thus, a bilateral contract may be formed UPON THE START OF PERFORMANCE by the offeree. Therefore, once the offeree BEGINS PERFORMANCE, the contract is complete an REVOCATION becomes IMPOSSIBLE. Notification of the start of performance may be necessary.

59

Termination by Offeree: 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.

60

Termination by Offeree: 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. A counteroffer serves as a rejection of the original offer AS WELL AS A NEW OFFER. This usually happens in two situatuions:
1. Counteroffer combined with an express rejection.
2. Acceptance conditional upon additional terms, e.g., I'll take it at that price, but only if it is also equipped with air conditioning.

Note: A2 provides for exceptions to the above general treatment in the "battle of the forms" provision.

61

Distinguish Counteroffer from Mere Inquiry

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.

Examples:
1. The offeree says to the offeror, "Would you consider lowering your price by $5,000?" This, without more, is merely an inquiry, not a rejection.

2. The offeree says to the offeror, "I couldn't possibly pay your asking price but could pay $5000 less." This is more than a mere inquiry because of the certitude involved and will be treated as a counteroffer.

62

A rejection is effective ___.

When received by the offeror.

63

Revival of offer:

If an offer is rejected, the offeror may restate the same offer and create a new power of acceptance. Some courts refer to this as the revival of the offer. It is more precise to suggest that a new offer, although the same as the original offer, has been made.

64

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 this offeror has DETRIMENTALLY RELIED on the offeree's rejection.

65

Offer: Lapse of Time

MUST ACCEPT WITHIN SPECIFIED OR REASONABLE TIME: The offeree must accept the offer within the time period specified or, if no time period is specified, within a reasonable time. If she does not do so, then she will have allowed the offer to terminate.

LOOK TO WHEN OFFER IS RECEIVED BY OFFEREE: If the offer provides that it will expire within a particular period of time, that period commences when the offer is received by the offeree. If the offer is delayed in transmission and this fact IS OR SHOULD HAVE BEEN APPARENT TO THE OFFEREE, the offer terminates at the time it would have expired had there been no delay. All relevant facts must be considered in determining whether this knowledge is present. These include, e.g., date of letter, postmark, and any subsequent statements made by the offeror.

66

Termination of Offer by Operation of Law: list

1. Termination by Death or Insanity of Parties
2. Termination by Destruction of Subject Matter
3. Termination by Supervening Legal Prohibition of Proposed Contract

67

Termination by Death or Insanity of Parties

If either of the parties dies or is adjudicated insane prior to acceptance, the offer is terminated. It is NOT necessary that the death or insanity be COMMUNICATED to the other party. Note, however, that the offer will NOT terminate in this fashion if the rules limiting an offeror's power to terminate are applicable (such as an option).

68

Acceptance: defined

An acceptance is a manifestation of assent to the terms of an offer. Through this manifestation of assent, the offeree exercises the power given her by the offeror to create a contract.

69

Who may accept offer:

1. Party to Whom Offer is Addressed or Directed
2. Offeree's Power of Acceptance Cannot be Assigned (Exception: Option contracts)

70

Acceptance of Offer for Unilateral Contract: rules

1. 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 an acceptance of the offer.

2. Notice: required to notify the offeror within a reasonable time after performance has been completed. If a required notice is not given, a contract is formed, but the offeror's duties are discharged for failure of an implied condition subsequent. However, no notice is required if:
1. The offeror waived notice; or
2. The offeree's PERFORMANCE WOULD NORMALLY COME TO THE OFFEROR'S ATTENTION within a reasonable time.

COMPARE ARTICLE 2
Provides that when a contract is accepted by the beginning of performance, if the offeree fails to notify the offeror of the acceptance within a reasonable time, the offeror may treat the offer as having LAPSED BEFORE ACCEPTANCE.

71

Acceptance of Offer for Bilateral Contract: Exception to general rule that acceptance must be communicated

Waiver in Offer: If an offer provides that an acceptance need not be communicated, then no communication of the acceptance is required.

72

Acceptance of Offer for Bilateral Contract: Silence as acceptance

Although the offeree cannot be forced to speak under penalty of having her silence treated as an acceptance, if the offeree silently takes offered benefits, the couts will often find an acceptance. This is especially true if prior dealings between the parties, or trade practices known to both, create a commercially reasonable expectation by the offeror that silence represents an acceptance. In such a case, the offeree is under a duty to notify the offeror if she does not intend to accept.

73

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.

1. Act as Acceptance: the offeror is master of the offer and can require an act to signify acceptance.

74

Offers to Buy Goods for Current or Prompt Shipment--Acceptance

Under A2, 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.

75

Shipment of Nonconforming Goods: acceptance

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 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.

76

Acceptance must be unequivocal: Common law rule

Traditional contract law insisted on an absolute and unequivocal acceptance of each and every term of the offer (the "mirror image rule"). At common law, any different or additional terms in the acceptance make the response a REJECTION AND COUNTEROFFER.

DISTINGUISH THIS FROM:
1. Statements that Make Implicit Terms Explicit
2. "Grumbling Acceptance"
3. Request for Clarification

77

Article 2 Rule--Battle of the Forms Provision and Acceptance

A2 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 becomes part of the contract depends on whether or not both parties are merchants.

78

Article 2: 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. The contract consists of all terms on which their writings agree, plus supplementary terms supplied by the UCC.

79

Acceptance: Bilateral Contracts Formed by Performance

Sometimes in business, a contract is not formed by the parties' communications, either because:
1. the mirror image rule has not been satisfied; or
2. in a contract for the sale of goods, the original offeror's form contains a clause objecting in advance to any new or inconsistent term and the offeree sends a response with new or different terms that states it is not an acceptance unless the original offeror agrees to these terms.

Clearly, no contract is formed at this point. But, as is sometimes the case, if the parties begin to perform as if they formed a contract, a contract is formed.

COMMON LAW RATIONALE: the last communication sent to the party who performed is a counteroffer and the performance is considered acceptance of the counteroffer.

SALE OF GOODS: A2 specifically provides that conduct by both parties that recognizes the existence of a contract is sufficient to establish the contract.

80

Acceptance: When Effective--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).

NOTE: Because in most states a revocation is effective only upon receipt, under the mailbox rule if the offeree dispatches an acceptance BEFORE HE RECEIVES A REVOCATION sent by the offeror, a contract is formed. This is true even though the acceptance is dispatched after the revocation is dispatched and received after the revocation is received.

81

Offeree Sends Rejection, Then Acceptance--Mailbox Rule _____.

DOES NOT APPLY
If the offeree sends a rejection and then sends an acceptance, the mailbox rule does not apply. Whichever one is RECEIVED FIRST is effective.

82

Offeree Sends Acceptance, Then Rejection--Mailbox Rule ____.

GENERALLY APPLIES
If the offeree send the acceptance first, the mailbox rule applies; i.e., a contract is created upon dispatch of the acceptance. However, if the offeror received the rejection first and CHANGED HIS POSITION IN RELIANCE on it, the offeree will be ESTOPPED from enforcing the contract.

83

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.

84

UCC Auction Contracts Rules: Goods Auctioned in Lots

In a sale by auction, if goods are put up in lots, each lot is the subject of a separate sale.

85

UCC Auction Contracts Rules: When Sale is Complete

A sale by auction is complete when the auctioneer so announces by the FALL OF THE HAMMER or in another customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid, the auctioneer may, in his discretion, reopen the bidding or declare the goods sold under the bid on which the hammer was falling.

86

UCC Auction Contracts Rules: Auction With Reserve or Without Reserve

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. In an auction without reserve, once the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case, a bidder may retract his bid until the auctioneer announces completion of the sale, but a bidder's retraction does not revive any previous bid.

87

UCC Auction Contracts Rules: A bid on seller's behalf

Except at a forced sale, if the auctioneer knowingly receives a bid on the seller's behalf, or the seller makes or procures such a bid (in order to drive up the price of the goods), and notice has not been given that liberty for such bidding is reserved, the winning bidder may at his option avoid the sale or take the goods at the price of the LAST GOOD FAITH BID prior to the completion of the sale.

88

Consideration: elements

1. BARGAINED FOR EXCHANGE between the parties;
2. 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. At the present time, the DETRIMENT element is emphasized in determining whether an exchange contains legal value.

89

Consideration: Bargained-For Exchange

This element of consideration requires that the promise induce the detriment AND the detriment induce the promise.

90

Consideration: gift

If either of the parties intended to make a gift, he was not bargaining for consideration and this requirement will not be met.

Act or Forbearance by Promisee Must Be of Benefit to Promisor: It is not enough that the promisee incurs detriment; the detriment must be the PRICE of the exchange, and not merely fulfillment of certain conditions for making the gift. The test is whether the act or forbearance by the promisee would be of benefit to the promisor. In other words, if the promisor's motive was to induce the detriment, it will be treated as consideration; if the motive was no more than to state a condition of a promise to make a gift, there is no consideration.

2. Economic Benefit Not Required
The benefit to the promisor need not have economic value. Peace of mind or the gratification of influencing the mind of another may be sufficient to establish bargained-for consideration, provided that the promisee is not already legally obligated to perform the requested act.

91

"Past" or "Moral" Consideration: general rule

NOT SUFFICIENT CONSIDERATION
If something was already given or performed before the promise was made, it will not satisfy the "bargain" requirement. The courts reason that it was not given in exchange for the promise when made.

92

"Past" or "Moral" Consideration: exceptions

There is substantial disagreement with the general rule. Thus, the courts have sought to avoid it application by creating exceptions.

1. Debt Barred by a Technical Defense: If a past obligation would be enforceable except for the fact that a technical defense to enforcement stands in the way (e.g., statute of limitations), the courts will enforce a new promise if it is IN WRITING or has been PARTIALLY PERFORMED. However, the court will enforce the contract only to the extent of the new promise.

2. Promise to Pay Arising Out of Past Material Benefit--Material Benefit Rule
Under a modern trend, SOME courts will enforce a promise if it s based on a material benefit that was previously conferred by the promisee on the promisor and if the promissee did not intend to confer the benefit as a gift. This includes situations in which the promisee performed an act at the promisor's request or performed an unrequested act during an emergency. R2 follows this rule, but adds that the promise if unenforceable to the extent it is disproportionate to the benefit conferred.

93

Consideration: Legal Value--Adequacy of Consideration

Courts of law will NOT inquire into the adequacy of consideration. If a party wishes to contract to sell an item of high market value of relatively low price, so be it. However, COURTS OF EQUITY may inquire into the relative values and deny EQUITABLE REMEDY (such as an order for specific performance) if they find a contract to be unconscionable.

94

Token consideration:

If the consideration is only token (i.e., something totally devoid of value), it will usually not be legally sufficient. The courts reason that this indicates a gift rather than a bargained for consideration.

95

Sham consideration:

Parties to a written agreement often recite that it was made in consideration of $1 or some other insignificant sum. Frequently this recited sum was not in fact paid and, indeed, it was never intended to be paid. Most court hold that evidence may be introduced to show that the consideration was not paid and no consideration was given in its stead.

96

Consideration: Possibility of Value:

Where there is a possibility of value in the bargained for act, adequacy of consideration will be found even though the value never comes into existence.

97

Legal Benefit and Legal Detriment Theories: Majority Rule

The majority of courts still adhere to the view that DETRIMENT TO THE PROMISEE in performing an act or making a promise is the exclusive test of consideration. The fact that this act or promise may confer a legal benefit on the other party, taken alone, is not sufficient consideration.

98

Legal Benefit and Legal Detriment Theories: Minority and First Restatement

The minority and R1 view is stated in the alternative: Either DETRIMENT OR BENEFIT to the other party will suffice.

99

Legal Benefit and Legal Detriment Theories: R2

Departs from the use of the benefit/detriment test. The only question it would ask about consideration is whether something was BARGAINED FOR AND GIVEN (or promised to be given) in exchange.

100

Detriment and Benefit Defined: legal detriment to Promisee

Legal detriment will result if the promisee does something he is under no legal obligation to do or refrains from doing something that he has a legal right to do. It is important to remember that the detriment to the promisee need not involve any actual loss to the promisee or benefit to the promisor.

101

Detriment and Benefit Defined: legal benefit to Promisor

A legal benefit to the promisor is simply the reverse side of legal detriment. In other words, it is a forbearance or performance of an act by the promisee which the promisor was not legally entitled to expect or demand, but which confers a benefit on the promisor.

102

Preexisting Legal Duty Not Consideration: Exceptions

1. New or Different Consideration Promised (doesn't matter how slight)
2. Promise to perform a Voidable Obligation (ratification)
3. Preexisting Duty Owed to Third Party
4. Honest Dispute as to Duty (modifying agreement seen as a compromise and a detriment to each party)
5. Unforeseen Circumstances if RISES TO THE LEVEL OF IMPRACTICABILITY
6. Modification of Contract for the Sale of Goods sought in GOOD FAITH are binding without consideration under A2.
7. Existing Debts: payment of a smaller sum not sufficient consideration for a promise by the creditor to discharge the debt unless NEW OR DIFFERENT (e.g., payment before maturity or to one other than the creditor or payment in a different medium--stock instead of cash)

103

Consideration: Forbearance to Sue

The promise to refrain from suing on a claim may constitute consideration. If the claim is VALID, the forbearance to sue is, of course, sufficient consideration. If the claim is INVALID and the claimant is aware of this fact, he has no such right; his suit is no more than the wrongful exercise of power. But even if the claim is invalid, in law or in fact, if the claimant reasonably and in good faith believes his claim to be valid, forbearance of the legal right to have his claim adjudicated constitutes detriment and consideration.

104

Illusory Promises: defined

Consideration must exist on both sides of the contract; that is, promises must be mutually obligatory. There are many agreement in which one party has become bound, but the other has not. Such agreements lack mutuality, i.e., at least one of the promises is "illusory." If so consideration fails.

105

Requisite mutuality will be found to exist in certain situations even though the promisor has some choices or discretion: list

1. Requirements and Output Contracts
2. Conditional Promises
3. Right to Cancel or Withdraw
4. Exclusivity Agreements--Best Efforts Implied
5. Voidable Promises
6. Unilateral/Option Contracts
7. Suretyship Promises
8. Right to Choose Among Alternative Courses

106

Requirement of mutuality: requirements and output contracts

Enforceable because consideration exists, as the promisor is suffering a legal detriment; he has parted with the legal right to buy (or sell) the goods he may need (or manufacture) from (or to) another source.

107

Requirement of mutuality: Conditional Promises

Enforceable, no matter how remote the contingency, UNLESS the "condition" is entirely within the promisor's control.

PROMISE CONDITIONED ON SATISFACTION is not illusory, because the buyer cannot reject the goods unless the buyer is truly dissatisfied. The buyer has a duty to act in good faith in such a situation.

108

Requirement of mutuality: Right to Cancel or Withdraw

Although reservation of an unqualified right to cancel or withdraw at any time may be an illusory promise, the consideration is valid if this right is in ANY WAY RESTRICTED, e.g., the right to cancel upon 60 days notice. Note that A2 implies a requirement of reasonable notice even if it is not specified in the contract.

109

Requirement of mutuality: Exclusivity Agreements--Best Efforts Implied

A court may find an implied promise furnishing mutuality in appropriate circumstances (such as exclusive marketing agreements). The courts will usually find an implied promise to use best efforts and sustain agreements that might otherwise appear illusory.

110

Requirement of mutuality: Unilateral/Option Contracts

Unilateral: Enforceable because one has begun performance, or option contracts, enforceable because one has begun performance.

Option contracts: enforceable because one has purchased time to decide.

111

Requirement of mutuality: suretyship promises

A suretyship contract involves a promise to pay the debt of another. A suretyship contract is not enforceable unless it is supported by consideration. If a suretyship is compensated, the requirement of consideration is not much of an issue, because the compensation will serve as consideration for the surety's promise. If, however, the surety is gratuitous (i.e., surety is not paid for his service), the consideration requirement may cause problems. The timing becomes important in determining whether adequate consideration is present in a gratuitous surety situation.

112

Surety makes promise before (or at the same time as) creditor performs or promises to perform -- is there consideration?

CONSIDERATION PRESENT
If the gratuitous surety makes his promise to pay BEFORE (or at the SAME TIME as) the creditor performs or promises to perform, the CREDITOR'S performance or promise will serve as consideration for the surety's promise, because the creditor has incurred a detriment in exchange for the surety's promise.

113

Surety makes promise after creditor performs or promises to perform-- is there consideration?

GENERALLY NO CONSIDERATION TO SUPPORT SURETY'S PROMISE
If a gratuitous surety does not make his promise until AFTER the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety's promise because of the preexisting legal duty rule--the creditor has not incurred any new detriment in exchange for the surety's promise. The the surety's promise is unenforceable.

Exceptions:
1. Obtaining Surety is Condition Precedent
2. Additional Consideration

114

Requirement of mutuality: Right to Choose Among Alternative Courses

A promise to choose one of several alternative means of performance is illusory unless EVERY ALTERNATIVE involves SOME LEGAL DETRIMENT to the promisor. However, if the power to choose rests with the PROMISEE or some THIRD PARTY not under the control of the promisor, the promise is enforceable as long as AT LEAST ONE ALTERNATIVE involves some legal detriment.

SELECTION OF VALUABLE ALTERNATIVE CURES ILLUSORY PROMISE: even if a promisor retains the power to select an alternative without legal detriment, his ACTUAL selection of an alternative involving legal detriment would cure the illusory promise.

115

Promissory Estoppel or Detrimental Reliance:

CONSIDERATION IS NOT NECESSARY if the facts indicate that the promisor should be estopped from not performing. Under R1, a promise is enforceable if necessary to prevent injustice if:
1. The promisor should reasonably EXPECT TO INDUCE ACTION OR FORBEARANCE;
2. OF A DEFINITE AND SUBSTANTIAL CHARACTER;
3. AND SUCH ACTION OR FORBEARANCE IS IN FACT INDUCED.

R2: no longer requires that the action or forbearance be "of a definite and substantial character." It also provides that the remedy "MAY BE LIMITED AS JUSTICE REQUIRES."

Typically, if the elements for promissory estoppel are present, a jurisdiction following R1 will award expectation damages (i.e., what was promised under the contract), while a jurisdiction following R2 might award reliance damages (i.e., whatever the promisee spent in reliance on the promise), which usually is something less than expectation damages, but theoretically can exceed them.

116

Requirement That No Defenses Exist: defined

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 a formation of contract, because there is a defect in capacity (making the obligation voidable by one of the parties), or because a defense to enforcement of certain terms exists.

117

Defenses to Formation of Contract: 3 categories

1. absence of mutual assent; 2. absence of consideration; 3. public policy considerations that deny contractual status to the agreement.

118

Defenses to Formation of Contract: Absence of Mutual Assent: list 5

1. Mutual Mistake as to Existing Facts
2. Compare--Unilateral Mistake
3. Mistake by Intermediary (Transmission)
4. Ambiguous Contract Language
5. Misrepresentation

119

Defenses to Formation of Contract: Absence of Mutual Assent: MUTUAL MISTAKES AS TO EXISTING FACTS

When 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:
1. The mistake concerns a BASIC ASSUMPTION on which the contract is made;
2. The mistake has a MATERIAL EFFECT on the agreed-upon exchange; and
3. The party seeking avoidance DID NOT ASSUME THE RISK of the mistake.

Assumption of risk: commonly occurs when one party is in a position to know the risks better than the other party or where the parties knew that their assumption was doubtful (i.e., where the parties were consciously aware of their ignorance). In other words, to be a defense, it must be a mistake, not a mere uncertainty.

Mistake in value generally not a defense because both parties usually assume the risk that their assumption as to value is wrong.

120

Defenses to Formation of Contract: Defenses to Formation of Contract: 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.

Unilateral Mistake May Be Canceled in Equity: there is authority in a number of cases that contracts with errors, such as mistakes in COMPUTATION, may be canceled in equity, assuming that the nonmistaken party has NOT RELIED on the contract. There is also modern authority indicating that a unilateral mistake that is SO EXTREME that it outweighs the other party's expectations under the agreement will be a ground for cancellation of the contract.

ERROR IN JUDGMENT: an error in judgment by one of the parties as to the value or quality of the work done or goods contracted for will NOT prevent formation of a contract, even if the nonmistaken party knows or has reason to know of the mistake made by the other party.

121

Defenses to Formation of Contract: 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.

122

Defenses to Formation of Contract: Ambiguous Contract Language

Contract language with at least two possible meanings leads to different results depending on the awareness of the parties.

1. Neither Party Aware of Ambiguity--No Contract UNLESS both parties happened to intend the same meaning.
2. Both Parties Aware of Ambiguity--No Contract UNLESS both parties in fact intended the same meaning.
3. One Party Aware of Ambiguity--Contract enforced according to the intention of the party who was unaware of the ambiguity.
4. Subjective Intention of Parties Controls

123

Defenses to Formation of Contract: Misrepresentation: list

1. Fraudulent Misrepresentation;
2. Nonfraudulent Misrepresentation

124

Defenses to formation: Fraudulent Misrepresentation

(Fraud in the Inducement)--Contract Voidable: Misrepresentation is a false assertion of fact. Fraudulent if intended to induce a party to enter into a contract and the maker knows or believes the assertion if false or knows that he does not have a basis for what he states or implies with assertion. A fraudulent assertion can be inferred from conduct.

Concealment and Nondisclosure: an action intended to prevent another from learning a fact is the equivalent of asserting that a fact does not exist. Similary, if a party frustrates an investigation by the other party or falsely denies knowledge of a fact, it can be considered a misrepresentation. Note, however, that nondisclosure without concealment is usually not a misrepresentation. A party is not required to tell everything he knows to the other party, but if the nondisclosure is either MATERIAL OR FRAUDULENT, the contract is voidable for misrepresentation.

Distinguish: Fraud in the Factum
If one of the parties was tricked into giving assent to the agreement under circumstances that prevented her from appreciating the significance of her action, the agreement cannot be enforced; it is VOID.

125

Misrepresentation: justified reliance

A party's reliance on a misrepresentation must be justified for the contract to be voidable; i.e., he is not entitled to relief if the reliance was unreasonable under the circumstances. However, the mere fact that the misrepresentation could have been revealed by the exercise of reasonable care does not mean reliance was unjustified. For example, a party's failure to read a contract or use care in reading it will not necessarily preclude him from avoiding the contract.

126

Misrepresentation: Innocent Party May Rescind Agreement

The innocent party need not wait until she is sued on the contract, but may take affirmative action in equity to RESCIND the agreement. The right to rescind the agreement exists even if the terms are fair or beneficial to the misled party. The right to void or rescind such a contract may be lost, however, if the party so induced affirms the contract in question.

127

Remedies for Fraud;`

In addition to rescission, remedies for material misrepresentation or fraud include all remedies available for breach. In a contract for the sale of goods, neither rescission nor the return of the goods is inconsistent with the claim for damages. Note that the time period to bring an action for fraud does not run until the party knows or should have known of the fraud.

128

Defenses to Formation of Contract: 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.

129

Defenses to Formation of Contract: Public Policy Defenses to Contract Formation--Illegality

If either the CONSIDERATION OR THE SUBJECT MATTER of a contract is illegal, this will serve as a defense to enforcement. Contracts may be illegal because they are inconsistent with the Constitution, violate a statute, or are against public policy as declared by the courts.

130

Defenses to Formation of Contract: Some Typical Cases of Illegality

1. Agreements in restraint of trade;
2. Gambling contracts;
3. Usurious contracts;
4. Agreements obstructing administration of justice;
5. Agreements inducing breach of public fiduciary duties; and
6. Agreements relating to torts or crimes.

131

Defenses to Formation of Contract: Effect of Illegality

1. Generally Contract is Void

2. Effect Depends on Timing of Illegality:
If the subject matter or consideration was illegal at the time of the offer, there was NO VALID OFFER. If it became illegal after the offer but before acceptance, the supervening illegality operates to REVOKE THE OFFER. If it became illegal after a valid contract was formed, the supervening illegality operates to DISCHARGE THE CONTRACT because performance has become impossible.
3.

132

Defenses to Formation of Contract: Illegal Purpose

If the contract was formed for an illegal PURPOSE but neither the consideration nor the subject matter is illegal, the contract is only VOIDABLE by the party who 1. did not know of the purpose; or 2. knew but did not facilitate the purpose AND the purpose does not involve "serious moral turpitude." If both parties knew of the illegal purpose and facilitated it, or knew and the purpose involves serious moral turpitude, the contract is VOID and unenforceable.

133

Limitations on Illegality Defense: list

1. Plaintiff Unaware of Illegality: if the plaintiff contracted without knowledge that the agreement was illegal and the defendant acted with knowledge of the illegality, the innocent plaintiff may recover on the contract.
2. Parties Not in Pari Delicto: a person may successfully seek relief if he was not as culpable as the other.
3. Licensing--Revenue Raising v. Protection: if a contract is illegal solely because a party does not have a required license, whether the contract will be enforceable depends on the reason for the license (if the license is merely to raise revenue, the contract is generally enforceable; if the license is for the protection of the public, the contract is void)

134

Defenses Based on Lack of Capacity: list

1. Legal Incapacity to Contract;
2. Duress and Undue Influence

135

Legal Incapacity to Contract: defined

Individuals in certain protected classes are legally incapable of incurring binding contractual obligations. Timely assertion of this defense by a promisor makes the contract VOIDABLE at his election.

136

Legal Incapacity to Contract: list

1. Contracts of Infants
2. Mental Incapacity
3. Intoxicated Persons

137

Who is an infant?

The age of majority in most jurisdictions is 18. however, in many states, married persons under 18 are considered adults.

138

Effect of Infant's Contract

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. In other words, a contract entered into between an infant and an adult is VOIDABLE BY THE INFANT BUT BINDING ON THE ADULT.

139

Disaffirmance of Infant contract:

An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. If a minor chooses to disaffirm, she must return anything that she received under the contract THAT STILL REMAINS at the time of disaffirmance. However, there is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed.

Exceptions: most states have created a small number of statutory exceptions to the rule that minors can disaffirm their contracts (e.g., student loan agreements, insurance contracts, agreements not to reveal an employer's proprietary information, etc.)

140

Affirmance of infant contract upon Majority:

An infant may affirm, i.e., choose to be bound by his contract, upon reaching majority. He affirms either expressly or by conduct, e.g., FAILING TO DISAFFIRM the contract WITHIN A REASONABLE TIME AFTER REACHING MAJORITY.

141

Legal Incapacity to Contract: 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 recovery, 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.

142

Legal Incapacity to Contract: 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.

143

Duress and Undue Influence: defined

Contracts induced by duress or undue influence are VOIDABLE and may be rescinded as long as not affirmed.

144

Duress: 2 types

1. Physical compulsion: contract is void.
2. Improper threat that leaves victim no reasonable alternative: contract voidable by the victim.

Economic Pressure Generally Not a Defense

Economic Duress as a defense must have the two elements:
1. The party threatens to commit a wrongful act that would seriously threaten the other contracting party's property or finances; and
2. There are no adequate means available to prevent the threatened loss.

145

Undue Influence:

Unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relationship between them is justified in assuming that the person will not act in a manner inconsistent with his welfare. The elements of undue influence are often described as undue susceptibility to pressure by one party and excessive pressure by the other. Other factors considered are the unfairness of the resulting bargain and the availability of independent advice.

146

Defenses to Enforcement: defined

Defects in the subject matter of a bargain or in the capacity of one party to contract arise at the formation stage and make the agreement void or voidable. Other defenses, however, involve failure of the agreement to qualify for judicial relief and may arise at the formation state or later.

147

Defenses to Enforcement: list

1. Statute of Frauds
2. Unconscionability

148

Statute of Frauds: writing requirement

The Statute of Frauds does not require that the contract be in writing; it requires only that there be one of more writings signed by the person sought to be held liable on the contract that reflect the MATERIAL TERMS of the contract (e.g., in a land sale contract, a description of the property and the price are required; in a contract for the sale of goods, the quantity is required). Thus, a letter (even of a nonparty) or receipt, or even a check indicating a quantity of goods on the memo line, could be sufficient.

ELECTRONIC RECORD SATISFIES WRITING REQUIREMENT: such as an email.

149

Statute of Frauds: 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.

ELECTRONIC SIGNATURE: The signature requirement may be satisfied by electronic signature. As with paper signatures, whether a record is "signed" is a question of fact. No specific technology is necessary to create a valid signature. If the requisite intent is present, one's name as part of an email may suffice as a signature, as may the firm name on a fax.

150

Statute of Frauds: Agreements covered

1. Executor or Administrator Promises to Personally Pay Estate Debts.
2. Promises to Pay the Debt of Another (Suretyship Promises)
3. Promises in Consideration of Marriage
4. Interest in Land
5. Performance Not Within One Year
6. Goods Priced at $500 or More

151

Statute of Frauds: Promises to Pay Debt of Another requirements

1. Must Be a Collateral Promise: A promise to answer for the debt of default of another must be evidenced by a writing. The promise may arise as a result of a tort or contract, but it must be collateral to another person's promise to pay, and not a primary promise to pay.

2. Main Purpose Must Not Be Pecuniary Interest of Promisor: 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 STATUTE OF FRAUDS even though the effect is still to pay the debt of another.

152

Statute of Frauds: Promises in Consideration of Marriage

A promise the consideration for 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--e.g., "if you marry my son, I will give the two of you a house."

153

Statute of Frauds: Interest in Land--what is an interest in land

1. Sale of real property
2. Leases for more than one year
3. Easements for more than one year
4. Minerals (or the like) or structures if they are to be severed by the buyer. If they are to be severed by the seller, they are not fixtures, but goods.
5. Mortgages and most other security liens

154

Statute of Frauds: items not within the statute

Even though the end result of some contracts may be an interest in land, they still do not come within the Statute. For example, a contract to build a building or a contract to buy and sell real estate and divide the profits do not come within the Statute.

155

Statute of Frauds: Effect of Performance on Contracts

If the seller conveys to the purchaser (i.e., fully performs), the seller can enforce the 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. Under the doctrine, conduct (i.e., part performance) 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.

156

Statute of Frauds: effective date

The date runs from the DATE OF THE AGREEMENT and not from the date of performance.

157

Statute of Frauds: contracts not within the statute

1. possibility of completion within one year, even though actual performance may extend beyond the one-year period
2. Right to terminate within year--majority view is that nonperformance is not performance within one year, and so the contract is still within the Statute of Frauds.
3. Lifetime Contracts: capable of performance within one year since a person can die at any time.

158

Statute of Frauds: sale of 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.

159

Statute of Frauds: goods priced at $500 ore more -- when writing not required for enforceability

1. Specially Manufactured Goods: seller has, under circumstances that reasonably indicate that the goods are for the buyer, made a SUBSTANTIAL BEGINNING in their manufacture or COMMITMENTS for their purchase before notice of repudiation is received.

2. 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 that in such a case the contract is not enforceable beyond the quantity of goods admitted.)

3. Payment or Delivery of Goods: If goods are either received or accepted or paid for, the contract is enforceable. However, the contract is not enforceable beyond the quantity of goods accepted or paid for.

160

Statute of Frauds: goods priced at $500 ore more -- 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: (1) he has reason to know of the confirmations' contents; and 2. he does not object to it in writing within 10 days of receipt.

161

Statute of Frauds: Effect of Noncompliance with the Statute

Under the majority rule, noncompliance with the Statute of Frauds renders the contract unenforceable at the option of the party to be charged (i.e., the party being charged may raise the lack of a sufficient writing as an affirmative defense). If the Statute is not raised as a defense, it is waived.

162

Statute of Frauds: Promissory Estoppel

Promissory Estoppel is sometimes applied in cases where it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim. When a defendant falsely and intentionally tells a plaintiff that the contract is not within the Statute or that a writing will subsequently be executed, or when his conduct foreseeably induces a plaintiff to change his position in reliance on an oral agreement, courts may use the doctrine to remove the contract completely from the Statute of Frauds.

163

Statute of Frauds: Remedies if Contract is Within Statute

If a contract is within the Statute of Frauds, because there is noncompliance with the Statute and no applicable exception, 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. This recovery would be in QUANTUM MERUIT rather than a suit on the contract. The rationale is that it would be unjust to permit a party to retain benefits received under the failed contract without paying for them.

PART PERFORMANCE: 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 the expectation damages, rather than merely in restitution for the value of the benefit conferred.

164

Statute of Frauds: contract made by agent

Must the agent's authority to enter a contract on behalf of the principle be in writing? Most states say no except for contracts involving interests in real property. A few states would say yes as to all such contracts pursuant to the state's EQUAL DIGNITIES statutes. However, even where written authority would be required, written authority may be dispensed with if the agent contracted in the presence and under the direction of the principal or if the principal later ratified the contract in writing.

165

Unconscionability: defined

The concept of unconscionability allows a court to REFUSE TO ENFORCE A PROMISE OF AN ENTIRE CONTRACT (or to modify the contract) to avoid "unfair" terms. It is sometimes said that there are two types of unconscionability: substantive unconscionability (i.e., unconscionability based on price alone) and procedural unconscionability (i.e., unconscionabilitybased on unfair surprise or unequal bargaining power). However, few cases recognize substantive unconscionability based on price alone. Instead, the cases have dealt mostly with procedural unconscionability.

166

Common instances of procedural unconscionability

1. Inconspicuous risk-shifting provisions
2. Contacts of adhesion--take it or leave it
3. exculpatory clauses
4. limitations on remedies

167

Inconspicuous risk-shifting provisions

standardized printed form contracts often contain a meterial provision that seeks to shift a risk normally borne by one party to the other. Examples:
1. CONFESSION OF JUDGMENT clauses, which are illegal in most states
2. DISCLAIMER ON WARRANTY provisions; and
3. ADD ON CLAUSES that subject all of the property purchased from a seller to repossession if a newly purchased item is not paid for

Typically, such clauses are found in the fine print (boilerplate) in printed form contracts. Courts have invalidated these provisions because they are INCONSPICOUS OR INCOMPREHENSIBLE to the average person, even if brought to his actual attention.

168

Contacts of adhesion--take it or leave it

Courts will deem a clause unconsionable and unenforceable if the signer is unable to procure necessary goods, such as an automobile, from any seller without agreeing to similar provision. The buyer has no choice.

169

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 (e.g., a contract releasing a ski hill operator for liability for neglgence will often be upheld.

170

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.

171

Unconscionability: Timing

Unconscionability is determined by the circumstances as they existed AT THE TIME THE CONTRACT WAS FORMED.

172

Unconscionability: Effect if a Court Finds Unconscionable Clause

If court finds as a matter of law that a contract or clause was unconscionable WHEN MADE, the court may:
1. refuse to enforce the contract
2. enforce the remainder of the contract WITHOUT the unconscionable clause
3. LIMIT THE APPLICATION OF ANY CLAUSE so as to avoid an unconscionable result.

173

General Rules of Contract Construction: list

1. Construed as a whole: specific clauses will be subordinated to the contract's general intent
2. Ordinary meaning of words, unless it is clearly shown that they were meant to be used in a technical sense
3. Inconsistency between provisions, written or typed provisions will prevail over printed provisions (which indicate a form contract)
4. Custom and Usage, in particular business and particular locale
5. Preference to Construe Contract as Valid and Enforceable
6. Ambiguities Construed against the party preparing the contract, absent evidence of the intention of the parties, especially where not evidence of fraud, mutual mistake, duress, or knowledge by one party of unilateral mistake and both parties represented by counsel.
7. Weight given to conflicting rules of construction (1. express terms; 2. course of dealing; 3. trade usage)

174

Parol Evidence Rule: defined

In interpreting and enforcing a contract, questions arise as to whether the written instrument is the complete embodiment of the parties' intention. Where the parties to a contract express their agreement in 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.

175

Parol Evidence Rule: purpose

Not generally regarded as a rule of evidence, but a rule of SUBSTANTIVE CONTRACT LAW. It is designed to carry out the apparent intention of the parties and to facilitate judicial interpretation by having a single clean source of proof (the writing) on the terms of the bargain.

176

Parol Evidence Rule: Is the writing an integration? what two questions?

must answer two questions:
1. Is the writing intended as a FINAL expression?
2. Is the writing a COMPLETE or PARTIAL integration?

177

Parol Evidence Rule: Is the writing intended as a final expression?

Writings that evidence a purported contract are not necessarily the "final" expression of that contract. Thus, for example, the parties might only have intended such writings to be preliminary to a final draft. If so, the parol evidence rule will not bar introduction of further evidence. One should note that the MORE COMPLETE the agreement appears to be on its face, the more likely it is that it was intended as an INTEGRATION.

178

Parol Evidence Rule: Is the writing a complete or partial integration?

After establishing that the writing was "final," one should determine if the integration was "complete" or only "partial." In the former case, it may not be contradicted or supplemented; in the latter it cannot be contradicted, but may be supplemented by proving up consistent additional terms.

Note: if the agreement contains a MERGER CLAUSE reciting that the agreement is complete on its face, this clause strengthen the PRESUMPTION that all negotiations were merged in the written document.

179

Parol Evidence Rule: Is the writing an integration? Who makes the decision?

MAJORITY VIEW: question of fact, but unlike other fact questions, the judge decides, then if extrinsic evidence admitted, the jury decides whether the extrinsic evidence was part of the agreement.

180

Parol Evidence Rule: Is the writing an integration? How is determination made?

Two competing tests:
1. Corbin Test: (most courts) take into consideration the SPECIFIC CIRCUMSTANCES OF THE TRANSACTION INVOLVED 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 will be admissible.

2. Williston test: look only at the face of the written agreement and decide whether contracting parties (in general) would include the terms sought to be proved. If so, the evidence will be excluded.

181

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: defined

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 where they will not bring about the result, i.e., they will fall outside the scope of the parol evidence rule.

182

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: list

1. Attacking validity
2. Interpretation (
3. Showing of "True Consideration"
4. Reformation

183

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: attacking validity

A party to a written contract can attach the agreement's validity. The party acknowledges that the writing reflects the agreement, but asserts, most frequently, that the AGREEMENT NEVER CAME INTO BEING because of the following:
1. formation defects (fraud, duress, mistakes, and illegality may be shown by extrinsic evidence)
2. Conditions Precedent (where a 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)
3. Distinguish from Condition Subsequent: parol evidence is not admissibable as to condition subsequent--an oral agreement that the party would not be obliged to PERFORM until the happening of an event.

184

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: 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. If the meaning of the agreement is plain, parole evidence is inadmissible.

185

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: Showing of "True Consideration"

The parol evidence rule will not bar extrinsic evidence showing the "true consideration" paid.

186

Parol Evidence Rule: Extrinsic evidence outside the scope of rule: reformation

If a party to a written agreement alleges facts entitling him to reformation of the agreement, the parol evidence rule is inapplicable. Because the plaintiff is asserting as a cause of action that despite the apparently unambiguous terms of the written agreement, those terms do not in fact constitute the agreement between the parties.

187

Parol Evidence Rule: Collateral Agreements and Naturally Omitted Terms

Parole evidence is often said to be admissible if the alleged parol agreement is collateral to the written obligation (ie. related to the subject matter but not part of the primary promise) and does not conflict with it.

This collateral agreement doctrine is hard to apply because it is conclusory. The restatement includes a similar concept with a more definitive approach: the naturally omitted terms doctrine. The doctrine allow evidence of terms that would naturally be omitted from the written agreement.

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Parol Evidence Rule: a term would be naturally omitted if:

1. It does not conflict with the written integration; and
2. it concerns a subject that similarly situated parties would not ordinarily be expected to include in the written instrument.

189

Parol Evidence Rule: Not applicable to subsequent modifications

Parol evidence can be offered to show subsequent modifications of a written contract, because the parole evidence rule only applies to prior or contemporaneous negotiations.

190

Parol Evidence Rule: Article 2 rule

Article 2 generally follows the rules of the Parol Evidence rule including the Corbin test, providing that a party cannot contradict a written contract but he may add CONSISTENT ADDITIONAL TERMS unless: 1. there is a merger clause, or 2. 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.

Article 2 also provides that a written contract's terms may be EXPLAINED OR SUPPLEMENTED by the following whether or not the writing appears to be ambiguous:

1. Course of dealing (previous transactions between the parties)
2. Usage of trade (practice or method of dealing in a particular business)
3. Course of performance (where contract involves repeated occasions for performance)

191

Article 2 Provisions on Interpreting Contracts: list

1. Battle of the Forms
2. Supplemental (Gap Filler) Terms
3. Delivery Terms and Risk of Loss
4. Insurable Interest and Identification
5. Bilateral Contracts Formed by Performance
6. Warranties

192

Article 2 Provisions on Interpreting Contracts: Battle of the Forms defined

A contract can be formed even though the terms of acceptance do not match the terms of the offer. Article 2 has specific rules for determining what terms are included in the contract in such a case, and these rules are dependent on whether both parties to the transaction are merchants.

193

Battle of the Forms: Contracts Involving a Nonmerchant

Term of Offer Govern
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 the contract unless the offeror expressly agrees.

194

Battle of the Forms: Contracts Between Merchants--Additional terms

ADDITIONAL TERMS IN ACCEPTANCE USUALLY INCLUDED
If BOTH parties to the contract are merchants, ADDITIONAL terms in the acceptance will be included in the contract unless:
1. They MATERIALLY ALTER the original terms of the offer (i.e., they change a party's risk of the remedies available).
2. The offer EXPRESSLY LIMITS ACCEPTANCE to the terms of the offer; or
3. The OFFEROR HAS ALREADY OBJECTED to the particular terms, or OBJECTS WITHIN A REASONABLE TIME after notice of them is received.

195

Battle of the Forms: Contracts Between Merchants--Different terms

DIFFERENT TERMS IN ACCEPTANCE MAY OR MAY NOT BE INCLUDED
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, and follow the test set out above in determining whether the terms should be part of the contract. Other courts follow the KNOCK OUT 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 of such terms in the contract. Under the knockout rule, gaps left by knocked-out terms are filled by the UCC.

196

Article 2 Provisions on Interpreting Contracts: Supplemental ("Gap-Filler") Terms: rule defined

The key to forming a contract for the sale of goods is the quantity term. If other terms are missing from the agreement, Article 2 has gap-filler provisions to fill in the missing term(s).

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Gap Fillers: list

1. Price
2. Place of Delivery
3. Time for Shipment or Delivery
4. Time for Payment
5. Assortment

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Gap Fillers: price

If:
1. nothing has been said as to price;
2. the price is left open to be agreed upon by the parties and they fail to agree; OR
3. 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 OF DELIVERY

199

Gap Fillers: Place of Delivery

If the place of delivery has not been specified, the place is the SELLER'S PLACE OF BUSINESS, if he has one; otherwise, it is the seller's home. However, if the goods have been identified as the ones to satisfy the contract and the parties know that they are in some other place, then that is the place of delivery.

200

Gap Fillers: time for shipment or delivery

If the time for shipment or delivery is not specified, shipment/delivery is due in a REASONABLE TIME.

201

Gap Fillers: 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

202

Gap Fillers: 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 to be AT THE BUYERS 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 (choosing a reasonable assortment) or treat the failure as a breach.

203

Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: defined

All contracts for the sale of goods require delivery of the goods. Often, delivery consists merely of allowing the buyer to take the goods with him (e.g., a purchase of groceries from the grocery store). However, circumstances often require some type of delivery. A contract's delivery terms are important because they determine when risk of loss passes from the seller to the buyer if the goods are damaged or destroyed.

204

Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: 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 (e.g., when you buy groceries). 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.

205

Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Carrier Cases

A carrier case is a sale in which it appears that the parties intended the goods to be moved by a carrier (e.g., when you order a book from an internet website). There are two types of carrier cases: shipment contracts and destination contracts. Whether a contract is a shipment contract or a destination contract depends on the delivery terms used in the contract.

206

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. The UCC presumes a contract is a shpment contract in the absence of a contrary agreement. A "ship to" address does not overcome this presumption.

207

Destination Contracts:

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. Specifying a destination in this context means more than just indicating an address for shipment. Otherwise, all contracts would be destination contracts. A contract that contains neither an FOB term nor any other term explicitly allocating the risk of loss is a shipment contract.

208

Article 2 Common Delivery Terms

1. CIF (cost, insurance, freight) SHIPMENT CONTRACTS
2. C&F (cost and freight) SHIPMENT CONTRACT
3. FAS (free alongside) term usually when goods shipped by boat and risk transfers to buyer when delivered to dock
4. FOB (free on board) always followed by a location and the risk passes to the buyer at the named location. Can be either shipment or destination contract.

209

Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Effect of Breach on Risk of Loss

1. Defective Goods: if goods are so defective that 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.

2. 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, the risk of loss at issue being that between the time of acceptance and the time of revocation of acceptance. However, revocation of acceptances is rightful only if it occurs "before any substantial change in condition of the goods which is not caused by their own defects." Thus, there can be no revocation of acceptance after a casualty loss to the goods.

210

Article 2 Provisions on Interpreting Contracts: Delivery Terms and Risk of Loss: Risk of Sale or Return and Sale on Approval Contacts

1. Sale or Return: For the purpose of determining the risk of loss, a sale or return contract (e.g., the buyer takes goods for resale but may return them if she is unable to resell them) is treated as an ordinary sale and the above rules apply. If the goods are returned to the seller, the RISK REMAINS ON THE BUYER while the goods are in transit.

2. Sale on Approval: In a sale on approval (e.g., 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. Acceptance may take place by failure to return or notify the seller of an intention to return within the required time. If the buyer decides not to take the goods, return is AT THE SELLER'S RISK.

211

Article 2 Provisions on Interpreting Contracts: Insurable Interest and Identification

A buyer often bears the risk of loss before receiving the goods purchased. In order to aid buyers in this situation (and a few others) 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 (e.g. as soon as the seller sets them aside for the buyer). This special property interest is insurable so that a buyer may obtain insurance for goods while they are being shipped to prevent loss in case of damage or destruction during shipment.

212

Article 2 Provisions on Interpreting Contracts: 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 Article 2's "battle of the forms" provision. In such case, Under Article 2, the contract contains all of the terms on which writings of both parties agree. Any necessary missing terms are filled in by the supplemental terms provided for in Article 2.

Compare Common law last shot rule: the rule is different in common law contracts where the contract will include the terms of the last communicaiton sent to the party who performed. Rationale: that communication was a rejection of any prior offer and a counteroffer, and the performance was an acceptance of the terms of that counteroffer.

213

Article 2 Provisions on Interpreting Contracts: Warranties

Contracts for the sale of goods automatically include a warranty of title (in most cases). They also may include certain implied warranties and express warranties.

214

Article 2: Warranty of Title and Against Infringement

1. 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.

2. 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. If this warranty is breached and the buyer is sued, she must give the seller notice of the litigation within a reasonable time or lose her right to any remedy. In such a case, the seller can give the buyer notice of his wish to defend the lawsuit and, if the seller agrees to bear all expenses and satisfy any adverse judgment, the buyer must let him defend or lose any rights against him arising out of the breach.

215

Article 2: Implied Warranty of Merchantability: when given

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. The serving of food or drink for consumption on the premises is a sale of goods subject tothe warranty of merchantability.

216

Article 2: Implied Warranty of Merchantability: elements

to be merchantable, goods must at least:
1. PASS WITHOUT OBJECTION in the trade under the contract description.
2. In the case of fungible goods, BE OF FAIR AVERAGE QUALITY within the description
3. BE FIT FOR THE ORDINARY PURPOSES for which such goods are used;
4. Be, within the variations permitted by the agreement, OF EVEN KIND, QUALITY, AND QUANTITY within each unit and among all units involved.
5. BE ADEQUATELY CONTAINED, PACKAGED, OR LABELED according to the contract; and
6. CONFORM TO ANY PROMISES OR AFFIRMATIONS OF FACT MADE ON THE LABEL.

The most important is fit for the ordinary purposes for which such goods are used and failure to live up to this test is the usual claim in a merchantability suit.

217

Article 2: Implied Warranty of Fitness for a Particular Purpose

A warranty will also be implied in a contract for the sale of goods whenever
1. 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 seller's skill and judgment to select suitable goods; and
2. the BUYER IN FACT RELIES on the seller's skill or judgment.

218

Article 2: 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 the statement, description, sample, or model to be a part of the basis of the bargain, it need only come at such a 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.

DISTINGUISH--STATEMENTS OF VALUE OR OPINION: A statement relating merely to the value of the goods, or a statement purporting to be only the seller's opinion or commendation of the goods, does not create an express warranty.

219

Article 2: Disclaimer of Warranties: warranty of title

can be disclaimed or modified only by specific language or by circumstances which 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 (e.g., sheriff's sale)

220

Article 2: Disclaimer of Warranties: 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.

221

Article 2: Disclaimer of Warranties: Implied warranties--specific disclaimers (list)

1. Disclaimer of Warranty of Merchantability: can be specifically disclaimed or modified by MENTIONING MERCHANTABILITY. If the sales contract is in writing, the disclaimer must be CONSPICUOUS.

2. Disclaimer of Warranty of Fitness for a Particular Purpose: can be specifically disclaimed only by a CONSPICUOUS WRITING.

222

Article 2: Disclaimer of Warranties: Implied warranties--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."

Language in the body of a writing is conspicuous if: 1. it is in larger type than surrounding text; 2. it is in a contrasting type, font, or color; or 3. it is set off from the text by marks that call attention to it.

The court, not the jury, decides any facts concerning conspicuousness.

223

Article 2: Disclaimer of Warranties: Implied warranties--general disclaimer methods

UCC also provides several general methods for disclaiming implied warranties. These methods are more dependent on the circumstances than the specific methods, and so are less certain to be effective than specific disclaimers.

1. By General Disclaimer Language: Unless the circumstances indicate otherwise, the implied warranties fo 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 not implied warranties.

2. By Examination and Refusal to Examine: When 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.

3. By course of dealing,etc: Implied warranties can also be disclaimed by the course of dealing, course or performance, or usage of trade.

224

Article 2: Disclaimer of Warranties: Express warranties

UCC provides that words or conduct relevant to the creation of express warranties and words or conduct tending to negate such warranties shall whenever possible be construed as consistent with each other, but NEGATION OR LIMITATION IS INOPERATIVE TO THE EXTENT THAT SUCH CONSTRUCTION IS UNREASONABLE.
Practically every sale will involve some description of the goods, and the basic obligation created by this description cannot be read out of the contract by a disclaimer clause.

Parol Evidence Rule: may be an obstacle to the buyer to whom an express warranty was made when the contract contains a broad disclaimer of warranties.

Note: buyer can often avoid the rule by a showing that he did not intend the writing be the complete and exclusive expression of the parties' agreement or that the disclaimer is unconscionable under the circumstances.

225

Article 2: Disclaimer of Warranties: Limitations on damages

Parties may include in their contract a clause limiting the damges available in the case of breach of warrant. Such a limitation generally will be upheld unles the limitation is unconscionable.

226

Article 2: Disclaimer of Warranties: Timing--disclaimers and limitations on the box

To be effective, a disclaimer of warranty or limitations 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. However, there are ways around this (e.g., the outside of the box could indicate that the sale is subject to the conditions stated inside the box; a registration card inside the box can indicate that by registering, the owner agrees to all of the conditions set out in the documents in the box)

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 purchase can return software if he disagree with the conditions.

227

Article 2: Disclaimer of Warranties: Unconscionability and Warranty Disclaimers

Some courts will, in addition to determing whether disclaimers have met the formal requirements discussed above, test warranty disclaimers by teh conscionability standards of UCC 2-302. Such things as lack of bargaining position, lack of choice, and failure to understand would be relevant in determining whether a disclaimer is unconscionable. Moreover, warranty disclaimers that limit damages for personal injury caused by a breach of warranty on consumer goods are prima facie unconscionable.

228

Article 2: Damages for Breach of Warranty: in general

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 warranted, measured at the time and place of acceptance. When, however, there are special circumstances that show proximate damages of a different amount, that amount is the proper measure.

229

Article 2: Damages for Breach of Warranty: breach of warranty of title

Buyer may rescind the contract, revoke acceptance of the goods, or sue for damages. In these cases, the goods are reclaimed by the true owner or lien holder, thus dispossessing the purchaser. The value of the goods accepted is deemed to be nothing; so the damages are the value of the goods as warranted. Often, but not always, that is the same as the purchase price.

230

Article 2: Damages for Breach of Warranty: breach of warranty of title--special circumstances

APPRECIATION AND DEPRECIATION

A great appreciation or depreciation in the value of the goods from the time of delivery until the purchaser is dispossessed of the property is usually considered such a special circumstance. In that case the value is measured at the time of dispossession rather than at the time of acceptance.

231

Article 2: To Whom Do Warranties Extend?

A2 provides alternative provisions for determing to whom warranty liability extends.
Alternative A: seller's warranty liability extends to any natural person who is in the FAMILY OR HOUSEHOLD of the buyer or is a GUEST in the buyer's home if it is reasonable to expect that the person may use, consume, or be affected by the goods and that person suffers PERSONAL INJURY because of a breach of warranty. MOST STATES

Alternative B extends a seller's express or implied warranty liability to ANY NATURAL PERSON reasonably expected to use, consume, or be affected by the goods and who suffers PERSONAL INJURY because of the breach of warranty.

Alternative C extends warranty to ANY PERSON reasonably expected to use, consume, or be affected by the goods and who is INJURED by breach of the warranty (this includes property damage). The seller may not exclude or limit the operation of the section with respect to PERSONAL INJURY.

232

MODIFICATION OF CONTRACT TERMS: consideration

Under general contract law, a final contract cannot be modified unless the modification is supported by new consideration. Under the UCC, however, promise of new and different terms by the parties to a sales contract are valid without consideration.

233

MODIFICATION OF CONTRACT TERMS: writing

A written contract can be modified orally. For sale of goods contracts, however, the modification must be in writing if the contract as modified falls within the Statute of Frauds. This, if the contract as MODIFIED is for $500 or more, it must be evidenced by writing. If the contract AS MODIFIED is for less than $500, then no writing is necessary.

234

MODIFICATION OF CONTRACT TERMS: common law -- provisions prohibiting oral modification

NOT EFFECTIVE
even if a written contract expressly provides that it may be modified only in writing, the parties can orally modify the contract

235

MODIFICATION OF CONTRACT TERMS: UCC -- provisions prohibiting oral modification

RECOGNIZES NO-MODIFICATION CLAUSES
Under the UCC, even if a contract is not within the Statute of Frauds, if it explicitly provides that it may not be modified or rescinded except by a signed writing, that provision will be given effect.

1. Contract Between Merchant and Nonmerchant: if the provision requiring written modification is on the merchant's form, it will not be given effect unless it is SEPARATELY SIGNED by the nonmerchant.

2. Waiver: if the parties attempt to orally modify a contract that requires written modification (either because of a contract clause or because of Statute of Frauds), it is technically ineffective as a modification, but can operate as a waiver. Such a waiver will be found whenever the other party has changed position in reliance on the oral modification.

3. Retraction of a waiver: a party who makes a waiver affecting an executory (not yet performed) 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, however, if the other party detrimentally relied on it.

236

MODIFICATION OF CONTRACT TERMS: Parol Evidence Rule

DOES NOT APPLY
Parol evidence is admissible to show subsequent oral modifications of a written contract.

237

PERFORMANCE: common law

A party's basic duty at common law was to substantially perform all that is called for in the contract.

238

PERFORMANCE: Article 2

Article 2 generally requires a PERFECT TENDER--the delivery and condition of the goods must be exactly as promised in the contract.

1. Obligation of Good Faith
2. Seller's Obligation of Tender and Delivery
3. Buyer's Obligation to Pay--Right to Inspect

239

PERFORMANCE: Article 2 -- good faith

honesty in fact and the observance of reasonable commercial standards of fair dealing.

240

PERFORMANCE: Article 2 -- seller's obligation of tender and delivery: NONCARRIER CASES

1. NONCARRIER CASES: a sale in which it appears that the parties did not intend that the goods be moved by carrier

1. Tender of Delivery: In a proper tender of delivery, 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 good. The TENDER MUST BE AT A REASONABLE HOUR.

2. Place of Delivery: In the absence of an agreement otherwise, the place of delivery is the SELLER'S PLACE OF BUSINESS or if he has none, his residence. However, if at the time of contracting, the goods are, to the knowledge of both parties, at some other place, that place is the place of delivery.

241

PERFORMANCE: Article 2 -- seller's obligation of tender and delivery:CARRIER CASES

A carrier case is a sale in which, due either to the circumstances or to the express terms of the agreement, it appears that the parties intended that a carrier be used to move the goods.

1. Shipment contracts: Where Seller Has Not Agreed To Tender At A Particular Destination: The seller need not see that the goods reach the buyer, but need only:
1. put the goods into the hands of a reasonable carrier and make a reasonable contract for their transportation to the buyer
2. 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
3. Promply notify the buyer of the shipment.

2. DESTINATION CONTRACTS: WHERE THE SELLER HAS AGREED TO TENDER AT A PARTICULAR DESTINATION
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. He must also give the buyer any notice of tender that is reasonably necessary and provide her with any documents of title necessary to obtain delivery. Tender and documents through ordinary banking channels is sufficient.

242

PERFORMANCE: Article 2: Buyer's Obligation to pay: rules

1. 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 cases, 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.

2. Payment by check: TEnder of payment by check is sufficient unless the seller demands legal tender and gives the buyer time to get cash. 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.

3. Installment Contracts: In an installment contract (i.e., one that requires or authorizes delivery in separate installments), the seller may demand payment for each installment if the price can be so apportioned, unless a contrary intent appears.

243

PERFORMANCE: Article 2: Buyer's right of inspection

Unless the contract provides otherwise, the buyer has a right to inspect the goods before she pays. expenses of inspection must be borne by the buyer but can be recovered from the seller if the goods do not conform and are rejected. A buyer may inspect at any reasonable time and in any reasonable manner.

NOTE: if the contract between the parties provides for payment COD or otherwise indicates that the buyer has promised to pay without inspecting the goods, there is no right of inspection prior to payment. If payment is due before inspection, the fact that the goods are defective does not excuse nonpayment unless the defect appears without inspection or there is fraud in the transaction.

244

CONDITIONS--HAS THE DUTY TO PERFORM BECOME ABSOLUTE?

A contract may provide that a party does not have a duty to perform unless some condition is fulfilled. In such a case, the party's failure to perform will normally be justified if the condition was not fulfilled.

245

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.

246

Promise: definition

A promise is a commitment to do or refrain from something. If a promise is unconditional, the failure to perform according to its terms is a breach of contract.

247

Condition: definition

In this context, the term "condition" normally means either
1. An event or state of the world that must occur or fail to occur BEFORE a party has a duty to perform under a contract; OR
2. an even or state of the world the occurrence or nonoccurrence of which RELEASES a party from its duty to perform under a contract.

In other words, a condition is a provision the fulfillment of which creates or extinguishes a duty to perform under a contract.

A condition is a PROMISE MODIFIER.

There can be no breach of promise until the promisor is under an immediate duty to perform. He may insert conditions on his promise to prevent that duty of immediate performance from arising until the conditions are met.

248

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 who obligations on the conditional promise never mature.

An unexcused failure to perform a PROMISE is always a breach of contract and always give rise to liability, however, minimal. On the other hand, nonfulfillment of a CONDITION is NOT a breach of contract and does not give rise to liability.

249

Excuse of performance: condition v. breach

Breach of a PROMISE by one party may not excuse the other party's duty to perform under the contract. Nonfulfillment of a CONDITION normally will excuse a duty to perform that was subject to the condition.

250

Interrelation of Conditions and Promises

If a party's promise to perform is subject to a condition, there can be no breach of contract by that party until the condition has been fulfilled.

251

Interpretation of Provision as Promise or Condition: basic test

Intent of the Parties

252

Basic criteria the court uses in reaching a determination as to intent of the parties:

1. Words of agreement: words such as "provided," "if," and "when," usually indicate that an express condition rather than a promise was intended. Words such as "promise," and "agree" usually indicate a promise. Need to use the context of the entire contract.
2. Prior Practices.
3. Custom
4. Third Party Performance: if performance is to be rendered by a third party, it is more likely to be a condition than an absolute promise.
5. Courts Prefer Promise in Doubtful Situations: particularly significant where the breaching party has SUBSTANTIALLY PERFORMED.
6. Reference to Time: a provision that a duty is to be performed "when" an event occurs raises an issue of whether the event is a condition or intended to merely mark the passage of time. Courts prefer the time interpretation unless the event is within the obligee's control.

253

Provision Both a Promise and a Condition

1. Condition may imply a promise: when the occurence of a condition is within the benefiting party's control, that party impliedly promises to act in good faith and use reasonable effort to cause the condition to occur.
2. Express Promise and Condition: In some cases, a provision may be both a promise and a condition--i.e., a party may commit (promise) to bring about a given state of events, and the contract containing that commitment may also expressly state that the other party's duty to perform under the contract is conditioned on the occurrence of the state of events.

254

Classifications of condition:

1. Condition precedent: one that must occur before an absolute duty of immediate performance arises in the other party.
2. Conditions Concurrent: those that are capable of occurring together, and that the parties are bound to perform at the same time (e.g., tender of deed for cash). Thus, in effect, each is a condition "precedent" to the other.

3. Condition Subsequent: a condition subsequent is one the occurrence of which CUTS OFF an already existing absolute duty of performance.

255

Express conditions: defined

normally refers to an EXPLICIT CONTRACTUAL PROVISION. It is an express statement in the contract providing that either:
1. a party does not have a duty to perform unless some event occurs or fails to occur;
2. 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.

256

Express conditions: examples

1. Promisor's Satisfaction as Condition Precedent
2. Satisfaction of Third Person as Condition

257

Promisor's Satisfaction as Condition Precedent: rule

The issue is how the promisor's satisfaction is to be measured; i.e., whether the performance must meet with promisor's ACTUAL PERSONAL satisfaction, or must only be a performance that would meet with the satisfaction of a REASONABLE PERSON. The provision requiring the promisor's satisfaction is construed according to the SUBJECT MATTER of the contract.

1. Mechanical Fitness, Utility, or Marketability: satisfaction fulfilled by a performance that would satisfy a REASONABLE PERSON.

2. Personal Taste or Judgment: satisfaction fulfilled if based on honesty and good faith.

258

Satisfaction of Third Person as Condition: rule

(construction contracts)
Requires the ACTUAL PERSONAL SATISFACTION of the third person--must be based on honesty and good faith.

259

Constructive (Implied) Conditions: list and define

1. Constructive Conditions of Performance: By far 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.

2. Constructive Conditions of Cooperation and Notice: (are common) The obligation of one party to render perfromance is impliedly conditioned on the other party's cooperation in that performance. Also, it is often a condition to one party's performance of a duty under a contract 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 a notice was given.

260

Constructive (Implied) Conditions: Order of Performance: rule

The courts will also imply conditions relating to the time for performance under the contract.

1. Simultaneous Performance Possible--Conditions Concurrent
2. One Performance Takes Time--Conditions Precedent

261

Constructive (Implied) Conditions: Effect of Condition -- Equitable Remedy

If a contract is not enforceable 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.

262

Constructive (Implied) Conditions: Excuse of Conditions--rule

A duty of immediate performance with respect to a conditional promise does not become ABSOLUTE until the conditions
1. have been PERFORMED, or
2. 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.

263

Constructive (Implied) Conditions: Excuse of Conditions--list

1. by Hindrance or Failure to Cooperate
2. by Actual Breach
3. by anticipatory repudiation
4. by Prospective Inability or Unwillingness to Perform
5. by Substantial Performance
6. by "Divisibility" of Contract
7. by Waiver or Estoppel
8. by Impossibility, Impracticability, or Frustration

264

Constructive (Implied) Conditions: Excuse of Conditions 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 such prevention is WRONGFUL. Note, however, that it is not necessary to prove bad faith or malice. Courts construe the requirement simply to mean that the other party would not have reasonably comtemplated or assumed the risk of this type of conduct.

NOTE: condition will be excuses not only by active noncooperation but by passive noncooperation as well.

265

Constructive (Implied) Conditions: Excuse of Conditions 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. Even if the minor breach may be cured, it will not suffice to excuse conditions. Rather, the courts will make the nonbreaching party whole by either giving him damages or otherwise mitigating his promised performance so as to account for the breach.

266

Constructive (Implied) Conditions: Excuse of Conditions by Anticipatory Repudiation: applies only when

Anticipatory repudiation applies only if there is a bilateral contract with EXECUTORY (UNPERFORMED) DUTIES ON BOTH SIDES. If the nonrepudiating party has nothing further to do at the moment of repudiation, as in the case of a unilateral contract or a bilateral contract fully performed by the nonrepudiator, the doctrine of anticipatory repudiation does not apply. The nonrepudiator must wait until the time originally set for performance by the repudiating party. Until such time, the repudiator has the option to change his mind and withdraw the repudiation and perform in accordance with the contract.

267

Constructive (Implied) Conditions: Excuse of Conditions by Anticipatory Repudiation: Must 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.

Cannot just be an expression of doubt of ability to perform.

268

Constructive (Implied) Conditions: Excuse of Conditions by Anticipatory Repudiation: effect of

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 SEE 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 that 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 unless the promise retracts the repudiation.

NOTE: provides substantially identical alternatives to a nonrepudiating party when there is an anticipatory repudiation in the case of the sale of goods.

269

Constructive (Implied) Conditions: Excuse of Conditions by Anticipatory Repudiation: retraction

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 considered the REPUDIATION FINAL. Withdrawal of the repudiation may be in any manner that clearly indicates intention to perform, but must include any assurances justifiably demanded.

270

Constructive (Implied) Conditions: Excuse of Conditions by Prospective Inability or Unwillingness to Perform: defined

Prospective failure of condition occurs when a party has reasonable grounds to believe that the other party will be unable or unwilling to perform when performance is due.

271

Constructive (Implied) Conditions: Excuse of Conditions by Prospective Inability or Unwillingness to Perform: distinguish from actual and anticipatory repudiation

Prospective inability or unwillingness to perform is not an anticipatory repudiation because such repudiation must be UNEQUIVOCAL, where prospective failure to perform involves conduct or words that merely raise doubts that the party will perform. (In short, the distinction between anticipatory repudiation and prospective inability to perform is one of degree.)

272

Constructive (Implied) Conditions: Excuse of Conditions by Prospective Inability or Unwillingness to Perform: what conduct will suffice?

Any conduct may suffice for a finding that there is prospective inability or unwillingness to perform. Note that in judging this conduct, a REASONABLE PERSON standard will be applied.

273

Constructive (Implied) Conditions: Excuse of Conditions by Prospective Inability or Unwillingness to Perform: effect of prospective failure

The effect of this prospective failure is to allow the innocent party to suspend further performance on her side until she receives ADEQUATE ASSURANCES that performance will be forthcoming. If she fails to obtain adequate assurances, she may be excused from her own performance and may treat the failure to provide assurances as repudiation.

274

Constructive (Implied) Conditions: Excuse of Conditions by Prospective Inability or Unwillingness to Perform: 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 other party in order to be effective. If the other party has already changed her position in reliance on the prospective failure, an attempted retraction may be ineffective.

275

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: policy

The performance of one contractual promise is usually a condition precedent to the duty of immediate performance of the return promise. Technically, if the promise has not been completely performed, the other performance is not yet due. This can cause forfeiture if the breach is minor, because the promisee can receive almost complete performance with no duty to perform in return. To avoid this harsh result, the courts have adopted the "substantial performance" and "divisibility" concepts.

276

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: rule

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 the doctrine only where a CONSTRUCTIVE (implied in law) condition is involved. They will not apply it where there is an EXPRESS condition for fear this would defeat the express intent of the parties.

277

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: if breach is minor

Rules for determining substantiality of performance are the same as those for determining materiality of breach. In other words, the test is whether the breach of contract by the performing party is material or minor. If it is material, then performance HAS NOT been substantial; if it is minor, performance HAS been sustantial.

278

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: inapplicable where ___.

BREACH "WILLFUL"

Most courts will not apply the substantial performance doctrine if the breach was "willful." (This is so even though willfulness is only one of the six factors usually relied on in determining materiality of the breach.) Trivial defects, however, even if willful, will be ignored by the courts as de minimis.

279

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: 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.

280

Constructive (Implied) Conditions: Excuse of Conditions by Substantial Performance: contracts for the sale goods

GENERALLY INAPPLICABLE
The doctrine of substantial performance was developed in construction contracts cases, and there is considerable doubt as to the application of the doctrine beyond such cases. As to contracts for the sale of goods, the UCC PERFECT TENDER RULE gives the buyer the right to reject goods that do not conform to the contract in any manner, with a few exceptions.

281

Constructive (Implied) Conditions: Excuse of Conditions by "Divisibility" of Contract: rule

If a party performs one of the units of a divisible 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.

282

Constructive (Implied) Conditions: Excuse of Conditions by "Divisibility" of Contract: what is a divisible contract

Three tests must be concurrently satisfied in order to make the finding of a divisible contract:
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 PART from the other party, i.e., each performance is the quid pro quo of the other.

INTEPRETATION: Decisions on divisibility are questions of interpretation. The underlying consideration is one of fairness. Generally, the courts will construe contracts as divisible so as to avoid hardships and forfeitures that might otherwise result.

CONTRACT EXPRESSLY INDIVISIBLE
If the contract by its own terms is expressly indivisible, the court may not construe it as otherwise.

283

Constructive (Implied) Conditions: Excuse of Conditions by "Divisibility" of Contract: sale of goods

Article 2 assumes that a contract is not divisible unless it authorizes deliveries in several lots, in which case the contract is called an installment contract. In installment contracts, the price, if it can be apportioned may be demanded for EACH LOT unless a contrary intent appears.

284

Constructive (Implied) Conditions: Excuse of Conditions by Waiver or Estoppel: generally

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. The courts, in certain circumstances, will enforce this expression on the basis that the party has "waived" the condition or is "estopped" from asserting it.

285

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.

286

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 (1) terminate her liability, OR (2) continue under the contract. If she chooses the later course, 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.)

287

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. This would amount to a new undertaking that is really a gift in the disguise of a waiver.

288

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 fo 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.

289

Waiver and the right to damages

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.

290

Has the Absolute Duty to Perform Been Discharged: list

1. by performance
2. by tender of performance
3. by occurrence of condition subsequent
4. by illegality
5. by impossibility, impracticability, or frustration
6. by rescission
7. by partial modification of contract
8. by novation
9. by cancellation
10. by release
11. by substituted contract
12. by accord and satisfaction
13. by account stated
14. by lapse
15. by running of statute of limitation

291

Discharge of duty by impossibility: MUST BE ____.

Objective: the duties could not be performed by anybody
Subjective impossibility will not suffice: where the duties could be performed by someone but not the promisor.

292

Timing of impossibility:

The impossibility must arise AFTER the contract has been entered into. If the facts giving rise to impossibility already existed when the contract was formed, the question is not really one of "discharge of contractual duties." RAhter it is a "contract formation" problem, namely, whether the contract is voidable because of mistake.

293

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.

294

Partial impossibility:

If the performance to be rendered under the contract becomes only partially impossible, the duty may be discharge ONLY TO THAT EXTENT. The remainder of the performance may be required according to the contractual terms. This is so even though the remaining performance might involve added expense or difficulty.

295

Temporary Impossibility:

Temporary impossibility SUSPENDS contractual duties; it does not discharge them. When performance once more becomes possible, the duty "springs back" into existence. Note, however, that a duty will not "spring back" into existence if the burden on either party to the contract would be substantially increased or different from the originally contemplated.

296

Part Performance Prior to Impossibility--Quasi Contractual Recovery

If part performance has been rendered by either party prior to the existence of the facts leading to impossibility, 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. (Note that such recovery will also be available when contract duties are discharged by impracticability or frustration.)

297

Impossibility: specific situations

1. death or physical incapacity (of a person NECESSARY to effectuate the contract--usually services that cannot be delegated)
2. Supervening Illegality
3. Subsequent destruction of Contract's subject matter or means of performance (cannot be the fault of either party) (a contractor's duty to construct a building is not discharged by the destruction of the work in progress--can rebuild--but deadline may be extended if destruction not the fault of the contractor) (does not apply where risk of loss has passed to the buyer)

298

Impracticability: test

The test for a finding of impracticability is that the party to perform has encountered:

1. EXTREME AND UNREASONABLE difficulty and/or expense; and
2. Its nonoccurrence was a BASIC ASSUMPTION of the parties.

299

Impossibility and Impracticability: contracts for the sale of goods

Article 2 generally follows the common law rules. If performance has become impossible or commercially impracticable, the seller will be DISCHARGED TO THE EXTENT OF THE IMPOSSIBILITY OR IMPRACTICABILITY.
1. Allocation of the 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.

2. Events Sufficient for Discharge: include a SHORTAGE OF RAW MATERIALS or the inability to convert them into the seller's product 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 increases in costs of more than 50% have been held to be insufficient.

3. Seller's Partial Inability to Perform: if the seller's inability to perform as a result of the unforeseen circumstance is only partial, he MUST ALLOCATE DELIVERIES among his customers and, at his option, may include in the allocation regular customers not hten under contract. The seller must reasonably notify his buyers of any delay or reduction in deliveries because of the unforeseen circumstances. A buyer who receives such a notification may refuse any particular delivery affected, and if the deficiency substantially impairs the whole contract, she may treat the contract as at an end.

300

Temporary or Partial Impracticability:

same as impossibility

301

Frustration: defined

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.

302

Frustration: elements

1. There is some SUPERVENING ACT or event leading to the frustration;
2. At the time of entering into the contract, the parties DID NOT REASONABLY FORESEE the act or event occurring;
3. The PURPOSE of the contract has been completely or almost completely DESTROYED by this act or event; AND
4. the purpose of the contract was realized by BOTH PARTIES at the time of making the contract.

303

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 by discharging performance. Paying money is never impracticable.

304

Discharge by rescission: mutual rescission

The contract may be discharged by 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. The reason for entering into such an agreement are immaterial absent duress or fraud.

305

Discharge by rescission: MUTUAL RESCISSION: requirements

MUST BE EXECUTORY ON BOTH SIDES
For a contract to be effectively discharged by rescission, the duties must be executory on both sides:

UNILATERAL CONTRACTS: If the contract is unilateral, a contract to mutually rescind where one party still has a duty to perform will be ineffective. The courts reason that the original promisor who has not suffered a legal detriment, has not given consideration. Thus, 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, i.e., detrimental reliance; or
3. Manifestation of an INTENT by the original offeree to make a GIFT of the obligation owed her.

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 will depend on the terms of the rescission agreement. The party seeking such compensation must affirmatively prove his right to the compensation in order to recover.

306

Discharge by rescission: MUTUAL RESCISSION: formalities

Mutual rescission may be made ORALLY. This is so even though the contract to be rescinded expressly states that it can only be rescinded by a written document.

EXCEPTIONS:
1. Subject matter of contract to be rescinded within statute of frauds, the rescission should be in writing
2. Contracts for the sale of goods: Article 2 requires in writing if contract to be rescinded expressly required written rescission.

307

Discharge by rescission: MUTUAL RESCISSION: contracts involving 3rd party beneficiary rights

If the rights of third party beneficiaries have already vested, the contract may NOT be discharged by mutual rescission.

308

Discharge by rescission: 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 and action in equity to obtain it.

309

Partial Discharge by Modification of Contract: requirements

1. Mutual assent
2. Consideration (usually the courts find it present because each party has limited his right to enforce the original contract as is). (no consideration is necessary where there effect of the modification is merely to correct an error in the original contract) (contracts for the sale of goods don't need consideration for modification, but only good faith)

310

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 serve to discharge the old contract. The elements of a novation are:
1. A PREVIOUS valid contract;
2. An AGREEMENT among all parties, including the new party (or parties) to the new contract;
3. The IMMEDIATE EXTINGUISHMENT of contractual duties as between the original contracting parties; and
4. A valid and enforceable NEW contract.

311

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 serve as a discharge, it will usually have the effect if consideration or one of its alternatives is present.

312

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.

313

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.

1. revocation may be express or implied: impliedly revoked if the terms of second contract are inconsistent with the terms of the first

2. intent governs: 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.

314

Discharge by Accord and Satisfaction: 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 performcance.

315

Accord: requirements of consideration

In general, an accord must be supported by consideration. Where the consideration if 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 it the claims is to be paid to a third party.

Partial payment of original debt:
One frequently 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.
MAJORITY VIEW: 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.

316

Accord: effect of

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.

317

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.

318

Effect of Breach of Accord Agreement before Satisfaction

1. Breach by debtor: creditor may sue either on the original undischarged debt OR for breach of the accord agreement.
2. Breach by creditor: creditor sues on original contract--then debtor may: 1. raise the accord agreement as an equitable defense and ask that the contract action be dismissed
2. she may 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 of the breach of the accord contract.

319

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.

320

Discharge by Account Stated

An account stated is a contract between two 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. In other words, all rights as to the individual, original transactions are discharged and the new agreement is enforceable. For an agreement to qualify as an account stated, the parties must have had MORE THAN ONE PRIOR TRANSACTION between them.

1. Writing generally not required (unless one or more of the original transactions was subject to the statute of frauds)
2. account may be implied (presentation of bill not objected to within a reasonable amount of time)

321

Discharge by Lapse:

Where the duty of each party is a condition concurrent to the other's duty, it is possible on the day set for performance, neither party is in breach and their contractual obligations lapse.

Time when lapse becomes effective: If the contract states that time is "of the essence," the lapse will occur immediately; otherwise the contract will lapse after a reasonable time.

322

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 statute 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)

323

When does a breach occur?

If it is found that
1. the promisor is under an absolute duty to perform, and
2. this absolute duty of performance has not been discharged,
then this failure to perform in accordance with the contractual terms will amount to a breach of the 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.

324

Once you have determined that there is a breach of contract, the next determination to be made in a common law contract situation is:

whether that breach is material or minor.

325

EFFECT OF BREACHES: minor breach

A breach of contract is minor if the obligee gains the substantial benefit of her bargain despite the obligor's defective performance. Examples would be insignificant delays in completing performance or small deficiencies in the quality or quantity of performance when precision is not critical. The effect of a minor (immaterial) breach is to provide a remedy for the immaterial breach to the aggrieved party. The aggrieved party is NOT RELIEVED of her duty of performance under the contract.

326

EFFECT OF BREACHES: material breach

If the obligee does not receive the SUBSTANTIAL BENEFIT OF HER BARGAIN as a result of failure to perform or defective performance, the breach is considered material. If the breach is material, the consequences are more severe. 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.

327

EFFECT OF BREACHES: minor breach coupled with anticipatory repudiation

If a minor breach is coupled with anticipatory repudiation, the nonbreaching party may treat it as a material breach; i.e., she may sue immediately for total damages and is permamently 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.

328

EFFECT OF BREACHES: 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.

329

Determining materiality of breach: general rule

Whether a breach is material or minor is a fact question. To make this determination, the courts generally apply the following six criteria:
1. Amount of Benefit Received
2. Adequacy of damages
3. extent of part performance
4. hardship to breaching party
5. negligent or willful behavior
6. likelihood of full performance

330

Failure of timely performance:

The basic question here is whether the parties to the contract must perform on time. Assuming that the defaulting party had a duty to immediate performance when his failure to perform occurred, then his failure to perform on time will always be a breach of contract. There are, however, additional specific rules for determining the materiality of breach by failure of timely performance.

331

Failure of timely performance: As specified by nature of contract

unless the nature of the contract is such as to make performance on the exact day agreed upon of vital importance, or the contract by its terms provides that time is of the essence, failure by promisor to perform at the stated time will not be material.

332

Failure of timely performance: when delay occurs

Delay at the onset of performance before the delaying party has rendered any part of his agreed-on performance is more likely to be considered material than delay where there has been part performance.

333

Failure of timely performance: mercantile contracts

In mercantile contracts, timely performance as agreed is important, and unjustified delay is material.

334

Failure of timely performance: land contracts

More delay in land contracts is required for materiality than in mercantile contracts.

335

Failure of timely performance: Availability of Equitable remedy

(In equity, the courts generally are much more lenient in tolerating considerable delay. Hence, they will tend to find the breach immaterial and award compensation for the delay where possible.)

336

Perfect Tender Rule

Article 2 follows the perfect tender 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.

337

Commercial unit: define

A commercial unit is one that by commercial usage is treated as a single whole for the purpose of sale, and division of which materially impairs its value. A commercial unit may be a single article, or any other unit treated in use or in the relevant market as a whole. The test for commercial unit is "not only what unit has been the basis of contract, but also whether the partial acceptance produces so materially an adverse effect upon the remainder as to constitute bad faith."

example: unit is 100, so cannot accept 25 and reject 75

338

Right to Reject Cut Off by Acceptance (Article 2): a buyer accepts when

1. after a 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;
2. 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
3. She does any ACT INCONSISTENT WITH THE SELLER'S OWNERSHIP.

339

Article 2: Defective goods: notice

If in connection with the rejection the buyer fails to state that the goods have a particular defect that is ascertainable by reasonable inspection, she CANNOT RELY ON THAT DEFECT to justify rejection or to show seller's breach IF:
1. The SELLER COULD HAVE CURED defect if he had been told about it; or
2. BETWEEN MERCHANTS when the SELLER HAS, after rejection, MADE A REQUEST in writing for a full and final written statement of all the defects upon which the buyer proposes to rely.

340

Buyer's Responsibility for Goods After Rejection:

1. Buyer must hold goods with reasonable care for a time sufficient to permit the seller to remove them;

2. When seller gives no instruction on disposal of goods, the buyer must reship the goods to the seller, store them for the seller's account, or resell them for the seller's account. The buyer has a security interest in rejected goods in her possession for any part of the price already paid and for expenses reasonably incurred in connection with handling them after rejection.

3. When buyer resells goods, she is entitled to have her expenses of selling and any commission ordinarily paid in trade or, if there is none, a reasonably commission not exceeding 10%.

341

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.

342

When acceptance may be revoked:

The buyer may revoke acceptance of goods if the goods have a defect that SUBSTANTIALLY IMPAIRS their VALUE to her AND:
1. She accepted them on the REASONABLE BELIEF THAT THE DEFECT WOULD BE CURED and it has not been; or
2. She accepted them because of the DIFFICULTY OF DISCOVERING DEFECTS or because of the SELLER'S ASSURANCE THAT THE GOODS CONFORMED to the contract.

343

Requirements for revocation of acceptance:

Revocation of acceptance must occur:
1. WITHIN A REASONABLE TIME after the buyer discovers or should have discovered the defects; and
2. BEFORE ANY SUBSTANTIAL CHANGE IN THE GOODS OCCURS that is not caused by defect present at the time the seller relinquished possession.

344

Exceptions to the Perfect Tender Rule: 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 doctrine SUBSTANTIALLY IMPAIRS the value of that installment AND CANNOT BE CURED. In addition, the whole contract is breached only if the nonconformity SUBSTANTIALLY IMPAIRS the value of the ENTIRE CONTRACT.

345

Exceptions to the Perfect Tender Rule: Seller's right to cure -- single delivery contracts

1. Seller can cure by giving reasonable notice of intention to cure and new tender within time for performance.

2. Seller's right to cure beyond original contract time: Ordinarily, the seller has not right to cure beyond the original contract time. However, in cases where the buyer rejects a tender of nonconforming goods, that the seller REASONABLY believed would be acceptable "with or without money allowance," the seller, upon a 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 to believe that the tender would be acceptable if the seller can show that
1. trade practices or prior dealings with the buyer led the seller to believe that the goods would be acceptable; or
2. the seller could not have known of the defect despite proper business conduct.

346

Exceptions to the Perfect Tender Rule: Seller's right to cure -- installment contracts

Article 2 provides that a defective shipment in an installment contract cannot be rejected if the defect can be cured. Ordinarily, defects in the particular goods themselves cannot be cured, so the buyer can reject them, but then might be required to accept substitute goods under the provisions discussed above. Note that a deficiency in quantity may be cured by an additional delivery, and a delivery of too much may be cured by acceptance or return of a part.

347

REMEDIES: specific performance

If the LEGAL REMEDY IS INADEQUATE, the nonbreaching party may seek specific perfromance, which is essentially an order from the court to the breaching party to perform or face contempt of court charges. The legal remedy (damages) generally is inadequate when the SUBJECT MATTER OF THE CONTRACT IS RARE OR UNIQUE. The rationale is that if the subject matter is rare or unique, damages will not put the nonbreaching party in as good a position as performance would have, because even with the damages the nonbreaching party would not be able to purchase substitute performance.

348

REMEDIES: specific performance--available for what?

Specific performance is always available for land sale contracts because all land is considered to be unique. It is also available for goods that are rare or unique at the time performance is due (e.g., rare paintings, gasoline in short supply because of oil embargoes, etc.)

349

REMEDIES: specific performance--not available for what?

Service contracts: even if the services are rare or unique. This is because of problems of enforcement (it would be difficult for the court to surpervise the performance) and because the courts feel it is tantamount to involuntary servitude, which is prohibited by the Constitution.

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. This is allowed because less court supervision is required for a negative injunction than for a specific performance decree, and the prohibition against working (as opposed to the requirement of working) does not run afoul of the Constitution. The rationale for this approach is that an employee providing rare or unique services expressly or impliedly covenants that she will not work for a competitor during the contract term.

350

Specific performance and covenant not to compete:

Most courts will grant a covenant not to compete if:
1. the services to be performed are unique (thus rendering money damages inadequate); and 2. the covenant is reasonable .

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 it GEOGRAPHIC SCOPE AND DURATION (cannot be broader than the benefited person's customer base and no longer than 1-2 years);
3. The covenant MUST NOT HARM THE PUBLIC.

351

Equitable defenses against specific performance:

Since specific performance is an equitable remedy, it is subject to equitable defenses. The most frequently claimed equitable defenses are laches, unclean hands, and sale to a bona fide purchaser.

352

laches:

The equitable defense of laches arises when a party delays in bringing an equitable action and the delay prejudices the defendant (e.g., the delay has substantially increased the cost or difficulty of performance). Note that mere delay itself is not a ground for this defense.

353

unclean hands:

The unclean hands defense arises when the party seeking specific performance is guilty of some wrongdoing in the transaction being sued upon (e.g., the defendant entered into the contract because of the plaintiff's lies). Note that the wrongdoing must be related to the transaction being sued upon; it is not sufficient that the plaintiff has defrauded other persons in similar transactions.

354

Sale to a bona fide purchaser:

If the subject matter of a goods or land contract has already been sold to another who purchased for value and in good faith (i.e., a bona fide purchaser), the right to specific performance is cut off.

355

Nonmonetary remedies under Article 2: buyer's nonmonetary remedies

1. Cancellation
2. Buyer's right to replevy identified goods
3. Buyer's right to specific performance

356

Nonmonetary remedies under Article 2: buyer's nonmonetary remedies: cancellation

If a buyer rejects goods because they do not conform to the contract, one of her options is simply to cancel the contract.

357

Nonmonetary remedies under Article 2: buyer's nonmonetary remedies: Buyers right to replevy identified goods

1. On buyer's prepayment: if the 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;
1. the seller becomes INSOLVENT within 10 days after receiving the buyer's first payment; or
2. 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.

2. 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.

358

Nonmonetary remedies under Article 2: buyer's nonmonetary remedies: Buyers right to specific performance

A right closely related to the buyer's right to replevy is her right to specific performance where the good 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. Comment says that inability to cover is "strong evidence of other circumstances." Thus, buyers in inability to cover circumstances have their choice of replevin or specific performance, but replevin will lie only with identified goods.

359

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: list

1. Seller's right to withhold goods
2. Seller's right to recover goods
3. Seller's ability to force goods on buyer limited

360

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: seller's right to withhold goods

(if the buyer fails to make a payment due on or before delivery) (also, if the seller discovers the buyer is insolvent, the seller must allow buyer to purchase with cash)

361

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: seller's right to recover goods from buyer on buyer's insolvency

1. Right to recover 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. Note that the seller's right to reclaim the goods is subject to the rights of a buyer in the ordinary course or any other good faith purchase.

362

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: seller's right to recover shipped or stored goods from bailee

1. On buyer's insolvency: the seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent. Of course, the seller must deliver the goods if the buyer tenders cash for their payment.

2. On Buyers breach: the seller may stop delivery of carload, truckload, planeload, or larger shipment of goods when the buyer breaches the contract or when the seller has a right to withhold performance pending receipt of assurances.

3. when goods may not be stopped: the seller may stop delivery of goods to the buyer UNTIL the buyer receives: 1. the goods or a negotiable document of title covering the goods; or 2. an acknowledgment from a bailee other than the carrier that is holding the goods for the buyer.

4. Obligation of Carrier or Bailee: the seller's notification must come in time to give the person in possession a REASONABLE TIME TO STOP DELIVERY. If a negotiable document covers the goods, the carrier or bailee is not obligated to obey a stop order until the document is surrendered.

363

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: seller's ability to force goods on buyer

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.

364

Nonmonetary remedies under Article 2: seller's nonmonetary remedies: 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 many suspend his own performance. If the proper assurances are not given within a reasonable time, he may then treat the contract as repudiated. What constitutes an adequate assurance depends on the facts of the case.

365

Monetary remedies: types of damages

1. Compensatory damages
2. Punitive damages
3. Nominal damages
4. Liquidated damages

366

Compensatory damages: purpose

The purpose of contract damages is to give compensation for the breach; that is, to PUT THE NONBREACHING PARTY WHERE SHE WOULD HAVE BEEN HAD THE PROMISE BEEN PERFORMED so far as money can do this.

367

Compensatory damages: 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 damage for her to buy a SUBSTITUTE PERFORMANCE. This is also known as BENEFIT OF THE BARGAIN damages.

368

Compensatory damages: reliance damage measure

If the plaintiff's expectation will be too speculative to measure (e.g., the plaintiff cannot show with sufficient certainty the profits she would have made if the defendant had performed the contract), 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.

369

Compensatory damages: 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.

370

Compensatory damages: 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.

371

Compensatory damages: certainty rule

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.

372

Punitive damages:

Generally NOT awarded in contracts cases.

373

Nominal damages:

Nominal (token) damages (e.g., $1) may be awarded where a breach is shown but not actual loss is proven.

374

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.

375

Liquidated damages will be enforceable if what two conditions are met?

1. Damages for contractual breach must have been DIFFICULT TO ESTIMATE OR ASCERTAIN AT THE TIME THE CONTRACT WAS FORMED.
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.

UCC RULE: allows a court to consider actual damages to validate a liquidated damages clause. Even if the clause was not a reasonable forecast of damages at the time of the contract formation, it will be valid if it was reasonable in light of the subsequent actual damages.

If the above requirements are met, plaintiff will receive the liquidated damages, even if no actual money or pecuniary damages are suffered. If requirements not met, plaintiff will recover only those damages she can prove.

376

Contract for Sale of Goods: Buyer's damages when 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 the market price (i.e., BENEFIT OF THE BARGAIN damages) or the cost of buying replacement goods (i.e., COVER), plus incidental and consequential damages, if any, less expenses saved as a result of the seller's breach. In the case of a seller's anticipatory repudiation, the buyer's damages are measured as of the time she learns of the breach.

Market price determined at the time the buyer learns the breach and at the place of tender.

Cover is the usual measure of damages for a buyer. Typically, if a buyer is not sent the goods contracted for, he will go out into the marketplace to buy replacement goods. If the buyer chooses the cover measure, the buyer must make a REASONABLE CONTRACT for substitute goods IN GOOD FAITH and WITHOUT UNREASONABLE DELAY.

377

Contract for Sale of Goods: Buyer's damages when seller delivers nonconforming goods that buyer accepts

1. 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, plud incidental and consequential damages.

2. 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 a flexible standard.

378

Contract for Sale of Goods: Buyer's damages when seller anticipatorily breaches contract

the difference between the MARKET PRICE AT THE TIME THE BUYER LEARNED OF THE BREACH and THE CONTRACT PRICE

379

Contract for Sale of Goods: Buyer's damages -- consequential damages

seller is liable for consequential damages arising from his breach if: 1. he had reason to know of the buyer's general or particular requirements, and 2. the subsequent loss resulting from those needs could not reasonably be prevented by cover.

Goods for resale: if the buyer is in the business of reselling the goods, the seller is deemed to have knowledge of the resale.

Good necessary for manufacturing: if a seller knows that the goods he provides are to be used in manufacturing, he is deemed to know that this breach would cause a disruption in production leading to a loss of profits.

380

Contract for Sale of Goods: Seller's damages--Buyer refuses to accept goods or anticipatorily breaches contract

The seller's basic damages when the buyer refuses to accept goods or repudiates are either the difference between the contract price and the market price or the difference between the contract price and the resale price of the particular goods, plus incidental (but not consequential) damages, if any, less expenses saved as a result of the breach.

If damages based on the difference between the contract price and market or resale price do not put the seller in as good a position as performance would have, then the seller may recover lost profits plus incidental damages.

In the case of a buyer's anticipatory breach, the seller's damages are measured as of the actual time for performance, in which case damages are measured as the time the seller learned of the breach.

381

Contract for Sale of Goods: Seller's damages--differences between contract price and market price

Market price is measured as of the time and at the place for DELIVERY.

382

Contract for Sale of Goods: Seller's damages: differences between contract price and resale price

This is the usual measure of seller's damages. Requires good faith, commercially reasonable sale that may be either private or public (auction). In the case of a private sale, the breaching buyer must be given reasonable notice of intention to resell.

In the case of an auction sale, the sale must be at a usual market for such goods if such a market is reasonably available. Notice of the sale is to be given to the breaching buyer unless the goods are perishable or threaten to decline rapidly in value. Only existing and identified goods may be sold, unless there is a market in futures for the particular goods. The seller may buy the goods at an auction sale.

383

Contract for Sale of Goods: Seller's damages: damages based on lost profits

The other two measures of damages might not give adequate compensation for the buyer's breach in situations where the seller can obtain or manufacture as many goods as he can sell. In such a case, the seller is known as a LOST VOLUME SELLER, because although he is able to resell the goods for the same or similar price as in the initial contract, he loses VOLUME of business: but for the buyer's breach, the seller would have made two sales instead of one. Generally lost profits are measured by the contract price with the breaching buyer minus cost to the seller.

384

Contract for Sale of Goods: Action for Price

If the buyer has accepted the goods and has not paid, or has not accepted the goods and 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.

385

Damages: Contracts for 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.

386

Employment contracts: breach by employer

Irrespective of when the breach occurred--i.e., before performance, after part performance, or after full performance, the standard measure of the employee's damages is the FULL CONTRACT PRICE.

387

Damages:Employment contracts: intentional breach by employee

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. The modern view allows the employee to offset any monies due from work done to date.

388

Damages:Employment contracts: unintentional breach by employee

same as for intentional breach. However, when the breach is unintentional, e.g. personal illness, the employee may have a right to quasi-contractual recovery for work done to date.

389

Damages:Construction contracts: breach by owner before contract started

builder is entitled to the PROFITS he would have derived from the contract

390

Damages:Construction contracts: breach by owner during construction

If the breach occurs during construction, the builder is entitled to any PROFIT he would have derived from the contract PLUS any COSTS he has incurred to date.

391

Damages:Construction contracts: breach by owner after construction completed

builder is entitled to the full CONTRACT PRICE PLUS INTEREST

392

Damages:Construction contracts: breach by builder before construction started

Owner's measure of damages is COST OF COMPLETION

393

Damages:Construction contracts: breach by builder during construction

If the builder breaches after partially performing, the owner is entitled to the COST OF COMPLETION PLUS REASONABLE COMPENSATION FOR ANY DELAY in performance. If, however, completion would involve undue economic waste, the measure of damages will be the difference between the value of what the owner WOULD HAVE RECEIVED if the builder had properly performed the contract and the value of what the owner ACTUALLY RECEIVED.

394

Damages:Construction contracts: breach by builder by later performance

Owner has a right to damages for any loss incurred by not being able to use the property when performance was due, e.g., loss of reasonable rental value when the property could have been leased. However, if damages for this lost use are not easily determined or were not foreseeable at the time the contract was entered into, the owner can recover only INTEREST on the value of the building as a capital investment.

395

Damages: Contracts calling for installment payments

If a contract calls for payments in installments and a payment if 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.

396

Avoidable Damages (Mitigation): defined

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 expenditure 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.

397

Avoidable Damages (Mitigation): 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 have to be at exactly the pay level). However, note that burden is on the employer to show that such jobs were available.

398

Avoidable Damages (Mitigation): contracts for 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.

399

Avoidable Damages (Mitigation): 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.

400

Avoidable Damages (Mitigation): construction contracts

A builder does not own a duty to avoid the consequences of the owner's breach, e.g., by securing other work, but does have a duty to mitigate by NOT CONTINUING WORK after the breach. However, if completion will decrease damages, it will be allowed.

401

RESTITUTION: defined

As an alternative to the contract damages discussed above, 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.

402

RESTITUTION: terminology

often referred to as an action for an IMPLIED IN LAW contract or an action in QUASI-CONTRACT

403

RESTITUTION: measure of damages

VALUE OF THE BENEFIT CONFERRED. usually based on the benefit received by the defendant, it 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

404

RESTITUTION: Specific Application When Contract Breached--generally

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.

405

RESTITUTION: Specific Application When Contract Breached-- "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. (example: builder fires architect--architects FMV of work is $12K but contract is $10K. Architect should go for restitution.)

406

RESTITUTION: Specific Application When Contract Breached--Breach by Plaintiff

Typically the plaintiff will be seeking restitution because the defendant breached the contract. However, 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.

407

RESTITUTION: Specific Application When Contract Breached--Breach by Plaintiff: restitution of advance payments or deposit if buyer of goods in breach

Article 2 has very specific rules concerning whether and how much a breaching party can recover of advance payments. 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.

1. General Offset Provision: When the buyer breaches, the seller may keep advance payments totaling 20% of the purchase price or $500, whichever is less. The balance must be returned to the buyer.

2. Effect of Liquidated Damages Provision
If there is a valid liquidated damages clause, the seller is required to refund only the excess of the buyer's payments over the amount of liquidated damages.

3. Seller's Right to Greater Damages
The general offset rule applies only if the seller cannot prove greater actual damages. If the seller can prove damages in excess of 20% of the price or $500, he may recover them. Even if he cannot prove actual damages beyond the offset, he is additionally entitled to incidental damages and the value of any benefits received by the buyer.

408

RESTITUTION: Specific Application When Contract Unenforceable--Quasi Contract remedy

Restitution may be available in a QUASI-CONTRACT action when a contract was made but is unenforceable and unjust enrichment otherwise would result.

409

RESTITUTION: Specific Application When No Contract Involved--Quasi Contract remedy

Restitution may also be available in a QUASI-CONTRACT action when there is no contractual relationship between the parties if:

1. The plaintiff has CONFERRED A BENEFIT on the defendant by rendering service 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.

NOTE: Where the parties are in a CLOSE RELATIONSHIP to one another, it is usually presumed that the benefits were given gratuitously and the party claiming relief bears the burden of showing that they were conferred with an expectation of being paid therefor.

410

RESCISSION: defined

Rescission is a remedy whereby the original contract is considered voidable and rescinded. The parties are left as though a contract had never been made.

411

RESCISSION: grounds

The grounds for rescission must have occurred either before or at the time the contract was entered into. The grounds are:
1. MUTUAL MISTAKE of a material fact;
2. Unilateral mistake if the OTHER PARTY KNEW or should have known of the mistake;
3. Unilateral mistake if HARDSHIP BY THE MISTAKEN PARTY IS SO EXTREME it outweighs the other party's expectations under the contract;
4. MISREPRESENTATIONS OF FACT OF LAW by either party as to a material factor in the negotiations that was relied upon; and
5. OTHER GROUNDS, such as duress, undue influence, illegality, lack of capacity, and failure of compensation.

412

RESCISSION: defenses

Generally, all equitable defenses (e.g., laches, unclean hands) are available in a recission action. Note that the plaintiff's negligence is not a defense.

413

RESCISSION: additional relief

If the plaintiff has paid money to the defendant, she is entitled to restitution in addition to rescission.

414

REFORMATION: defined

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.

415

REFORMATION: grounds

A reformation actin is usually based on mutual mistake; i.e., the parties agree to a set of terms and unbeknownst to either party 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. Finally, reformation is available when the writing is incorrect because of innocent or fraudulent misrepresentation. In that case, the writing will be reformed to reflect the EXPRESSED intent of the parties.

416

REFORMATION: standard of proof

The variance between the antecedent agreement and the writing must be established by clear and convincing evidence.

417

REFORMATION: parol evidence rule and statute of frauds

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.

418

REFORMATION: defenses

In addition to the general equitable defenses, the existence of a bona fide purchaser for value is also a defense to reformation. If the subject matter of the contract is sold to a bona fide purchaser, reformation will not be allowed. Similarly, reformation is not permitted if the rights of third parties will be unfairly affected.

419

STATUTE OF LIMITATIONS UNDER UCC: general rules

States have enacted differing statutes of limitations for contracts actions in general, and some have specific limitations periods for specific types of contracts. For sales contracts, however, the UCC provides for a FOUR YEAR STATUTE of limitations.

Parties may agree to shorter period, but not less than one year.

Statutory period begins to run when the cause of action accrues. The cause of action accrues when a party can bring suit, i.e., when the breach occurs. The statutory period begins to run regardless of whether the aggrieved party knows about the breach.

420

STATUTE OF LIMITATIONS UNDER UCC: breach of warranty actions

For a breach of warranty action, the breach occurs and the limitations period begins to run upon DELIVERY of the goods. This is true even if the buyer does not discover the breach until much later.

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.

IMPLIED WARRANTIES BREACHED ON DELIVERY: Because implied warranties cannot "explicitly" extend to future performance, they are breached, if at all, upon delivery.

421

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: general rule

The general rule is that a contract operates to confer rights and impose duties only on the parties to the contract and on no other person. However, two important exceptions exist: (1) contractual rights involving third-party beneficiaries, and (2) contractual rights or duties that are transferred to third parties. In the first situation, the original contract will confer the rights and duties on the third party; in the second situation, the original contract does not confer any rights or obligations on the third party, but subsequently one of the parties has sought to transfer his rights and/or duties under the contract to a third party (i.e., assignment of rights, delegation of duties).

422

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: third party beneficiaries: intended (have rights) vs. Incidental (do not have rights)

TEST
The best test for determining whether someone is an intended beneficiary is to pose the following question: "To whom is performance to be given ACCORDING TO THE LANGUAGE OF THE CONTRACT?" In other words, was the purpose of the promisee, according to the language of the contract, to get the benefit for herself primarily or to confer a right on another directly? If the purpose was to confer a right on another directly, we have a third-party beneficiary situation.

423

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: determining promisee's intention

The courts generally look at the following FACTORS in resolving the question of intention:
1. Is the third party expressly DESIGNATED in the contract? If so, it is more likely that it is primarily for her benefit. But note that is not necessary that the third-party beneficiary be named, or even identifiable, at the time the contract is made; she need only be identifiable at the time performance is due.

2. Is PERFORMANCE TO BE MADE DIRECTLY to the third party? If so, it is more likely that the contract is primarily for her benefit.

3. Does the third party have any RIGHTS under the contract (e.g., the right to designate when and where performance is to be made)? Is so, it is more likely that the contract is primarily for her benefit.

4. Does the third party stand in such a RELATIONSHIP to the promisee that one could infer that the promisee wished to make an agreement for the third party's benefit? If so, it is more likely that the contract is primarily for her benefit.

424

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: when do the rights of the beneficiary vest?

An "intended" beneficiary can enforce a contract only after his rights have vested. This becomes important when the original parties to the contract take actions (e.g., rescission, modification, etc.) that affect the third-party beneficiary. The general rule for BOTH creditor and donee beneficiaries is that their rights vest when the beneficiary:

1. Manifests ASSENT to the promise in a manner invited or requested by the parties;
2. Brings SUIT to enforce the promise; or
3. Materially CHANGES POSITION in justifiable reliance on the promise.

SIGNIFICANCE OF VESTING: Before the intended third party beneficiary's rights vest, 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 beneficiary's rights have vested, the promisor and promisee cannot vary his rights without his consent.

425

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: Third-Party Beneficiary vs. Promisor

If the promisor fails to perform, the third party beneficiary may sue the promisor on the contract, subject to defenses as follows:

1. Promisor's Defenses Against Promisee
Because the third-party beneficiary's rights are derivative, the promisor may raise any defense against the third party beneficiary that he would have against the promisee, including: lack of consideration, illegality, impossibility, and failure of a condition.

2. Promisee's Defenses Against Third-Party Beneficiary if Promise Not Absolute
Whether the promisor can use any of the defenses that the promisee would have against the third-party beneficiary depends on whether the promisor made an absolute promise to pay (e.g., "I will pay T $500 in exchange for your services") or only a promise to pay what the promisee owes the beneficiary (e.g., "I will pay T whatever you owe him in exchange for your services"). In the former case, the promisor CANNOT assert the promisee's defenses; in the later case, the promisor CAN assert the promisee's defenses.

426

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: Third Party Beneficiary vs. Promisee

If the promisor fails to performe vis-a-vis the third party beneficiary, whether the third party beneficiary may sue the promisee depends on whether the third party beneficiary is a donee beneficiary or a creditor beneficiary. A DONEE BENEFICIARY generally may NOT sue the promisee because generally there is no right to sue for nondelivery of a gift. However, a CREDITOR BENEFICIARY can sue the promisee on the underlying obligation that the promisor's performance was meant to discharge.

Note: The rights of a creditor beneficiary are cumulative. She need not elect between suing the promisor and suing her own debtor (i.e., the promisee). She may SUE BOTH. Of course, she may obtain but ONE SATISFACTION.

Exception: Detrimental Reliance
If the PROMISEE TELLS the donee beneficiary of the contract and should FORESEE RELIANCE by the beneficiary, and the beneficiary REASONABLY RELIES to her detriment, the beneficiary can sue the promisee directly under a promissory estoppel/detrimental reliance theory, even though the beneficiary cannot sue the promisee as a third-party beneficiary.

427

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: Promisee v. Promisor--Donee Beneficiary Situation

If the promisor fails to perform and the contract involves a donee beneficiary, it was once said that the promisee could not sue the promisor at law. The rationale was that because the donee beneficiary had no cause of action against the promisee, there was no damage suffered. Today, however, the MAJORITY VIEW is that the PROMISEE HAS A CAUSE OF ACTION. Because the promisee hardly ever suffers any actual damage, however, she will usually receive only nominal damages. Hence, most courts have resolved this problem by allowing SPECIFIC PERFORMANCE in this situation.

428

RIGHTS AND DUTIES OF THIRD PARTIES TO THE CONTRACT: Promisee v. Promisor--Creditor Beneficiary Situation

If the promisor fails to perform as to a creditor beneficiary and a promisee has had to pay the beneficiary on the existing debt, the promisee MAY RECOVER against the promisor. If the debt has not yet been paid by the promisee to the third party, the promisee can compel the promisor to pay in a SPECIFIC PERFORMANCE action.

429

ASSIGNMENT OF RIGHTS: main issues

A transfer of right under a contract is called an "assignment." The main issues regarding assignments are:

1. What rights may be assigned?
2. What is necessary for an effective assignment?
3. Is the assignment revocable or irrevocable?
4. What are the rights and liabilities of the various parties?
5. What problems exist if there have been successive assignments of the same rights?

430

ASSIGNMENT OF RIGHTS: terminology

X and Y have a contract, Y assigns her rights under the contract to Z. Y is the assignor, Z is the assignee, and X is the obligor.

431

ASSIGNMENT OF RIGHTS: what rights can be assigned?

Generally, ALL contractual rights may be assigned.

Exceptions:

1. Assigned rights would substantially change obligor's duty:
1a: Personal service contracts where performance so involves the personality or personal characteristics of the obligor that is would be unfair to require the obligor to perform for another person. Lawyer, doctor, architect, author.
1b: Requirements and Output Contracts: common law not assignable, Article 2 says quantity must be measured by good faith output or requirements and cannot be unreasonably disproportionate to a stated estimate or if no stated estimate, prior output or requirements.

2. Rights Assigned Would Substantially Alter Obligor's Risk

3. Assignment of Future Rights: the assignment of RIGHT EXPECTED TO ARISE under a contract of employment not then existing operates only as a promise to assign the right when it arises, i.e., when the expected future contract is in fact entered into. Contrast this with FUTURE RIGHTS IN EXISTING CONTRACTS, which generally are ASSIGNABLE even though the right might not yet have vested.

4. Assignment Prohibited by Law (example--wage assignments)

5. Express Contractual Provisions Against Assignment
5a. Assignment of "the Contract"
Absent circumstances suggesting otherwise, a clause prohibiting assignment of "the contract" will be construed as barring ONLY THE DELEGATION of the assignor's DUTIES.
5b. Assignment of Rights Under the Contract
A clause prohibiting the assignment of CONTRACTUAL RIGHTS generally does not bar assignment, but merely gives the obligor the right to sue for breach if an assignment is made. In other words, the assignor has the POWER BUT NOT THE RIGHT to assign.
5bi. Factors that make the assignment ineffective: notwithstanding the general rule, if the clause provides that any attempt to assign will be VOID, the assignment will be ineffective (i.e., the assignor has neither the power nor the right to assign). Also, if the assignee has NOTICE of the nonassignment clause, assignment will be ineffective.

432

ASSIGNMENT OF RIGHTS: effect of assignment--real party in interest

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and assignor. The assignee hten replaces the assignor as the real party in interest, and she alone is entitled to performance under the contract.

433

What is necessary for an effective assignment?

1. WRITING: usually NOT REQUIRED except for: 1. wage assignments; 2. assignments of interest in land; 3. assignments of choses in action worth more than $5K; 4. assignments intended as security interests under Article 9

2. ADEQUATE DESCRIPTION of right being assigned

3. PRESENT WORDS OF ASSIGNMENT: assignor must manifest an intent to transfer his rights under the contract COMPLETELY AND IMMEDIATELY to the assignee. Whether such intent is present will be determined by looking to the terms of the transfer itself, i.e., the test is objective, not subjective. It is not necessary to use the word "assign"; generally accepted words of transfer will suffice (convey, sell, transfer)

4. CONSIDERATION: not required; a gratuitous assignment is effective. However, the lack of consideration will affect revocability.

434

Partial assignments:

Contract rights may be transferred to one assignee or split up and transferred to two or more. Similarly, the assignor may transfer some rights under the contract and retain others.

435

Is the Assignment Revocable or Irrevocable?

1. Assignments for value are irrevocable. An assignment is for value if it is: 1. done for CONSIDERATION, or 2. taken as security for or payment of a PREEXISTING DEBT. Assignments for value cannot be revoked.

2. Gratuitous Assignments Are Revocable: An assignment not for value, i.e., a "gratuitous" assignment is generally revocable.

436

Exceptions to the rule of revocability:

In certain situations, a gratuitous assignment will be held irrevocable.

1. Performance by Obligor: If the obligor has already performed, the assignment will be irrevocable.

2. Delivery of Token Chose: If a token chose (tangible claim) involving the rights to be assigned has been delivered, the assignment will be irrevocable.

3. Assignment of Simple Chose in Writing
If the assignment involves a simple chose, i.e., an intangible claim not embodied by any token (or of the majority of ordinary contract rights), setting it forth in writing will make the assignment irrevocable.

4. Estoppel. The theory of estoppel may prevent the assignor from revoking a gratuitous assignment if: 1. the assignor should reasonably foresee that the assignee will change her position in reliance on the assignment; and 2, such detrimental reliance does in fact occur.

437

Methods of revocation of a gratuitous revocable assignment:

1. Death of the assignor;
2. Bankruptcy of the assignor;
3. Assignor takes performance directly from the obligor; or
4. Subsequent assignment of the same right by the assignor to another.

438

Effect of revocation of a gratuitous revocable assignment:

Privity between the assignor and the obligor is restored, and the assignor is one again the real party in interest.

439

Effect of "irrevocable" assignment:

The term "irrevocable" as applied to assignment may be misleading. The effect of such irrevocability is to remove from the assignor the right to revoke or make a subsequent assignment of the same right to a third party. However, in many situations, even though the assignor no longer has this RIGHT, he still has the POWER to do so. He would, of course, be liable for breach of contract. EXCEPTION: in an assignment accompanied by DELIVERY OF A TOKEN CHOSE, the assignor loses both the right AND the power to revoke or further assign.

440

Rights and Liabilities: Assignee v. Obligor

As the assignee is the real party in interest, she may enforce her rights against the obligor DIRECTLY.

DEFENSES OF OBLIGOR:
Any defenses the obligor had against the assignor EXCEPT for personal defenses against the assignor arising after assignment.

TEST: Is the defense INHERENT in the contract itself OR is it a defense UNRELATED to the contract, the right of which has been assigned. As to defenses inherent in the contract itself, these defenses are always available against the assignee because they came into existence when the contract was made. As to setoffs, counterclaims, and the like, such defenses are good against the assignee only if they came into existence before the obligor had notice or knowledge of the assignment.

2. Estoppel doctrine may operate to prevent the obligor from asserting a defense that might otherwise exist against the assignor.

Defenses of Assignor Not Available: obligor will not be able to raise by way of defense any defenses that the assignor might have against the assignee.

441

Rights and Liabilities: Assignee v. Obligor where there is modification of the contract

Suppose that after the obligor has received NOTICE of the assignment, the obligor and assignor attempt to MODIFY the contract. Will the modification affect the assignee's rights?

1. No Effect on the Rights of Assignee
2. UCC provides that such a modification of an assigned right to payment that HAS NOT YET BEEN FULLY EARNED BY PERFORMANCE is effective against the assignee if made in GOOD FAITH. However, the modification will cause a breach of an assignment contract that prohibits such modifications.

442

Rights and Liabilities: Assignee v. Assignor: Assignor's Warranties

In every assignment for value, the assignor impliedly warrants that:
1. He has the right to make the assignment; i.e., the assignor has made NO PRIOR ASSIGNMENT of the right.

2. The right exists and is NOT SUBJECT TO LIMITATIONS OR DEFENSES other than those stated or apparent at the time of the assignment; and

3. He will DO NOTHING TO DEFEAT OR IMPAIR the assigned right; e.g., he will not attempt a subsequent assignment.

443

Rights and Liabilities: Assignee v. Assignor: Obligor incapable of performance

The assignor will NOT be liable to the assignee if the obligor is incapable of performing, e.g., is insolvent.

444

Rights and Liabilities: Assignee v. Assignor: Rights of Sub-Assignees

Sub-assignees do not have any rights against the original assignor. The courts reason that there is no privity of contract. However, the assignee who "sub-assigns" becomes the assignor with respect to the assignment and can be held liable thereon.

445

Rights and Liabilities: Do Third Parties Have any Equities Relating to Assignment?

If third parties have any equities in the subject matter of the assignment, the assignee will take subject to them if she has notice; she will not be subject to such equities if she is a bona fide purchaser without notice of the assigned interest.

446

Successive Assignments of the Same Rights: revocable assignments

If the first assignment is revocable, a subsequent assignment will serve to REVOKE it (i.e., the subsequent assignee prevails).

447

Successive Assignments of the Same Rights: irrevocable assignments

General rule is that if the first assignment is IRREVOCABLE, the FIRST assignee has priority.

EXCEPTIONS:
1. Judgment Against Obligor: if the subsequent assignee gets the FIRST JUDGMENT against the obligor, she will prevail.

2. Payment of Claim: If the later assignee gets FIRST PAYMENT from the obligor on the assigned claim, her rights will be superior.

3. Delivery of Token Chose: If the subsequent assignee gets the FIRST DELIVERY OF A TOKEN CHOSE from the assignor, she will prevail.

4. Novation: The second assignee will prevail if she obtains a novation that supersedes the obligation running to the assignor in favor of the new one running to her. This assumes that the obligor had NO KNOWLEDGE of the prior assignment at the time of the novation.

5. Estoppel: if the subsequent assignee is able to set up an estoppel against the first assignee, she will have priority, e.g., the first assignee permits the assignor to retain a document that would indicate to a reasonable person that the assignor was sole owner of the right. (Estoppel could, of course, operate the other way as well. Thus, if the subsequent assignee has actual knowledge of the earlier assignment, she will be estopped to assert her claim as against the earlier assignee even though she would, under any of the other rules above, normally succeed.

448

Successive Assignments of the Same Rights: UCC rules

UCC imposes FILING REQUIREMENTS. If the filing provision is applicable to the transaction, generally the assignee who is the first to file will prevail.

449

Delegation of duties: terminology

X and Y have a contract. Y delegates duties thereunder to Z. Y is the obligor because Y is the one with the duty to perform the obligation. Y is also the delegator because Y delegated the duty. Z is the delegate because Z is the one to whom the duty was delegated. X is called the obligee, because X is the one for whom Y or Z is obligated to perform.

450

What duties may be delegated?

General rule: all contractual duties

Exception:
1. Duties involving personal judgment and skill;
2. "Special Trust" in delegator (attorney and client);
3. Material Change of Obligee's Expectancy
4. Contractual Restrictions on Delegation usually given STRICT EFFECT.

451

What is necessary for effective delegation?

In general, no special formalities are required to have a valid delegation. The delegation may be either WRITTEN OR ORAL. However, the delegator must manifest a PRESENT INTENTION to make the delegation. There is no need that the word "delegate" be used; any generally accepted words of transfer may be used.

452

What are the rights and obligations of parties: obligee

The obligee must accept performance from the delegate of all duties that may be delegated. She need not accept performance from the delegate of those duties that may not be delegated.

453

What are the rights and obligations of parties: delegator

The delegator will REMAIN LIABLE on his contract, even if the delegate expressly assumes the duties. However, as between the delegator and the delegate, the delegation places the primary responsibility to perform on the delegate. The delegator becomes secondarily liable, as a surety, for performance of the duty. Note that if an obligee expressly consents to the transfer of duties, it could be construed as an offer of novation rather than a delegation.

454

What are the rights and obligations of parties: delegate where there is a mere "delegation"

Delegation is a creation of a POWER in another to perform the delegator's contract duty. The nondelegating party to the contract (the obligee) cannot compel the delegate to perform, as the latter has not promised to perform.

455

What are the rights and obligations of parties: delegate where there is an assumption?

An assumption occurs when the delegate promises that she will perform the duty delegated and the PROMISE is SUPPORTED BY CONSIDERATION or its equivalent. This creates a third-party beneficiary situation in which the nondelegating party to the contractcan compel performance or bring suit for nonperformance.

456

What are the rights and obligations of parties: delegate when duties delegated with assignment of rights

What happens if a delegation of duties is made in connection with an assignment of rights under the same contract out of which the duties arise, but the delegate has nonetheless not expressly assumed the duties? The majority of courts, the restatement, and the UCC hold that unless a contrary intention appears, words assigning the "contract" or "all my rights under the contract" are to be construed as including an ASSUMPTION of the duties; i.e., they imply a promise by the assignee to assume the duties of performance.

457

NOVATION: distinguished from other 3rd party situations

Note the difference between novation and the other third-party situations discussed above. Novation SUBSTITUTES A NEW PARTY for an original party to the contract. It requires the ASSENT OF ALL PARTIES and COMPLETELY RELEASES the original party. The consent of the remaining party may be express or by implication of the accpetance of performance by the new party with knowledge that a novation is intended.

458

POWER OF PERSON OTHER THAN OWNER TO TRANSFER TITLE TO A PURCHASER: 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 pickup 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.

459

POWER OF PERSON OTHER THAN OWNER TO TRANSFER TITLE TO A PURCHASER: voidable title concept

The UCC continues the pre-Code concept of voidable title. That is, if a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer. However, the defrauded seller may not recover the goods from a GOOD FAITH PURCHASER FOR VALUE who bought from the fraudulent buyer. The UCC specifies 4 particular situation in which the bona fide purchaser for value cuts off the rights of the true owner; in several of these instances the result under pre-Code law is changed.

Under the UCC, the good faith purchaser for value cuts off the defrauded seller's rights even though:
1. the seller was deceived as to the identity of the buyer;
2. the delivery was in exchange for a check later dishonored;
3. the sale was a "cash sale"; or
4. the fraudulent conduct of the buyer is punishable as larceny.

The rights of the defrauded seller are cut off both by a buyer and by a person who takes a SECURITY INTEREST in the goods.

460

POWER OF PERSON OTHER THAN OWNER TO TRANSFER TITLE TO A PURCHASER: Thief

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 rights of the true owner if the seller's title was void.

Exceptions: a thief may pass title in limited circumstances, such as where the buyer has made ACCESSIONS (i.e., valuable improvements) to the goods or the true owner is estopped from asserting title (e.g., the true owner expressly or impliedly represented that the thief had title).